A year on from the Kalifa review and the jury is still out on the true impact its recommendations have had over the last twelve months. The independent review, commissioned by the government and led by former Worldpay chief executive Ron Kalifa, found that the UK’s fintech sector was at a ‘pivotal moment’ but required additional support to realise its potential. 

Although several recommendations have been implemented, including the establishment of the new industry-led Centre for Finance, Innovation and Technology (CFIT), as well as regulatory initiatives such as the FCA’s sandbox and the Bank of England’s extensive work on digital currencies, we still haven’t seen fintech-specific regulations as a result of the review. In fact, industry-wide calls have been loud and clear – as almost 70 Innovate Finance members penned an open letter to the UK government calling for more to be done in the name of progress in this area. 

However, if the fintechs demanding more progress are seeing the bigger regulatory picture (and they must!) they should remember: with every piece of red tape cut to stimulate sector growth, the FCA will be considering the impact this has on the consumer as well as the industry as a whole. Innovation doesn’t simply stem from a relaxation of rules, but rather a push and pull balancing act that promotes progress, while ensuring tighter regulation is in place so that the UK remains an attractive location for IPOs. 

Therefore, the success of the emerging fintech landscape lies in the balance of the regulatory framework that applies to it. While the Kalifa review is designed to promote innovation within the fintech sector, regulations that protect consumers and the fragility of the markets will also be at the top of the agenda for the UK regulator this year – and should not be eclipsed by the narrative surrounding the Kalifa review. 

Up until now, fintechs have considered themselves largely unconstrained by regulatory requirements more closely associated with that of their traditional counterparts – or have questioned their place within existing regulatory frameworks. But the fintech industry has transformed at breath taking speed since the Competition and Markets Authority decided the industry would benefit from competition in 2016. Four years later and the services on offer are beginning to mirror those typically associated with large financial institutions, in some instances acting as direct competitors. 

Fintechs are now unbundling the suite of services typically offered by traditional banks to offer often superior payments and lending products to consumers.  The outcome is that fintechs are increasingly playing an intrinsic role in the day-to-day lives of consumers. As such, it’s unsurprising that, alongside innovation, tighter regulation and compliance are following closely behind. 

A preview of times to come is the regulators’ latest crackdown on the booming buy now, pay later (BNPL) sector. In 2020 alone, the use of BNPL products tripled to £2.7bn, and as the industry has soared to new heights the regulator has – understandably – closed in. In this instance, the FCA has pulled up certain businesses around the ‘potentially unfair and unclear’ terms within BNPL products, such as repayment plans. 

This has now been successfully addressed by the companies in question, but this is just the start. The FCA’s statement that ‘we do not yet have the powers to regulate these firms’ – in reference to emerging fintechs – should be seen as a wake-up call as the UK government reviews regulatory options for the sector as a whole. Fintech providers offering financial services products need to ensure they are providing their already overworked compliance teams with the resources and tools to be able to navigate the next twelve months effectively. 

And in this case, two heads may not be better than one. Adding more manpower to the equation won’t necessarily streamline inefficiencies facing compliance teams in this space. Instead, fighting fire with fire – or, in this case, fintech with fintech – may be the answer. 

For some fintechs, regtech might be just another accolade better suited to their traditional counterparts, however, failure to use technology to navigate the successful growth and future of embedded finance could be fatal. 

Regtech is not a tick-box exercise for compliance requirements, it can support fintechs with customer acquisition, product creation, and ensuring they can expand globally. Without this edge, can these firms ever truly be disruptive? 

Undoubtedly, this sector will see regulatory changes that promote innovation over the next twelve months. However, the reality that some fintechs have not yet realised, is that the result will be a push and pull of cutting the red tape and cracking down on a sector that has largely flown under the regulatory radar.