Fintech offers UK a way out of the Brexit bind

Britain’s departure from the EU has so far thrown up more challenges than opportunities for the country’s finance industry. Boris Johnson’s government failed to ensure that financial services were an integral part of Brexit talks and the ensuing trade deal. The result has been a trickle of business away from the City of London, with the fear that it will become a steady stream. With hopes fading for a free-trade deal in financial services with Brussels, the Square Mile urgently needs to think of new ways to retain its pre-eminence as a financial centre.

One obvious avenue is Britain’s thriving financial technology, or fintech, sector. The UK has a strong record in spawning and fostering these companies — fintech contributes £11bn to the economy — but it could do much more. Brexit gives the UK a chance to change its financial regulation to make itself even more attractive to fintech entrepreneurs and enterprise capital. In doing so it would be fighting the battles of tomorrow, rather than battling to preserve a former glory. 

A government-commissioned report by Ron Kalifa, a former chief executive of Worldpay, has set out a range of proposals with the aim of sparking a “digital big bang”. The five-point plan covers areas such as regulation, investment and skills. Some of the recommendations are both common sense as well as overdue. Among these is the creation of a tech visa to allow access to global talent. One of the industry’s concerns since the 2016 Brexit vote has been that Britain’s departure from the EU would end the free movement of workers. The chancellor said on Friday the government is ready to launch a fast-track scheme but it should go further and ensure it also offers a pathway to citizenship to those deemed to be eligible. The review also identified 10 fintech “clusters” around the UK that, it says, need to be fostered, with a three-year strategy to support growth. The approach is the right one and would help to underpin the broader “levelling up” agenda from Birmingham to Belfast.

Other more radical proposals will require careful implementation but deserve support. Loosening London’s listing rules to allow dual-class share structures is one. The city’s global leadership as a fintech hub has not fed through to the stock market. The London Stock Exchange lacks the technology stars that dominate the US public markets — which embraced dual-class shares during the 1980s. Founders naturally want to retain a stake in their business in the early years after going public. It is sensible, therefore, for London to go down this path, although safeguards such as imposing time limits or restrictions on what the shares can vote on will be vital.

In a similar vein, it makes sense to loosen rules to allow pension funds and insurers to invest in more risky assets. Even before Brexit, the argument for less stringent rules to allow a larger investment in a broader range of asset classes was strong. Danish pension funds, for example, have benefited from their early support for offshore wind projects which were deemed too risky by many others. Any changes, however, should be carefully calibrated to ensure appropriate transparency and safeguards are in place.

Ministers will need to strike a shrewd balance in order to maintain the competitive strengths that flow from good governance while fostering an environment that attracts entrepreneurs. Implementing Kalifa’s reforms will also only go so far; New York still benefits from higher valuations and a deeper pool of liquidity. London and the rest of the UK will need to keep fighting to gain any competitive edge they can.