Leading City partners have warned that making London more attractive to fintechs will require more than the reforms put forward by Chancellor Rachel Reeves, with better access to capital and a shift in attitude from regulators required in order to bring the financial services market out of the doldrums.
London fintech partners have reacted with cautious optimism to Reeves’ Financial Services Growth & Competitiveness Strategy – set out in her Mansion House speech earlier this week (15 July) – which aims to make the UK the ‘world’s most technologically advanced global financial centre, a leading jurisdiction for fintech firms to start up, scale and list.’
‘What fintechs need is immediate access to cash and liquidity, and this is still some way off. So there’s a harsh reality of being able to see a bright horizon but not having ready access yet to the stepping stones to get there,’ said Fiona Ghosh (pictured right), a partner at Ashurst’s digital economy transactions practice.
The reforms include the launching of a bespoke fintech scale-up unit led by the PRA and the FCA, the creation of a brand-new type of stock exchange for private company share trading (PISCES), and the piloting of a digitally native, tokenised UK government bond, a ‘Digital Gilt Instrument’ (DIGIT), using distributed ledger technology.
‘To grow unicorns into major global businesses, you have to provide a supportive regulatory environment where you’re not going to pull them back from innovation unnecessarily, but where they’ll be able to access capital to fund what they need to do to get to the next stage,’ commented Arun Srivastava (pictured right), a corporate partner and fintech regulatory advisor at US firm Paul Hastings.
A stifled market?
In her speech, which came a week after City AM reported that fintech executives from Zilch, Atom Bank and Revolut had told the Chancellor that they would need to be incentivised to list in London, Reeves stated that regulators had gone too far in seeking to eliminate risk. She said: ‘Regulators in other sectors must take up the call I make this evening, not to bend to the temptation of excessive caution, but to boldly regulate for growth in the service of prosperity across our country.’
This approach was broadly welcomed by partners. ‘They have to empower them to regulate in a way that is not zero risk, that is proportionate, but also creates space for these businesses to enter the market and to grow,’ said Srivastava.
Clifford Chance partner Diego Ballon Ossio (pictured right) highlighted the tension between consumer safety, innovation and growth: ‘It cannot be the case that you put customer protection as the only paradigm of financial services regulation, because ultimately that is one of the factors which stifled the market.’
Stuart Davis, global co-chair of the fintech industry group at Latham & Watkins, noted that while much of the regulation targeted by Reeves is not directed at fintechs, a shift in the regulatory climate could still prove beneficial.
‘Fintechs will be closely watching whether regulators now deliver on the calls to lighten the regulatory burden, as many of the suggested areas for deregulation focus on banks and traditional financial services rather than challengers.’
‘Fundamentally what I think needs to be calibrated correctly is openness to new business models, to new activities, to new ways of doing old things,’ added Ballon Ossio, ‘I think that will come with an increased risk appetite and understanding that things sometimes go wrong.’
A step in the right direction
Despite the residual challenges, the Chancellor’s speech has generally been positively received by financial services lawyers.
Ben Koehne, head of financial services at Addleshaw Goddard, said that ‘unlocking pension and insurance capital for UK investment is essential—not just for scale-ups but also for deepening the UK capital markets. A joined-up strategy between the Treasury, regulators and market participants will be key to delivering on this ambition.’
Davis called the proposed reforms ‘another step in the right direction. The narrative around regulators being facilitators and, in essence, getting out of the way, is the right narrative’.
Etay Katz, head of digital assets at Ashurst, went further, calling the strategy ‘sensationally refreshing.’ ‘This is now a reality and may be a historical moment in a new chapter of making the UK a global leader in this tremendously important field of digital finance.’
Looking at the reforms from a fintech perspective, Ghosh remarked that ‘this is symptomatic of a wholesale mindset shift of our domestic economy from one that is quite heavily regulated sector by sector, to one that is genuinely looking at global growth driven, hopefully, through simplification.’
‘London is now clearly the least frictional place to access the public markets in Europe,’ added Davis. ‘The go-live of PISCES later this year could also be a very attractive gateway to listing for UK fintechs as they rightsize themselves and their cap tables ahead of any IPO.’
Srivastava said that the reforms could lead to ‘cultural transformation, adding: ‘they have the potential to deliver tangible output, and I think they’re genuine in their desire to make the UK competitive and supportive for the tech industry.’
Speaking about Reeves, Ghosh concluded: ‘the markets feel that they genuinely have in front of them somebody who’s trying to make systemic change for fintechs – root and branch.’
