Four actions needed now to support the UK fintech sector

Over the past decade, the UK has established itself as a global leader in financial innovation and one of the best places in the world to start, build and scale a FinTech. This has led to easier and cheaper financial services for UK consumers, as the FinTech community has contributed to a more efficient, inclusive and democratic financial services system that works better for everyone.

It is important that we now build on this global leadership by further supporting our FinTech community so that they can continue to help individuals and SMEs navigate the cost of living crisis and drive greater economic equality and wellbeing across the country.

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

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

The timely passage and implementation of two important pieces of legislation currently pending in Parliament are critical to the continued growth of UK FinTech: the Financial Services and Markets Bill and the Data Protection and Digital Information Bill.

We urge swift passage of this legislation that will enable smarter regulation to increase competitiveness, unblock existing barriers, and accelerate a broad rollout of open banking. This can help cut costs for SMEs and consumers and give people more efficient tools to assess and manage their household finances. For FinTech to thrive and benefit consumers, we need proactive, fast and intelligent regulation – not deregulation.

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

We support the bill, including a competitiveness target for regulators, which is essential to support proportionate rules that promote innovation and ensure better outcomes for consumers. However, the bill from the previous government may be bolder when it comes to putting in place a system that ensures that regulators support international competitiveness. This includes strengthening the competitiveness target and expanding the framework of the Bank of England and the Payments Systems Regulator – both of which will have a critical role in regulating new technology-led innovation.

• The bill on data protection and digital information

This bill has two provisions that will spark further innovation in UK FinTech to drive continued growth in financial services and improve productivity in the economy:

• Smart data. The smart data provisions can ensure that the UK maintains its global leadership in open banking and build on this to widen the availability of data-driven financial products in ways that stimulate both exports and investment. In addition, it will create more tools that will increase 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 verifying identity and eligibility. This will enable the introduction of digital ID schemes, which should create new opportunities for innovation, including easier customer contact, tackling financial exclusion and supporting productivity by providing greater security for existing and new products.

In parallel with the rapid adoption of this bill, the government can further stimulate growth in these areas by:

• mandates regulators to expand 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 their household finances.
• require public authorities to release data (with individuals’ consent) which may further support better credit assessments, financial advice and access to finance (eg benefits and HMRC data).
• encourage the FCA to agree clear guidelines enabling rapid deployment of robo-advice to help households struggling financially this winter.

2. Level the playing field to unlock additional FinTech loans for SMEs

SMEs account for a significant proportion of growth in the UK and as such continued access to finance is essential.

UK FinTechs are central to this delivery, with alternative lenders, challenger banks and capital finance companies providing around 65% of all lending to SMEs. However, we expect lending volumes to fall over the next 12 months due to higher funding costs and increased operating costs for SMEs due to energy bills and cost growth, reducing 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 big banks. They also finance the additional growth in housing construction by lending to smaller developers.

It is crucial that FinTech lenders finance the borrowers not served by the big banks; it is these marginal borrowers who are the driving force behind delivering growth. However, these lenders face a different playing field when it comes to cost of capital compared to the big banks. Their input funding cost (based on 5 year gilt rate) has increased by 3.7 percentage points over the last 12 months, with 2.3 percentage points added over the last 6 weeks, all of which must be passed on to SME borrowers .

Ignoring the rise in risk margin could add £300m per year to SME interest costs. In addition, the 15% cap on the phase 3 recovery loan scheme is now outdated given the sharp increase in gilt yields, and there will not be much use of this scheme by FinTech lenders.

We recommend that the British Business Bank be mandated to expand and deepen its guarantee and funding products to give FinTech lenders the ammunition to keep SME growth on track during the cost of living crisis. In addition, appropriate changes to bank capital rules (MREL and IRB) could free up capital for FinTech challenger banks to deploy more lending to the SME market.

3. Stimulating funding for all stages of FinTech growth, and revitalizing the UK as the preferred listing market

FinTech accounts for around 50% of all VC investment in the UK. Recent announcements have laid the foundation for strengthening access to growth capital at all stages of business growth, from start-up to scale-up 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 location for FinTech investment.

• Continuation of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) beyond the sunset date of 2025. We welcome the support in the Economic Growth Plan to extend EIS, SEIS and VCT beyond 2025 and raise SEIS limits. If the eligibility (‘permitted activities’) for EIS and SEIS could also be expanded, this would further support growth: Our recommendation is that the rules be changed to allow lending and insurance risk as permitted activities without a 3-year look-back limitation.
• R&D tax deduction. We welcome commitments to expand into cloud computing and data; expansion to cover software procurement will also support a significant driver of productivity.
• Reforms of the pension contribution ceiling and Solvency II want facilitate institutional investment in UK technology companies.
• The Competition for long-term investment for technology and science are also welcome. We hope it will be open to investing in commercial fintech growth and applications as well as other technologies.
• Much has been done in the past year to get UK entries 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 number 1 choice for global investors and IPOs. Rapid implementation of digitization of stock records will make the UK a world leader, as recommended by the Mark Austin Review and now taken forward by Sir Douglas Flint’s task force.
• Additionally, while our latest set of investment data shows a remarkable performance from the UK FinTech sector, the gender gap is widening, with a significant year-on-year decline in investment for female founders. Our ecosystem must work together to level the playing field and provide equal opportunities for women and for all underrepresented FinTech leaders.

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

The future of finance will be digital finance, as the technology underlying digital assets plus artificial intelligence and big data processing combine to transform market infrastructure, payment 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 of being the world’s leading digital financial center – and therefore the world’s leading financial center of the future .

In recent years, the UK has been the leading destination after the US for investments 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 place.

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

• Establishment of a unified strategy across government, regulators and the legal system which is alive to the potential benefits as well as the risks of crypto-technologies, providing clarity for businesses and consumers who interact with them.
• Secure one still review of UK law and regulation to ensure that it provides a basis for recognizing digital assets and digital transactions.
• An improvement in responsiveness and service levels to UK regulators in its processing of applications for new businesses or new business launches – without reducing the level of scrutiny.

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

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