Four Actions Needed Now to Support the UK FinTech Sector

Over the last decade the UK has established itself as a global leader in financial services innovation and one of the best places in the world to start, build and scale a FinTech. This has translated into easier and cheaper financial services for British consumers, as the FinTech community has contributed towards a more effective, inclusive, and democratic financial services system that works better for all.

It is imperative that we now build on this global leadership by supporting our FinTech community further, allowing them to continue to help individuals and SMEs navigate through the cost of living crisis and drive greater financial equality and wellness across the country.

As the industry body for UK FinTech, Innovate Finance has identified four immediate actions necessary for UK FinTech to thrive, drive growth and benefit consumers:  

1. Complete and build on legislation to drive competitiveness and innovation in financial services  

The timely adoption and implementation of two key pieces of legislation currently before Parliament is critical to the continued growth of UK FinTech: the Financial Services and Markets Bill and the Data Protection and Digital Information Bill. 

We encourage the rapid adoption of this legislation that will enable smarter regulation to boost competitiveness, unblock existing impediments and accelerate an extensive roll-out of open banking. This could help cut costs for SMEs and consumers and provide people with more effective tools to assess and manage their household finances. For FinTech to thrive and benefit consumers, we need proactive, quick, and intelligent regulation - not deregulation.

• Financial Services and Markets Bill: strengthening competitiveness of UK regulatory system 

We are supportive of the Bill, including a competitiveness objective for regulators, which is critical to supporting proportionate rules that promote innovation and ensure better outcomes for consumers. The Bill set out by the Government previously could, however, be bolder in putting in place a system that ensures that regulators support international competitiveness. This includes strengthening the competitiveness objective and extending the framework to the Bank of England and the Payments Systems Regulator - both of which will have a critical role in the regulation of new technology-led innovation. 

• Data Protection and Digital Information Bill

This Bill has two provisions which will unleash further innovation in UK FinTech to create continued  growth in financial services and improve productivity in the economy: 

• Smart data. The provisions on smart data can ensure the UK maintains its global lead in open banking and build on this to widen the availability of data driven financial products in ways that will both stimulate exports and investment. Additionally it will create additional tools that will boost SME productivity and help households manage their finances. 
• Digital ID (or ‘financial passport’). The Bill establishes a regulatory framework for digital identity verification services in the UK and enables public authorities to disclose personal information to trusted digital identity providers for the purpose of identity and eligibility verification. This will enable the introduction of digital ID schemes, which should create new opportunities for innovation including easier customer take-on, addressing financial exclusion and supporting productivity by providing greater security for existing and new products. 

In parallel with the rapid adoption of this Bill, Government could further stimulate growth in these areas by:

• mandating regulators to extend existing open banking rules to a wider range of services including all savings accounts, credit and mortgages – enabling comprehensive financial management tools to help people better manage household finances. 
• requiring public authorities to release data (with the individuals’ consent) that can further support better credit assessments, financial advice, and access to finance (e.g. benefits and HMRC data).
• encouraging the FCA to agree clear guidelines that enable rapid deployment of robo advice to help households struggling with finance this winter.

2. Level the playing field to unlock additional FinTech lending to SMEs 

SMEs account for a significant proportion of growth in the UK, and as such continued access to funding is vital. 

UK FinTechs are central to that delivery, with alternative lenders, challenger banks and asset finance companies providing around 65% of all lending to SMEs. However, we expect lending volumes to fall in the next 12 months due to higher funding costs and increased operating costs for SMEs due to energy bills and cost inflation, reducing the SMEs ability to service debt.

During Covid, FinTech lenders provided around 27% of all CBILS loans despite being brought into the scheme several weeks after the large banks. They are also funding the additional growth in housebuilding by lending to smaller developers. 

Crucially, FinTech lenders fund the borrowers who are not serviced by the large banks; it is these marginal borrowers that are the swing factor in delivering growth. However these lenders face an unequal playing field in terms of cost of capital versus the large banks. Their input funding cost (based on 5 year gilt rates) has increased by 3.7 percentage points over the last 12 months, 2.3 percentage points of which were added in the last 6 weeks, and this must all be passed on to SME borrowers.

Ignoring the increase in risk margin could add £300 million per year to SME interest costs. Additionally, the 15% rate cap on the Recovery Loan Scheme Phase 3 is now out of date given the steep rise in gilt yields and there will not be much take up of this scheme from FinTech lenders. 

We recommend that the British Business Bank is mandated to broaden and deepen its guarantee and funding products so that FinTech lenders are provided with the ammunition to keep SME growth on track during the cost of living crisis. Additionally, appropriate changes to bank capital rules (MREL and IRB) could free up capital for FinTech challenger banks to deploy more lending into the SME market.

3. Stimulate funding for all stages of FinTech growth, and revitalise the UK as the listings market of choice

FinTech accounts for around 50% of all VC investment in the UK. Recent announcements have provided the basis for strengthening access to growth capital at all stages of business growth, from startup to scale up through to IPO. Listing reforms have enabled the UK to catch up with international competitors. 

To make the most of these, further action is needed to position the UK as the leading place for FinTech investment.

• Continuation of Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) beyond their 2025 sunset date. We welcome the support in the Economic Growth Plan for extending EIS, SEIS and VCT beyond 2025 and raising SEIS limits. If the eligibility (‘permitted activities’) for EIS and SEIS could also be extended this would further support growth: Our recommendation is that the rules are changed to permit lending and insurance risk as permitted activities without the 3 year look-back restriction.
• R&D tax credit. We welcome commitments to extend to cloud computing and data; extending to cover software acquisition would also support a significant driver of productivity.
• Reforms to the pension charge cap and Solvency II will facilitate institutional investment in UK based tech firms. 
• The Long-Term Investment for Technology and Science competition is also welcome. We hope it will be open to invest in commercial fintech growth and applications as well as other technologies.  
• Much has been done over the last year to bring the UK listings environment back to a position where the UK can compete with other markets. Implementation of the Hill Review has been an important step. We now need strong statements to ensure a further push to make the UK the No. 1 choice for global investors and IPOs. Rapid implementation of digitalisation of shareholdings would make the UK a world leader, as recommended by the Mark Austin Review and now being taken forward by Sir Douglas Flint’s task force.
• In addition, while our latest set of investment data shows a remarkable performance by the UK FinTech sector, the gender gap is widening, with a significant YoY drop in investment for female founders. Our ecosystem must work together to even the playing field and provide equal opportunities for females and for all underrepresented FinTech leaders. 

4. Develop and deliver a plan to position the UK as the world’s preeminent centre for digital finance, which will cement our global leadership in financial services

The future of finance will be digital finance, as the technology underpinning digital assets plus artificial intelligence and greater data processing is combined to transform market infrastructure, payments systems and all aspects of financial services.

The UK has an opportunity to build on its previous plans to be the best place to start and grow a crypto business, to set out and achieve a more ambitious vision to be the world’s leading digital finance centre – and thereby the world’s leading financial centre of the future. 

In recent years the UK has been the leading destination after the USA for investment in distributed ledger technology (DLT) and crypto-asset based businesses. However, other countries are now catching up. So far this year, Singapore has overtaken and pushed the UK into third position.

To regain our position at the top, the UK needs to become a clear beacon of a ‘digital democracy’, building on its long-established traditions and reputation, while radically innovating in other areas. This should include:

• Establishing a joined-up strategy across Government, regulators and the legal system that is alive to the potential benefits as well as the risks of crypto-technologies, and provides clarity for businesses and consumers interacting with them.
• Ensuring a continued review of UK law and regulation to ensure it provides the basis for recognising digital assets and digital transactions.
• An improvement in the responsiveness and service levels of the UK’s regulators in their processing of applications for new businesses or new business launches - without reducing the level of scrutiny.

The above are four core areas that must be progressed quickly in order to retain and cement the UK’s leadership in financial innovation. During this period of global economic uncertainty, it is more important than ever before that we all come together - industry, government and regulators - to champion and bolster the world-leading UK FinTech community which serves to create a more accessible and inclusive financial services system for everyone.

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