In many respects, the U.K. is leading the way in innovation.
London has demonstrated a noteworthy ability to attract talent and capital. That, coupled with Britain’s pro-business policies and approach to regulation, makes it a model for other governments. London often sees itself as the financial capital of the world, and its policies position it to maintain that status.
Because of the United States’ much more aggressive regulatory environment, companies will likely continue to take advantage of Britain’s unique position bridging the tech and finance worlds of continental Europe and the U.S.
The State of European Tech 2017 report from Atomico and Slush reveals that the U.K. remains the largest European destination for capital invested in technology. London is home to more than 300,000 professional developers, nearly twice the number employed in Paris and more than three times the size of Berlin’s coding community, according to the report. In 2017, the U.K. tech sector attracted investment of $7.18 billion — a number that pales compared to investment in the U.S. tech sector. U.K investment in tech amounts to $59 per capita compared with $246 per capita in the U.S.
With such a reservoir of talent in the U.K., the report finds that venture capital investment from the United States and Asia is particularly strong in the fintech sector. The fact that Britain’s tech sector is less mature than U.S. tech, where valuations are sky high, has helped capital flow, producing more early opportunities for investors to back companies at less elevated valuations.
Building an economy in a sandbox
In the U.K., early stage startups in fintech have an easier time getting off the ground, thanks to the country’s friendly regulatory structure. Entities that need to be licensed by the Financial Conduct Authority (FCA) or the Bank of England’s Prudential Regulation Authority benefit from a slimmed-down licensing process.
In addition, U.K. consumers lead the developed world in their embrace of fintech innovations, according to the 2017 EY FinTech Adoption Index. Only in China and India, where the financial sector is less developed, is the adoption of fintech greater. EY notes that the FCA, created in 2013 after the global financial crisis, “has fostered a collaborative relationship with innovators in the financial services industry to ensure both consumer protection and market competition.”
In an unusual move for a regulator, the FCA in 2015 established the world’s first regulatory “sandbox” at its London headquarters, where fintech startups can build and test new products and services in a safe, controlled environment with oversight by regulators. The FCA is particularly encouraging to fintechs working on problems that fill market gaps, such as small businesses lending and robo-adviser products in wealth management, among other things.
Britain’s strong record of producing “unicorns,” startups that reach billion-dollar valuations, is also helping to encourage investment. Among those U.K. success stories are TransferWise, which is revolutionizing foreign exchange by matching customer buy-and-sell orders in an effort to reduce commissions, as well as investor-to-business lender Funding Circle and financial data and analytics innovator IHS Markit.
The blockchain advantage
The United States is playing catch up to the U.K.’s friendly fintech environment with such initiatives as the U.S. Commodity Futures Trading Commission’s LabCFTC, which opened in May, and the Financial Industry Regulatory Authority’s (FINRA) Innovation Outreach Initiative, announced in June.
However, U.S. politics, marked by turf wars between the CFTC, the Securities and Exchange Commission and others, make the U.S. regulatory environment more challenging for startups. In addition, fintechs in the United States must navigate a thicket of state laws and regulation.
The Atomico report finds that the United Kingdom is especially well-positioned to be a tech world leader in two particular areas: artificial intelligence and blockchain, as well as the cryptocurrencies that are being built on the latter’s technology. Cryptocurrencies provide an instructive look at the differences between the United States and Britain, with Washington aggressively cracking down while London is taking a leadership position.
Already, the SEC has ruled that tokens, or coins, issued in initial coin offerings are securities, drawing criticism from investors like Tim Draper. And, former SEC Chairman Harvey Pitt said recently that, “We’re in line for some serious regulatory responses,” warning of more regulations on the horizon. That stance could make entrepreneurs and investors very nervous.
By contrast, in the U.K., FCA Executive Director of Strategy and Competition Christopher Woolard promises that the regulator will lead “an open debate on the risks and benefits of distributed ledger technology.” That tone encourages investment and innovation.
While cryptocurrencies and ICOs are not regulated yet Europe-wide, regulators are allowing a patchwork of approaches to develop before eventually harmonizing those rules. In China and South Korea, initial coin offerings have been banned. Meanwhile, in the U.K., cryptocurrencies and ICOs are not regulated today. However, should British regulators subsequently develop rules, they would not apply retroactively — as happens when U.S. regulators rule — ensuring that London remains especially friendly to cryptocurrency entrepreneurs.
As a recent Early Metrics report notes, despite Brexit, London is “likely to remain Europe’s fintech hub in the medium term.” And that is good news for innovation and innovators.
Jacqui Hatfield leads the fintech and technology practice for Orrick in London.