The multibillion dollar question

Simon Briskman and Kirstene Baillie, partners at the legal firm Fieldfisher, examine establishing a growth platform for fintech

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The UK is Europe’s leading financial technology (fintech) centre. Research for London Fintech Week shows UK investment in the field to be greater than the rest of Europe combined. London & Partners estimates venture capital investment in the UK technology sector at roughly £6.96bn since 2010.

Given these figures, it may be hard to understand why the UK’s success in fintech is dwarfed by that of the US. The UK has one of the world’s largest financial centres, a strong pool of technology workers and established hubs for start-ups such as Tech City and Level39 in Canary Wharf. Yet KPMG says that US fintech investment was over £5.29bn last year while Europe attracted just £1.05bn, with over half of that invested in the UK. While the tap is running in America, capital in Europe trickles through.

America has the infrastructure for start-ups to flourish. Not only is Silicon Valley awash with talent, it is overflowing with entrepreneurs who follow a long tradition of hard work, clever innovation and pursuit of the American dream. Talent and hard work create opportunity. Capability is hotly pursued by the moneymen. Thus, access to capital is far more easily obtained in Silicon Valley.

Of course, Europe also has experienced entrepreneurs and innovative ideas. Across Britain and Europe new companies often display the discipline required to prototype and perfect a product and the hard work needed to sell it. Yet the figures show that London financiers focused on fintech are more reluctant to commit money than their US counterparts.

One rational explanation is that start-ups in the United States are more likely to show extraordinary growth than their EU counterparts. The investment research firm CB Insights reported 11 new tech European unicorns valued in excess of a billion dollars for 2015, while the US produced 22. Though there are many reasons for Europe’s lower success rate in fintech growth, one clear problem has to be addressed. To free the flow of capital we must also free our markets from undue regulation. European fintechs are tied up in red tape.

Financial services regulation is of primary importance to activities from mobile money to peer-to-peer lending. Good regulation instils consumer confidence and ensures well-run markets. There are, in fact, some fine examples of regulatory innovations designed to support fintech companies. The UK Financial Conduct Authority (FCA) is actively encouraging fintech enterprises to approach the FCA and develop new models, for instance through its “regulatory sandbox” initiative, which allows for the testing of new technology without the risk of regulatory action.

However, despite the occasional good initiative, Europe has a significant problem with financial services regulation. Getting things right in one EU country does not automatically mean getting it right across the whole of Europe. It is
notable that the FCA recently announced a fintech initiative in tandem with the Australian regulators. Yes, that’s Australia – not Austria, nor Germany, nor France. Europe remains fragmented in practice.

Despite financial services regulation in EU member states being largely governed by EU-driven regulation, it is behind the times on fintech. The FCA in the UK and regulators in a few other European country may be beginning to take the initiative individually in this area. However, scaling up in the US in its primarily single market is faster than on this side of the Atlantic.

The EU also sets privacy laws that apply across Europe. The coming EU General Data Protection Regulation should provide more uniformity than at present but raises other barriers to fintech growth. With further controls on storing and using personal data and purging it when not needed, big-data analytics projects require a regulatory assessment and may hit the rocks if privacy barriers cannot be overcome. Europe also has rules that turn exporting personal data between Europe and the rest of the world into a bureaucratic process, and make it harder to put cloud solutions in place.

While these and other regulatory issues can be addressed, many projects hit them very early. This can distract or even derail start-ups, which must spend time and money seeking regulatory-compliant approaches from an early stage. Unduly burdensome regulation acts as a brake on growth. Some entrepreneurial ideas simply never make it through.

US companies, by contrast, grow big-data and cloud solutions more rapidly, hitting a market of over 300 million people before worrying about picking off ­detailed EU rules. Regulation is important but getting the balance right between business needs and protection for our communities and economic well-being is absolutely vital.

There are other legal problems with the European market being fragmented. Although we should say vive la différence to our diversity there is no doubt that local legal issues, from advertising to consumer information, can seem very different and impenetrable to the outsider.

When London suffered the Great Fire of 1666, Sir Christopher Wren was commissioned to draw up grand designs for long boulevards and beautiful buildings. But by the time the scheme was approved by officials, entrepreneurial Londoners had already rebuilt their shops and houses. Only St Paul’s Cathedral matched the original plans. In Europe fintech developments are happening in any case, but without practical plans from the regulators we badly need.

Unfortunately, it takes time for primary EU legislation to be agreed, and then time to trickle down changes to local markets. Change takes years or decades. Fundamental regulatory change is glacial compared with changes in the market. Abandoning the pan-European approach cannot be the answer. Fintech needs consistent regulation across Europe. Even with the possibility of a Brexit ahead, growth of UK fintechs depends on access to sizeable and uniform markets, as we see from the US model. But we also need that regulation to allow for a more flexible response to rapid technological change.

We have in Europe a great deal of cooperation between regulators both in the field of financial services and in privacy. Should the UK vote to remain in Europe in June, the European Commission, the European Parliament and the European regulators must exercise their might and judgement to build a regulatory framework that is clear and simple. Europe must allow businesses to grow – through whatever channels may be demanded by consumers. Of course, our financial and privacy regulation must protect consumers properly and ensure confidence in the markets. But with faster and better responses from the government and the regulators, we may be able to give fintech in Europe the backing that it deserves.