Kalifa Review welcomed by incumbents, but ‘real test’ is implementation

The recommendations outlined in the Kalifa Review have been well-received by incumbent financial institutions eager to partner and invest in the sector, but the “real test” will be how the new initiatives are ultimately implemented by the government, according to market participants

by | June 23, 2021 | bobsguide

The Kalifa Review has been welcomed by fintechs and incumbent financial institutions alike, but the “real test” will be how the UK government implements the recommendations, according to market participants interviewed by bobsguide.

“The key thing now is that these recommendations need to be implemented […] that will be the real test,” says Joe Parkin, managing director, head of banks and digital channels in the UK at BlackRock. “Time will tell whether we can make the recommendations a reality.”

As it stands, the UK holds more than 10 percent of the global fintech market share, with the sector contributing over £11bn a year to the country’s economy. In 2020, investment into UK fintech stood at $4.1bn – more than the next four European countries combined (with $1.4bn invested in Germany, $1.3bn in Sweden, $0.52bn in France and $0.29bn in Switzerland and the Netherlands).

“There’s a massive amount of investment at quite an early stage in UK fintech, which is facilitated by angel investors Venture Capital Trusts (VCTs), Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS) structures – there’s a real groundswell at the early stage,” says Ben Luckett, chief innovation officer at Aviva.

“But then as you get further through the venture capital phase, there is quite a gap when you get to Series B+ and pre-IPO.”

To address the growth funding gap that exists in the UK, the Kalifa Review recommended the government create a £1bn ‘Fintech Growth Fund’ to act as a catalyst in developing a world leading ecosystem.

“It will certainly be a shot in the arm for the industry, and positioning as Series B+ does eliminate some of the very high-risk, early-stage opportunities, so providing a better risk/return profile for these investors,” says John Elliott, head of fintech and open banking partnerships at Investec.

“Whilst it makes the UK an attractive destination for pre-IPO firms, it obviously only works in concert with the fintech public listings recommendations taken into account, to unlock the full ecosystem benefit envisaged in the review.

“Although the review makes much of the need for domestic capital, fintech is ultimately a global ambition for the UK,” adds Elliot. “Keeping the UK at the forefront of the fintech industry globally will ensure that external capital flows remain.”

“Fertile” listing environment needed

The Kalifa Review noted that since 2015, a mere 6.7 percent of fintech opted to list on the London Stock Exchange (LSE), compared to 29.3 percent for the NASDAQ and 24 percent for the NYSE exchanges – a discrepancy the report blames on more favourable listing environments in other jurisdictions.

“The US has traditionally been a much more fertile environment for IPOs,” says Luckett. “It’s sometimes difficult for UK companies to go through that route, and many end up being acquired rather than listing.”

In an interview with bobsguide earlier this year, co-author of the Kalifa Review, Charlotte Crosswell, said that systematic and regulatory issues for listed entities have forced organisations to list elsewhere.

“Different markets have different rules, meaning we were effectively pushing companies away from the UK,” she said. “Is it right that we don’t give founders a choice of where to list and we’re effectively sending them overseas? What’s the impact of that going to be?

“We need to tell the founders that those decisions they make in the early lifecycle will have an impact later on,” she added.

However, despite a clear rationale for improving the listing environment in the UK, there is a level of concern among investors around dual-class share structures, says Henry Alty, investment director at Gresham House Ventures, a fund which focuses on growth capital investment into software and service businesses in the financial and professional services sectors.

“From a selfish point of view, it is good for us, as it is obviously good for valuations and is good for keeping listings in the UK, which is also beneficial,” says Alty. “But there are concerns about the broader governance which that drives, so we need to make sure that shareholders are treated fairly.”

The Kalifa Review recommended reducing the LSE’s minimum free-float requirement (25 percent), authorising dual-class shares and curbing pre-emption rights to improve the UK’s listing environment for fintechs.

“My concern with excessive [regulatory] rollbacks on some of these things just to keep fintechs listing in the UK [is that] it may have knock-on impacts on governance and the overall performance of these businesses,” says Alty.

“I just hope these measures are properly considered, because you do not want a regulatory race to the bottom, because that will ultimately be bad for shareholders.”

Supporting partnerships

The Kalifa Review also recommends the introduction of a ‘Scalebox’ to support fintechs as they scale, alongside measures to support partnerships with incumbents. The initiative builds on the Financial Conduct Authority’s (FCA) regulatory sandbox, which offers firms the ability to test products and services in a controlled environment.

“There is a focus on helping fintechs scale and having that formal framework in place makes it easier for incumbents like Société Générale to have consistent conversations with fintech partners, especially around potential impacts of policy regulation,” says Sohail Raja, head of execution platforms & UK chief digital officer at Société Générale.

“The fact [the FCA] is implementing ‘scalebox’ and the Digital Economy Taskforce as well will certainly help in terms of putting the necessary infrastructure in place that makes sense for firms like Société Générale.”

The openness of the FCA and its willingness to engage with businesses is also represents a huge competitive advantage, particularly against the US, says Alty.

“I was in San Francisco before the pandemic hit and it was interesting to see […] how much easier it is to operate in the UK as a fintech due to having a regulator that is accessible and wants to be helpful, with sandboxes to allow solutions to be trailed and tested as opposed to hindered – it is a very different environment in the US.”



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