Long reads

An in-depth look into the Kalifa Fintech Review ahead of the 2021 Budget

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

The release of Ron Kalifa OBE’s Review into the future of UK fintech set off a tidal wave of support across the industry. The Review outlines a plan to “bolster” the UK’s dominance in a global setting, and warns that “the trajectory of UK fintech is at an inflection point of opportunity – and risk. While the UK’s position is well established, its future is not assured.”

Competition, Brexit and Covid-19 were cited as the core threats to the strength of UK fintech, and the Review identified a five-point plan to deliver a “prize” of job growth, trade and inclusion. The five key recommendations of the strategy and delivery model include Policy and Regulation, Skills, Investment, International, and National Connectivity.

Notably, we do not know when the government will respond to make anything (or nothing) of the recommendations. When asked directly during the City of London panel session about timing of the government’s response, Economic Secretary to the Treasury John Glen MP simply replied, “Soon.”

This could be as early as tomorrow, following the FT’s predictions that Sunak “will use his Budget to launch a post-Brexit fightback by the City of London” to help it compete internationally.

In conversation, Nick Lee, OakNorth Bank’s head of regulatory affairs broke down some of the Review’s key recommendations, stating that they are generally “very happy with Ron’s findings.”

“The key points that resonate with us are about getting the sector ready to scale. We’re five and half years into our journey and have been successful to date. However, what’s critical is that we’re able to grow and scale to compete effectively as a bank in the UK, but also as a fintech selling SaaS [software-as-a-service].”

Lee continues: “The [Review’s] sections about removing barriers to scaling - investment barriers, regulatory or policy barriers, talent barriers – are critically important. Particularly now that we’ve left the EU, I think it’s become more important given international competition.”

London-based OakNorth was closely involved with the drafting of four of five of the Review’s workstreams (policy & regulation, skills, investment, and international), so it’s no surprise that the neobank (along with nearly every single fintech in the UK) was positive about its release and the importance it places on fintech in financial services. The Kalifa’s Preface spells out that “Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution that is changing the way we do finance.”

“Hopefully in a few years’ time we’ll have a few North Stars in the UK just as you’ve got in the US and China as world leaders in fintech, and I think that hopefully one of those is going to be OakNorth.”

We are yet to come across a negative response to the Review’s recommendations, but we also don’t expect fintechs to look a gift horse in the mouth.

The headline grabbing Growth Fund

Perhaps the sexiest part of the Review was the call for a £1 billion ‘Fintech Growth Fund’ pulled from institutional capital to address a £2 billion fintech growth capital funding gap. The report explained this would be a market-led fund, funded by holders of domestic institutional capital and would (where feasible) utilise existing regulatory concessions applicable only to the fund itself.

Stating that while domestic institutional investors may eventually create a fund directed at fintech, the report continued: “the opportunity therefore exists for the government to use its influence and convening power to support the concept of a domestically funded growth capital investment vehicle focused on fintech.”

Could it be a little too late to support the cohort of growth companies that need private funding now in order to scale and expand internationally?

Lee explains that it is important not to crowd out the private sector. “What’s been critical for OakNorth’s success so far is that we were able to bring in those private investors and funding. Whether it’s Softbank, or GIC, or Tosca Fund, we’ve been really lucky to have them on our list of shareholders.

“If it was just a government mandated fund that was investing in OakNorth, I’m not sure that would be the right answer. So, if it is an accelerator and it brings others in, which I think is the plan, then that’s brilliant, it would be really helpful.”

He furthers that if this fund does indeed have the ability to unlock the £6 trillion in UK private pension schemes alone and divert even just a small portion of this toward fintech, it would be significant for the sector and makes sense as an investment within a diversified portfolio.

The Kalifa Review calls for a ‘specialist investment team’ to govern this would-be Growth Fund, and Lee explains that this would have to be compiled from private sector professionals. “They would need to have that experience because investing in a fintech is riskier – that’s why we have VCs and seed investors, they’re prepared to take greater risk.”

He adds that he imagines the team would need to hold a truly commercial investment skillset and would look like Softbank’s Vision Fund, where they invested in specific opportunities where they saw strong potential. Importantly, “they would hold the businesses that they invest in to account.

“This has been a key part of it for us, because while founders have this discipline themselves, the shareholders and the experienced international investors are not only guiding you and providing advice, but they’re also asking the challenging questions at the right time. It is hugely beneficial to fintech executives.”

In April 2020 Sunak spearheaded the ‘Future Fund’ to invest over £1 billion of government funds into UK startups as a part of the government’s Covid-19 business support programme. The fund offered loans to start ups which saw state money matched by private investors with optional conversions into equity stakes.

Rumours of a new initiative called ‘Future Fund: Breakthrough’ were reportedly confirmed by the Treasury over the weekend, which will see Sunak launch £375 million of government money into fast-growing UK tech companies.

Quoting the Treasury, the FT states that the chancellor would co-invest alongside the private sector in “high-growth, innovative UK companies, including those in life sciences, quantum computing or clean tech.”

Revisiting listing rules

Within the Investment stream, the Review recommended enhanced governance structures with the relaxation around the use of dual-class shares, which “can be particularly attractive to founders who wish to raise funds but still retain control and guard against unwelcome takeovers, particularly in the years immediately following an IPO.”

These are currently available only to the less prestigious standard market in London but are available across major global stock exchanges (NYSE, NASDAQ, Euronext, HKSE, Deutsche Borse). A free float reduction and the relaxation of pre-emption rights are also on the table.

Lee elaborates that the focus around listing rules stems from competition. “There will be some people saying that this isn’t necessarily a good thing, but the reality is that if you’re a fintech founder and you don’t want to lose control of your business, then you’ll just go and list in New York or Amsterdam.

“It’s just a question about whether the UK wants to compete on a level footing with other jurisdictions. It’s getting the balance between good governance or keeping those fintech listings within the UK.”

Kalifa’s Scalebox-of-tricks

Chatter around the specifics of Kalifa’s “Scalebox” has also drawn interest, with the Review outlining that it would support firms which are focused on scaling innovative technology by enhancing the existing sandbox, making permanent the digital sandbox pilot and supporting partnerships between incumbents and fintech or regtech firms.

To understand the nature and reasoning behind the recommendation, Lee explains that it is useful to look to the FCA’s existing Regulatory Sandbox, of which the UK was the first in the world to launch and has since been copied in around 50 jurisdictions.

“One of the points I felt strongly about is the assistance that the FCA and PRA have been delivering to firms to help them start up, such as testing or providing a safe testing environment.

“Firms that have gone through this have been universal in their praise for support from the FCA or PRA. But, at a certain point this support stops and you either leave the sandbox or you are put back into the general pool.

“Whether you’re a fintech or non-fintech, the challenges that come from scaling and the regulatory requirements you have to meet as a fast-growing company are very different to those of a bank or building society with pretty static business model.”

While the work done on the startup-side is great, Lee explains, it tends to stop without the similar level of support/supervisors who know or have knowledge of the technology driven business models.

“For OakNorth, it has been about creating supervisory structures that allow fast growing banks and fintechs to really understand what the regulatory requirements are for them as they scale and grow.”

Though Lee believes the Sandbox has been great, there are only certain things you can do from within it, and as firms come out of the sandbox, they then must apply for authorisation from the FCA which can be time consuming. The lack of refinement and support around these processes are where the UK needs to inject resource and attention.

Tying-in to the concerns raised around boosting competition and listing rules, strengthening the scaling journey will assist the current cohort of UK fintechs develop into regional or global players. Scaling these firms successfully will generate interest in further listings and, as Lee explains, this creates something of a virtuous circle: “anything that the Review can help to assist with the IPO journey and helping London become an attractive place to list will only be beneficial to the sector as a whole.”

The Review’s Executive Summary flagged the trends which have positioned the UK as a true fintech hub, which, coupled with London’s sophisticated financial services ecosystem, ‘unicorns’ such as Wise, Onfido, Revolut and Checkout.com, have been able to grow and flourish. This success is not assured, the Summary continues, and requires both attention and resource in order to meet its potential.

Speedy fintech visas

Also expected to be announced in tomorrow’s Budget is a fast-track fintech visa scheme to attract and retain tech talent in the UK post Brexit, and the alignment with the Kalifa Review’s call for a new visa ‘Fintech Scaleup Stream’ is clear.

The Review argues that it would open up access to international talent which currently represents c. 42% of UK fintech employees. The report argues that in order to remain a global leader in fintech, the UK must strengthen its position on immigration or risk a significant shortage in human capital.

Additionally, in order to capitalise on the fintech talent pool already present in the UK, the Review recommends the upskilling and retraining of adults by ensuring access to education from high-quality institutions at lowered costs.

When questioned whether these two goals present something of a conflict for resource allocation, Lee’s personal opinion is that no, there isn’t a conflict.

Rather, “we’ve got to be honest and say that given the demand for specific skillsets there probably isn’t a big enough pool of talent in the UK at the moment. But that doesn’t mean there can’t be a bigger pool of talent built with the right training as recommended in Ron’s Review.”

“We view diversity as being absolutely key for our business, because we get better decisions and are able to build a better company by having a much broader base of talent. So, while we will continue to recruit in the UK, we have to be realistic and say that there is a limited talent pool at the moment in the UK, and we want to bring in the best talent from around the world.”

While Lee adds that in five years’ time, ideally the conversation will look a little different and there will be a stronger stream of tech talent being developed in the UK, “but we simply can’t press pause on all of our growth plans and wait until UK talent has been trained.”

Digital identity and crypto moving at snails’ pace

While the Review proposes the delivery of a digital finance package under its Policy and Regulation stream, Lee comments that the UK seems to take a much slower pace in its approach to digital identity than international counterparts – Singapore for example.

The Review states that recent work by the Cabinet Office, DCMS and the Digital Identity Strategy Board is welcome, “particularly with regard to the establishment of a trust framework for digital ID which includes corporate IDs. Innovate Finance and UK Finance have established an industry-wide taskforce to coordinate engagement on digital ID across the financial services sector with these departments.”

Yet this level of attention may not cut the ‘competitive’ mustard. Lee explains that while the UK will inevitably address the challenge of creating a digital ID, the issue remains that “other people will get to it first and we’ll end up taking the standards that others invent. It’s much better to come up with those standards yourself and then let the world copy rather than the other way around.”

Using Kalifa’s words, Lee says that the conversation around digital identity needs ‘gusto’ and energy to be thrown behind it.

Acknowledging that he may have become used to working at “a Rishi pace” (that's Rishi Khosla, co-founder and CEO of OakNorth), Lee laments the fact that for instance, despite being promised a review into the proportionality for small banks by the PRA, we’re not going to receive findings or a green paper or findings until the summer – six months after we left the European Union. “It could be done much more quickly, if you put your mind to it.”

Similarly, when asked about the FCA’s progress on setting up a cryptoasset regulatory regime along the lines of Abu Dhabi’s, Lee explains that “the regulators have been talking about a regime for years, but there is still nothing.”

Crypto firms have found themselves so frustrated with the pace at which the FCA is granting (or not granting) registrations that they are now looking at international jurisdictions as more attractive places to establish their business.

“At some point [crypto firms] will have to consider what the point of basing their business in London actually is if the regulators don’t seem interested and if the pace of regulatory policy in the space remains so slow.

“The UK really needs to get on the front foot in terms of regulatory policy for some of these fast-emerging technologies – whether it’s crypto assets, AI or machine learning, or digital identities.”


While it may be tempting to remain entirely optimistic about the outcome of the Review, the recommendations are just that. Lee explains that “what we really need is a detailed response from the government. All these recommendations are great, but if they don’t lead to any change or any action, then everything we’ve done is a little bit pointless.”

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