Fintech: What are the legal implications of the 2021 Kalifa Review?

Nearly one year to the day, Rishi Sunak first pledged a probe into the UK fintech scene in his 2020 budget; Ron Kalifa OBE’s ‘Kalifa Review of UK Fintech’ was subsequently published on 26 February earlier this year. It lays out a vision and execution model for the UK to maintain its leadership in the cutting-edge field of Fintech.

Kalifa, a non-executive director of the Bank of England’s Court of Directors and vice-chairman of WorldPlay, made five recommendations to the government regarding Policy and Regulation, Skills, and Investment, as well as a proposal for a Fintech International Action Plan. Over the past few weeks, business industry leaders, experts and others associated with fintech have considered and will continue to consider these new recommendations. 

Fintech – an abbreviation for ‘financial technology’ – is an economic sector made up of companies that use technology to enhance the quality of financial services. This includes areas such as: insurance, planning, trading, and investments, as well as crowdfunding according to IOSCO (International Organisation of Securities Commissions). First introduced in 2005 with the launch of Zopa, fintech deals have since become a major source of revenue for Big UK law firms such as Allen & Overy, Linklaters and Clifford Chance.

From a legal standpoint, fintech’s value means a range of problems and threats. Finding the balance between encouraging new technologies and the need to control them remains a challenge for regulators. This prompts commercial law enthusiasts at the Obiter Dicta to wonder: does the Kalifa Review consider this need? 

It is likely that the Review’s proposal for investment is likely to clash with data protection and cybersecurity laws. Kalifa proposes that the government establish a £1 billion fintech growth fund in order to assist homegrown start-ups in scaling and expanding, as previously speculated. The report suggests that the UK’s pension pots could be a great source of funding for fintech, citing the £6 million currently sat in private pension schemes across the UK.

A greater amount of investment would ultimately mean expansion for the fintech industry. Expansion of the fintech industry would consequently mean an increase in the amount of data to be collected by firms, and a decline in the efficiency of that collection as a result. 

Kalifa’s focus on ‘open banking’ in order to eventually achieve ‘open finance’ raises security concerns. Open banking involves the use of APIs to enable third-party developers to set-up financial institutions – i.e. unique applications and services. Potential issues mainly relate to data-controlling, and the risks that may derive from the processing of personal data related to financial services –  including theft of intellectual property, leaking of confidential information, and the destruction/corruption of databases. Furthermore, there exists the risk of data exchanges being misconstrued as the sharing of competitively sensitive information. This could arise where, for example, a potential fintech product is used to transfer precise transactional information (such as customer pricing and discounts) to other network members. Furthermore, open systems such as these are prone to exposing data to external attacks that could affect the system’s functionality.

How can this be avoided? Dentons partners Giangiacomo Olivi and Fabio Calivi advise conducting a data processing impact assessment to decide which steps should be taken to minimise the risk, as well as establishing security measures to ensure system continuity. They also advocate for programmes that protect the interests of consumers, to ensure that regulations are followed correctly.

So, what does this mean for future commercial solicitors? The main aim of the Kalifa Review is to ensure that the UK’s fintech market remains one of the most profitable globally, and there is no doubt that these recommendations – once considered and implemented by businesses across the UK – will mean a huge increase in revenue for commercial law firms which specialise in the area. This will particularly benefit Magic Circle and American firms, including Linklaters, Clifford Chance, and Latham & Watkins. Ultimately, for those interested in the world of commercial law, the future of the fintech sector within most law firms for at least the next four years could prove to be challenging but certainly financially rewarding.