The UK’s financial sector is the biggest and most respected in the world, with the City of London acting as a magnet for investment and industry talent. Here Craig James, CEO of Neopay, discusses with Finance Monthly the potential impact the FCA could have through its engagement in fintech beyond the City.
Most recently the capital has been a hotbed of innovation in the financial technology – fintech – sector, with a number of start-up accelerators and new companies coming onto the scene to challenge the established industry.
But with the confusion over Brexit now firmly in people’s mind, many are concerned that London’s position as a leading financial centre and the focal point of the EU’s fintech industry may be under threat.
Other EU countries are beginning to respond to this and attempting to entice fintech businesses away from London and the UK.
As a result, the British government and its financial regulator appear to be doing more than ever to boost the UK’s share of the fintech market.
This is definitely a good time for fintech businesses, as governments across the world compete for their business, and this is even more apparent in Europe and the UK as a result of Brexit.
In one of its latest initiatives, the British government are looking specifically beyond the borders of London to help boost fintech hubs in the rest of the UK and encourage greater development of fintech across the country.
Expanding access to regulation beyond the capital
Britain’s financial watchdog, the Financial Conduct Authority (FCA), has recently announced that it is to expand its regulatory support across the UK in efforts to aid emerging financial technology hubs based outside of London.
Specifically, the regulator is looking to areas with both a strong financial centre and technology presence.
Historically, fintech business have predominantly come from London due to its proximity to tech funding and major financial institutions as well as government and regulatory bodies.
Looking around the rest of the world, these four factors have been key in the success of fintech companies.
But devolution of government, the rise of non-London tech hubs and the increasing willingness of banks to have a presence in other major cities around the UK, means there is greater potential for fintech businesses to spread far beyond London, just at the time the country needs to solidify and expand its position in the world’s financial and technology markets.
Speaking to the Leeds Digital Festival earlier this year Christopher Woolard, executive director of strategy and competition at the FCA, identified emerging hubs in the Edinburgh-Glasgow corridor and the Leeds-Manchester area as significant areas for potential growth.
The developing “FiNexus Lab” in Leeds – a collaboration between local government, industry, and central government – is laying solid foundations for fintech firms to flourish in the city, while in Manchester, Barclays’ “Rise” hub and “The Vault”, a 20,000 sq ft co-working space for fintech firms in Spinningfield’s business quarter, is improving the conditions for innovative firms to collaborate and grow.
The FCA has also been seeking to assist up and coming fintech businesses through its “sandbox” scheme, which helps firms to experiment with innovative products, services and business models.
About two thirds of the scheme’s first cohort was London based, but a rash of regional interest has seen nearly half of applications for its latest round come from outside the capital, highlighting the growth of fintech across the UK.
Non-London fintech companies are also seeing an increased interest in investment with Durham based Atom Bank recently securing £83m of funding from investors including Spanish bank BBVA, fund manager Neil Woodford and Toscafund Asset Management.
Not an entirely new trend
While encouraging new fintech companies outside of London has just recently become a focus of the FCA, it is not an entirely new concept and as far back as 2014 politicians, as well as financial and technology bosses, were calling for an expansion of the UK’s fintech sector beyond the boundaries of London to fully recognise its potential – long before the possibility of Brexit became a reality.
For instance, Eric van der Kleij, head of Canary Wharf based start-up accelerator Level39, has been one of the leading fintech figures suggesting that a business’ location isn’t a factor in whether it will be a success, pointing particularly to Manchester as a place where fintech companies were performing strongly.
One of the major hurdles, and a major barrier the FCA is now seeking to breach with its latest commitment, is that much of the regulatory framework emanated from London, with businesses based outside of this area – particularly those further towards the north and Scotland – struggling to get access to the kind of help they needed.
Speaking at the Leeds Festival, Christopher Woolard said the FCA now wanted to make it “as easy as possible” for firms to engage with the regulator and get access to the advice and help they needed to get into the market.
While many businesses have been able to set up outside of London and travel, sometimes great distances, to access this regulatory assistance, actively moving this help closer to businesses could be a significant benefit to new businesses, and a boost to British fintech at a time when it most needs it.
Increasing Brexit Britain’s competitiveness
The global fintech market is one of the fastest growing sectors in the world and, according to European Union figures, the value of investment into the sector reached $22.3bn by the end of 2015, a 75% increase on the year before.
Since 2010, large corporates, venture capitalists and private equity firms have invested in excess of $50bn into nearly 2,500 global start-ups since the start of the decade.
In the UK, the fintech sector – enveloping everything from online lending to applying blockchain to capital markets – is worth about £7bn to the economy, while more than 60,000 people are employed in the sector.
Looking at the UK’s global positioning, the country is second only to the United States in prominence on the top 100 fintech list, compiled by KPMG.
But while many of the UK companies on the list are London based, the highest based company, and the only UK business to breach the top 10, is based outside London.
The fact that a non-London business is the country’s highest valued fintech business is significant if we are to continue to convince new businesses to set up in the UK.
This is particularly important as other EU countries are attempting to take advantage of the confusion surrounding Brexit and boost their share of the fintech market.
A new public-private partnership, “House of Fintech” was recently set up in Luxembourg to attract companies to set up in the country, while French lobbyists have been making efforts to entice fintech businesses to relocate from the UK to Paris.
Even outside of the EU, steps are being taken to replicate the innovation and success being seen in the UK and The Monetary Authority of Singapore has moved to copy the FCA’s “sandbox” scheme to improve the prospects of its own fintech market.
With the UK’s future position in the single market still not fully known, and not likely to be defined for another year at least, the UK government knows it needs to maintain its popularity for fintech businesses. These businesses need to be given an even greater chance to succeed if the UK is to maintain its strong position during the Brexit negotiations and fend off the competition.
We can expect to see further new initiatives from the UK aimed at making that a reality and more positive developments for fintech as European countries compete for their business.