With the UK General Election just six weeks away, the recent Budget was an opportune time for The Chancellor, George Osborne, to set out his stall and give the UK electorate a glimpse of what a Conservative-led Government after the election would prioritise. Among the macroeconomic announcements and promises were policies solely aimed at the growing financial technology (Fintech) sector. Both the Conservative Party and Labour Party now recognise the importance of this budding industry and have been quick to publicise their aspirations for the sector, should they lead the next Government.
Maturing with age
The UK FinTech industry generated £20bn in revenue in 2014. More than three quarters of London’s Fintech community believe the City is a better incubator than global tech hubs such as Silicon Valley, according to a new survey of technology influencers conducted by PR agency Seven Hills. Respondents felt that a combination of the city’s existing financial services infrastructure (81%), access to talent (72%) and geographical position (68%) is giving London’s Fintech scene an edge over the competition. As of the end of 2014, NewFinance estimates that there are over 1,000 Fintech startups in the UK, with 44,000 people employed in the sector in London alone. It has been a meteoric rise, which has inevitably left regulatory authorities struggling to keep pace.
Banking: from crisis to diversification
Since the financial crisis, political parties have been forced to promise further checks and balances to curtail any misconduct from within the banking sector. However, this doesn’t square entirely with some of the calls from the Fintech sector for better access to finance, for a more tailored anti-money laundering regulation, and less restrictions in promoting their products.
In the last two years of this Government’s five year term, senior politicians have become more vocal in their support for young Fintech startups. More recently, the Government has confirmed an open API standard in UK banking and set out a detailed framework for its design by the end of 2015. This will enable a much easier sharing of crucial bank data so firms can make use of it for the benefit of customers. This was one of the headline announcements from the Chancellor in his Budget speech.
The Labour Party has found it even more difficult to toe the line between being, on the one hand, strict towards the traditional banks, whilst on the other hand championing disruptive challenger banks. In early 2015, plans to retrospectively clawback bankers’ bonuses for misconduct were quickly followed by despatching Shadow Secretary of State for Business, Innovation and Skills, Chuka Umunna, to reassure financial services startups that the Labour Party was on their side.
Due, in part, to the political party being in opposition for the last five years, many Fintech companies are unaware and unsure of Labour’s position on many policies. On banking, Umunna has stated categorically that a Labour Government would “reduce the barriers to entry for challenger banks to create more choice”. He has added that he will look to promote alternative finance, including factoring and peer-to-peer lending.
British Business Bank
One of the policies that Labour will write into their manifesto is the expansion of the British Business Bank. Although this institution currently distributes funds via the existing bank network, Labour are proposing a more direct “network of geographically mandated regional banks” – a British version of German Sparkassen, as they like to put it.
The reasons they give for this proposed overhaul is that despite the economic recovery, banks continue to lend less to SMEs than previously. Between January 2013 and January 2015, lending to this group of companies fell by £9 billion to £167.5 billion. The British Business Bank, a government body, is becoming more important to SMEs and has doubled its investment in early stage equity finance with £400 million invested over three years.
The current Secretary of State of Business and Liberal Democrat MP, Vince Cable, has also vowed to encourage new “challengers” to the established big banks as a means to diversify and grow the market. The Liberal Democrats’ proposals include measures to allow smaller banks to collapse safely, reducing the risk to the public. The proposals also feed into the Liberal Democrat mantra of decentralisation. Co-operative and savings banks play an important role in encouraging the growth of SMEs, according to the current coalition party.
P2P Lending and Crowdfunding
The coalition Government can claim some success in the maturing of the equity crowdfunding and peer-to-peer lending sector. On its watch, the sector has grown rapidly and is now considered a viable option for SMEs to raise funds.
The Conservative Party has committed to reporting back in autumn 2015 on the feasibility of developing a regulatory ‘sandbox’ for financial services innovators, so-called ‘RegTech’. Although the details will need to be finalised, a ‘sandbox’ allows users to experiment within set parameters and assess costumer responses. The Financial Conduct Authority (FCA) will work with HM Treasury and the Prudential Regulatory Authority (PRA), who are tasked with leading this investigation and highlighting how this could work in practice, with a view to launching the sandbox by the end of 2015 with an expected duration of around 5 years.
However, the crowdfunding community would like to see some further clarification on a number of issues. For example, crowdfunding platforms must at present ensure that their advertising is clear, fair and not misleading. These guidelines cover all public pronouncements of the platform or projects on the platform, including those voiced over social media. As well as this, advertising projects must be strictly directed toward vetted and certificated sophisticated investors. These measures are considered too restrictive by market players and it remains to be seen how a future Government will choose to move forward.
To coincide with the budget, HM Treasury has released the submissions received from a recent consultation on digital currencies in the UK. The document collates the opinions given in 120 submissions and details the benefits and risks of digital currencies and the technology used by digital currencies.
In response to this, the Government has vowed to introduce anti-money laundering regulation for digital currency exchanges in the UK, to support innovation and prevent criminal use. This is a big step forward, compared to what has been up until now a tentative approach to cryptocurrency. A Conservative-led Government would also consider how to ensure that law enforcement bodies have effective resources and legislation to prosecute criminal activity relating to digital currencies, including the ability to seize and confiscate digital currency funds where transactions are for criminal purposes.
These announcements have been cautiously welcomed by many (although not all) cryptocurrency businesses in the UK. The consensus is that the Government has listened to their calls for a pragmatic regulatory framework that will evolve over time. The Government has also agreed to work with BSI (British Standards Institution) and the digital currency industry to develop voluntary standards for consumer protection.
The UK’s Shadow Minister for Digital Government, Chi Onwurah, has struck a similar tone – stating that cryptocurrency had the potential to take more power away from “classic, traditional financial institutions”. However, Labour has generally been slow to raise their head above the parapet regarding this asset class and they have confirmed that they would prefer to take a wait-and-see approach to the regulation of digital currency.
As the election moves closer, the best example of politicians taking advantage of pioneering Fintech can be seen in Vauxhall, London. Green Party candidate for the area, Gulnar Hasnain, is the first mainstream UK politician to accept Bitcoin donations for her campaign. She has collected over 30 donations in cryptocurrency following her efforts to enable supporters donate online. Hasnain believes that Blockchain technology can transform democracy worldwide. Not only that, but she has also made the most of crowdfunding for campaign funds as well. A sign of how politicians fund political campaigns in the future, perhaps?
This upcoming general election will clearly not be decided upon by the emerging Fintech policies from the main political parties, but this does give us an idea of what we can expect to be key issues in the early stages of the next Parliament. The election also gives many working in or following the sector cause to reflect on how far the industry has come. Politicians are now actively courting the Fintech vote, whether by supporting greater access to alternative finance, including savings benefits or debt relief to P2P lending, or promising tailored regulation for cryptocurrency. If the sector continues to fuel the UK recovery and to grow at impressive speed, we can only expect political interest to continue in the next Parliament.