Capital markets report: UK continues to shine as fintech hub, Europe leads on sustainable finance

AFME report shows regulatory sandboxes turbo-charged fintech growth in 2021

by | October 25, 2021 | bobsguide

The UK ranked number one as fintech leader in Europe for the third consecutive year, followed by Sweden, Denmark, and Lithuania, according to a capital markets performance report released by the Association of Financial Markets in Europe (AFME) on Thursday.  

Progress in the fintech sector over the last 12 months was assessed based on a composite indicator of the regulatory landscape, funding availability, innovation, and talent pool. 

Based on investment flows, the US remains the clear leader in the space, with flows of $40bn just in the first half of 2021 – more than double the $19.7bn it posted for the entire 2020 financial year. The UK follows with $10.5bn of flows in the first six months of the year, while EU countries posted $8.5bn of flows. 

Overall, though, the report said the UK continued to consolidate its position as the “main global financial center for fintech activities” thanks to “record funding […] and record M&A transactions.”  

For example, company valuations for UK fintech unicorns surged from $30bn in 10 businesses in 2020 to $82bn in 15 companies in 2021. 

European fintechs valued above $1bn also saw healthy valuation uptrends – from $11.8bn across four companies to $76bn across 13 firms in the first half of 2021. 

Regulatory ecosystem key catalyst of fintech growth 

But it was mainly the recent enhancements introduced in the UK’s regulatory sandboxes to help secure the UK its solid positioning, according to the report. 

AFME in fact listed increased regulatory support as one of the main drivers of growth in the fintech space, citing findings from the Bank for International Settlement that associated regulatory sandboxes with “an economically large and statistically significant rise in investment in fintech companies.  

“The BIS finds that ‘investment as a share of GDP is, on average, around 75 percent higher in the years after the establishment of a sandbox than in the years before’,” the markets association said. 

The UK Financial Conduct Authority has recently moved the domestic regulatory sandbox from operating on a cohort basis – whereby companies could only apply during a specific window in the calendar year – to “always open,” allowing firms to submit applications at any time, with testing periods of three to six months. 

According to the FCA’s statement at the time of the decision, the move will “maximize the benefits of live market testing for progressing the innovative models,” allowing the firms to access the sandbox testing services at the right point in their development cycle.  

Over the past year, AFME noted many other European countries fostered their legislative ecosystem for fintech – through both the launch of new regulatory sandboxes and the broadening of market activities covered by local innovation hubs.  

The increasingly key role played by regulatory initiatives is also evidenced by the fact that, although a country like Sweden improved significantly on several parameters, it was penalised by the lack of a local regulatory sandbox. 

“Sweden significantly improved the indicator values over the last two years on the back of a significant increase in funding flow, and from hosting Europe’s largest fintech unicorn (Klarna).  

“The main limitation for Sweden, as measured by our indicators, is the lack of a local regulatory sandbox.” 

Conversely, Austria, Greece, Hungary, and Spain gained ground in the country rankings thanks to improvements in their regulatory frameworks, the report noted. 

Upturn in sustainable finance issuance 

Along with digitization, the UK has also significantly improved its position in sustainable finance, according to the report, as it hit its highest level to date of ESG-labelled bonds relative to total bond issuance. 

The increase was in line with the broader European market, which now accounts for 54 percent of global ESG issuance, and where “ESG debt markets no longer represent a niche sector but rather a sizeable and growing component of overall debt markets,” AFME said. 

“The European Commission’s SURE scheme of social bonds and continued growth in sovereign and corporate green bond issuance have contributed to significantly expand this market segment,” it added. 

In the first six month of the year, the ratio of ESG issuance to total debt issuance rose to 21.5 percent for the European bloc including the UK – in stark contrast with the US, where sustainable-finance issuance represented a paltry 0.9 percent of total new debt. 

France and Germany led the way by ratio to total debt issuance and by volume of green bonds respectively. 

In terms of assets under management, global ESG investment funds continued to grow across all major asset classes except money market funds, the report noted – with ESG equity funds representing the largest fund asset class by far at 57 percent of the total, over three times larger than fixed income. 

Funds with an ESG mandate totalled $4.36trn as of the second quarter – a $1.3trn surge from the same quarter last year.  

Cross-border activity 

Meanwhile, AFME noted that intra-European private equity and M&A activity dropped in the past 12 months, with non-European companies playing a bigger role in cross-border activity.  

However, the Covid-19 crisis “has not generated significant disruption of cross-border flows, and in some instances, companies have sought to raise funding cross-border to endure the pandemic.” 

Luxemburg remained in the top position for intra-European integration as it continues to be the “EU’s hub for the cross-border distribution of investment vehicles with the largest domicile of UCITS and AIFS in the EU.”  

On a global level, however, the UK fared as “the most globally interconnected European capital market.”  

“The UK’s leading position is driven by its large role at intermediating global flows of interest rate derivatives and FX transactions.  

Luxembourg’s global interconnectedness is driven by the large portion of global equity and fund shares registered in Luxembourg,” the report said. 

According to Bank of England’s figures, FX trading from London trading desks increased 24 percent year-on-year in the first half of 2021, it added. 

Conversely, the UK’s capital market issuance actually decreased 5 percent year-on-year during the same period, due to a drop in investment grade bond issuance.

However, the UK market also saw an uptick in loans transferred into capital markets instruments, “due to an increase in total (placed + retained) securitisation issuance and, to a lesser extent, an increase in loan portfolio sales.”  

New bank loan origination, instead, slid 22 percent compared to 2020 levels. 

Additional reporting by Anna Brunetti 

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