Regulation Is a Vital Component of the UK Fintech Sector’s Leading Global Standing

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By Joseph Moss, International Banker

With the pace of innovation within the global fintech (financial technology) sector remaining as brisk in 2023 as ever, it is crucial that regulations continue to evolve to reflect the nature of the industry today and tomorrow. Over the past decade, the United Kingdom has emerged as a global leader in fintech innovation and a true international hub for prominent fintech companies. A clear regulatory framework for the country’s flourishing industry remains critical. Thankfully, British regulators have stepped up to the plate, creating not only a level playing field that protects fair competition between fintech companies but also the necessary space to unleash a true innovation spirit for both industry incumbents and newcomers alike.

With investment in its fintech sector among the world’s highest as a percentage of gross domestic product (GDP), the UK is unequivocally a preeminent global fintech hub. The country attracted $9.1 billion in investment last year, second only to the United States and more than Germany, France, Sweden and Italy combined. According to a January 30 article by the Financial Times, the British fintech sector is home to more than 1,600 fintech firms—a number that is projected to double by 2030—including many of the world’s biggest fintech players.

Part of the UK’s success has been attributed to the government’s collaborative approach to fintech innovation, directed right from the top. “Our vision is for a more open, greener, and more technologically advanced financial services sector. The UK is already known for being at the forefront of innovation, but we need to go further,” the current prime minister and then-chancellor of the Exchequer, Rishi Sunak, declared during his keynote speech at UK FinTech Week in 2021. “The steps I’ve outlined today, to boost growing fintechs, push the boundaries of digital finance and make our financial markets more efficient, will propel us forward. And if we can capture the extraordinary potential of technology, we’ll cement the UK’s position as the world’s preeminent financial centre.”

In support of such goals, UK regulators seem aligned regarding nurturing and optimising innovation. “Regulation is generally a blocker to innovation. But the UK has used it to foster domestic competition and successfully grow its global presence,” Andreessen Horowitz recently explained in an article published by the venture capital (VC) firm on its website entitled “The UK Is a Fintech Regulatory Superpower”. “If Europe is the world’s regulatory superpower, then the UK has quietly become Europe’s financial regulatory superpower (even post-Brexit).” 

Although no formal framework is specifically dedicated to fintech regulation, fintechs must be authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) to provide regulated financial services in the UK. The Financial Conduct Authority has launched several key innovation-themed initiatives in recent years.

First established in November 2015, the UK financial-services watchdog’s Regulatory Sandbox continues to provide firms with a robust, controlled environment in which they can test their ideas on a limited set of customers before bringing them to market. The sandbox ensures that fintech firms are up to speed on regulatory requirements and also cultivates innovation by supporting their access to capital to fund their early development stages. The FCA’s Innovation Pathways, meanwhile, separately assists fintech firms by promoting the launches of their innovative products and services while helping them understand how regulations relate to their specific activities.

Importantly, growing evidence upholds the effectiveness of such schemes, with studies showing they are having clear positive impacts on UK fintech companies’ overall performances. More than 50 countries have replicated the FCA’s innovation-focused regulatory model for fintechs and introduced regulatory-sandbox concepts while developing their own thriving fintech sectors.

A paper published in April 2023 by the Bank for International Settlements (BIS) focused on the fortunes of a sample of firms accepted into the FCA’s sandbox and found that such acceptance is associated with an increase in the average amount of funding raised and a higher probability of mobilising funding. “In firm-level regressions, we find that entry into the sandbox is followed by a 15 percent increase in capital raised (or $700,000) over the following two years, relative to firms that will enter the Sandbox at a later date,” the paper noted. “Firms’ probability of raising capital increases by 50 percent. The increase in capital raised corresponds to about one standard deviation.”

According to the FCA, a fintech firm’s innovation and development can be maximised by it becoming aware of all necessary regulatory requirements sooner rather than later, ultimately enabling faster growth. “One of the best things that a regulator can do to help innovators is to set firm foundations in place on which business can grow,” according to the FCA’s chief operating officer and executive director of authorisations, Emily Shepperd, in a speech delivered on April 26. “One of the essential ingredients is regulatory compliance, whether that is with KYC [know your customer] as your customer base grows, getting the appropriate licences or making sure the technology you are using meets sometimes a myriad of different regulatory rules.”

The UK has also been proactive regarding regulating crypto-assets, particularly by passing the Financial Services and Markets Act in June, which stipulates certain measures to bring cryptocurrencies under the scope of UK financial regulation. It also gives regulators additional powers to supervise the adoption of stablecoins—digital assets with values tied to other assets (typically fiat currency) to maintain stable, steady values. “Today’s ground-breaking Act enables the regulation of cryptoassets to support their safe adoption in the UK,” the HM (His Majesty’s) Treasury stated after the act was passed. It also noted that the act “establishes ‘sandboxes’ that can facilitate the use of new technologies such as blockchain in financial markets”, thereby further promoting the use of such environments for the development of innovative fintech solutions.

These new rules form part of UK financial regulators’ broader goal for the country to emerge as a leading global hub for cryptocurrency firms. “The UK is working hard to become a leading global centre for crypto and digital assets, building on its natural advantages—the legal and regulatory environment, the availability of skills, the quality of the Universities and the language and time zone positioning,” John Hallsworth, a partner in KPMG’s Financial Services, Open Finance & Fintech division, noted in the firm’s “Pulse of Fintech: UK perspective” report for the first half of the year. “While the UK may not be first out of the blocks with its crypto and digital assets regulations, they’ll likely come into force in early 2024, it is working to create the right regulatory environment to support a sustainable crypto and digital assets ecosystem and make it an attractive location to participants, while also protecting consumers.”

One aim of the UK’s regulatory efforts is to initiate cooperation with similarly advanced fintech industries in other parts of the world. Indeed, it is arguably Singapore that most closely matches the UK regarding the importance their respective governments place on fintech, the advanced level of fintech development observed, the unmatched investment poured into their respective fintech industries and the sheer sophistication of their regulatory frameworks. So, it should come as no surprise that the two jurisdictions are collaborating closely on the regulatory aspects of their fintech industries.

Specifically, the Memorandum of Understanding on the United Kingdom-Singapore FinTech Bridge was agreed upon in November 2022 at the seventh UK-Singapore Financial Dialogue held in Singapore to support continued growth, investment and technological innovation in the sector. Although non-binding, the MoU involves “recognising their position as world-leaders of FinTech development, supported by a regulatory approach to FinTech that is seen globally as the model to emulate—striking the right balance between efficiency and stability, ensuring that innovation is not stifled, while maintaining trust in the financial system”, according to the UK Government’s interpretation.

As for crypto-assets, both parties strongly agreed on the “need to support the safe development of a digital assets ecosystem while ensuring that risks posed by digital assets are consistently managed”, according to the Monetary Authority of Singapore (MAS). “Both countries will continue to actively participate in the shaping of robust global regulatory practices through engagement within international multilateral fora such as the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI) and IOSCO [International Organization of Securities Commissions].”

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