The Unicorn Council: initial policy recommendations

The Unicorn Council for UK FinTech is the coalition of UK-based FinTech unicorn founders to accelerate and unlock promised growth in the UK FinTech sector. The Council is co-chaired by Janine Hirt, CEO of Innovate Finance, and a steering committee of FinTech leaders, Philip Belamant, CEO of Zilch (Founding Co-Chair), Francesca Carlesi, UK CEO of Revolut and Charles McManus, CEO of Clearbank.

The Unicorn Council for UK FinTech will provide the government with key policy recommendations to both protect and maintain the UK’s leading global position in FinTech ensuring the country successfully meets the investment and growth challenges over the next 10 years.

FinTech is a crucial strategic sector of the UK economy, contributing to the country’s innovation, productivity and growth. According to Innovate Finance’s latest FinTech Investment Landscape, despite decreased investments in the sector in 2023, the UK maintains its global leadership, securing more capital than the rest of Europe combined.

The Council has a focus on improving policy, perception and liquidity for the FinTech sector by amplifying a unified industry voice on the key priorities of CEOs, investors and board members to scale their FinTech organisations. The Council will identify key prevailing issues for UK companies to truly scale-up and grow, and will have direct interaction with senior Government ministers and officials to provide recommendations as to how policy interventions can best help these companies. In turn, it will help unlock and drive greater direct foreign investment into the UK, enhancing our international competitiveness.

Unicorn Council for FinTech members:

The problems and the recommendations
1. UK regulatory environment

The problems

The regulatory environment for Fintechs in the UK has changed beyond recognition since most of the Unicorn Council members were set up. 10 years’ ago there were no specific regulations covering ewallets, cryptoassets, crowdfunding, alternative payments, open banking or buy-now-pay-later, and for Challenger Banks there was no MREL, and Basel III was still being written.  There was no Payments Systems Regulator (PSR) and no Open Banking Implementation Entity. The Financial Conduct Authority (FCA) had just started supervising Consumer Credit. Antitrust issues were mostly regulated by the European Commission on Competition.

In the intervening 10 years, regulations and regulators have been created piecemeal to manage the regulatory issues arising from new FinTech sectors as issues emerged for regulation, largely on a reactive basis. Unicorn Council members fully support proportionate regulation, but this has created two significant barriers to the next wave of innovation in the UK: (1) an unwieldy regulatory framework, sometimes with conflicting rules between overlapping regulators, and (2) an environment where interactions with the FCA (including but not limited to time taken to obtain regulatory authorisations) is slow. Council members believe that the FCA’s resources have not kept pace with its growth in scope and responsibilities.

Overlapping rule making, reporting and supervision has been cited consistently in industry reviews, for example the independent Kalifa Review of UK FinTech (2021) and the Future of Payments Review (2023). The latter stated:

“…the landscape is complex with more regulatory and industry bodies than comparable countries...The weight and complexity of the landscape is a hindrance to growth. We heard from many contributing Fintechs that the sheer volume and weight of regulation is almost impossible to navigate”.

As a result, Unicorn Council members believe the FinTech sector’s growth is being constrained by the regulatory environment, and also that today’s start-up environment for Fintechs is far less attractive than it was when they set up their own businesses in the previous two decades. Both of these issues threaten the UK’s leadership, international competitiveness, and growth in FinTech.

The recommendations

We need a regulatory framework for the future of digital financial services. The UK has played a leading role in FinTech in part because the FCA was the first regulator to adopt the regulatory sandbox model to support startups. But now nearly every regulator in the world has a sandbox. In the meantime, technological change has become faster and more wide-ranging and consumers are faster at adopting technology. Regulatory models are failing to keep up - failing to provide appropriate protection in some cases and failing to support and enable innovation in other cases.

We need an updated model for the UK’s financial services regulators with a renewed approach to innovation. Unicorn Council members believe the current structure is holding the industry back. Phrases like ‘agile regulator’ and ‘regulator as platform’ are often used, but with limited meaning. This is a topic that will require lengthy discussion between government, regulators and industry, however some example suggestions made by Unicorn Council members include:

• Consolidating economic crime reporting, regulation and supervision under FCA. During the last decade the PSR has become an additional financial services regulator. We recommend streamlining firms’ regulatory relationships, reducing operational risk and complexity, and concentrating rule making and supervision with bodies best placed to exercise these functions. For example, we recommend that as an economic regulator the PSR should re-focus its efforts on promoting competition and innovation in payments systems, while allowing the FCA to take the lead when it comes to fraud reporting, supervision and enforcement, as firms’ primary regulator for other types of financial crime.
• Coordinated support for Challenger Banks - There are myriad thresholds for UK banks to pass through as they scale. This complexity, and inconsistencies between ring fencing, remuneration proportionality, resolution and countless other regimes creates an unintended barrier to scaling. Regulation for Challenger Banks needs to be more coordinated and proportionate.
• Additional resourcing is needed at the FCA to address the current lengthy delays in authorisation timeframes for new businesses and to ensure high quality governance over an expanding range of firms and business models.

2. Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief)

The problems

There is a large opportunity to unlock growth, attract founders, deals, and investment from every sector. BADR was recently reduced and capped at £1m for life. The maximum value of this relief to an individual is £100k in saved capital gains tax when they eventually have a liquidity event several years after founding their company. No entrepreneur who has ambitions to build a multi-billion-dollar FinTech will be motivated by or attracted to the UK by a potential £100k saving of capital gains tax in several years’ time. Additionally successful entrepreneurs are a key driver of further new ventures, either as 2nd-time founder or seed investor: how can we incentivise this as well?

The recommendations

•  Increase the cap on BADR to £20m to make the benefit more meaningful to first time entrepreneurs.
• Encourage reinvestment into a new UK venture after the success of the first business: change Lifetime cap to 3x uses so that an entrepreneur reinvesting in a 2nd and 3rd venture is incentivised- Stepped down limits each time, £20m, £15m and £10m at equally stepped up tax rates 10%, 12.5% and 15%.
• Attract direct foreign investment to the UK – if moving business and family to the UK, an extra 1 time tax bonus of 50% reduction on the BADR rate.

3. Capital markets

The problems

There has been a well-documented decline in capital invested in the UK stock market over the last 20 years, particularly from UK institutional investors. This is both a driver of the decline in the number of companies choosing the UK as the venue for their listing (less institutional investor capital reduces liquidity for UK listed equities) and a symptom of the broader decline in London’s attractiveness as a venue.

The UK VC market has not kept pace with the number of High Growth companies produced by the UK and does not have capacity to fund large Growth Capital rounds.

The recommendations

• Removing the tax disincentive to invest in UK equities – Abolish 0.5% Stamp Duty Reserve Tax on non-AIM UK share trading (AIM and Aquis are already exempt). Stamp Duty should also not apply to the purchase of shares in the proposed PISCES market, which we fully support to allow employees and early stage investors to access liquidity for their shares in private companies.
• Investment research: The UK Investment Research Review recommended the creation of a Research platform to help generate research. This will improve institutional investor education in newer sectors such as FinTech, assist smaller companies to IPO earlier, and provide good Research to the Retail market. We urge the government to accelerate work to facilitate this platform.
•  Delivery of the existing listed markets reform agenda – a significant programme of reforms to improve the UK public markets and to promote the UK as a listing venue have already been identified (for example, the Austin Review; the Flint Review; the Kent Review). The specific policy proposals that have already been identified now need to be delivered, not least by concluding the FCA review of the UK listing rules and of the UK public offers prospectus regime (final implementation not expected until mid-2025).
•  Delivery of the Mansion House compact proposals - There is work ongoing to deliver the objectives of the Mansion House compact designed to increase capital investment in inter alia private capital by DC pension funds. This, including related work by the British Business Bank, is vital to increasing investment capacity for Growth Capital in the UK and now needs to be delivered.

4. R&D

The problems

R&D is one of the Treasury’s success stories to incentivise technology players in the UK, and it has been an important feature in investment by FinTechs in the UK. The most recent changes will exclude many Fintechs from qualifying for the relief and/or will reduce the benefit available to be claimed (merger of the SME scheme with the large company regime). The change in approach has the potential to penalise legitimate developers of innovative technology in the UK and to move R&D investment abroad.

There are also many ongoing issues regarding the assessment of existing R&D claims as a result of HMRC not having had the resources to review the majority of historical claims.

The consequence is that as FinTechs grow, they often have the strategic optionality to spend their R&D budget in the country of their choice, and without changes to the R&D tax rules it is likely that much of the next wave of R&D investment will move abroad.

The recommendations

• The scope of the relief should be revised to explicitly encompass the type of R&D carried out by Fintechs, thereby increasing investment in the UK. The definition should be clear and easy to interpret, which in turn will make HMRC’s validation work easier and require less HMRC resources to administer.
• Additionally there should be an advance clearance mechanism: many companies don’t include R&D credits in their cash and capital budgeting due to the high uncertainty surrounding claim success, which in turn leads to reduced or delayed investment spend.

5. Enterprise Management Incentives & Seed Enterprise Investment Scheme / Enterprise
Investment Scheme

The problems

EMI, EIS, SEIS: Regulated Fintechs in some sectors – banking, lending, insurance – are excluded from taking advantage of these incentives (banking, lending and insurance are defined as excluded activities) but are still competing for the same angel funding and talent pool (financial, technical and compliance) with established technology companies and other technology start-ups. Challenger banks and alternative lenders are now delivering the majority of lending to SMEs in the UK (a structural shift over the last 10 years).

EMI: The caps on EMI both for individual employees and for the company are too low and are restricting larger Fintechs from hiring the best talent. There is a cap of £250,000 over 3 years for the value of options issued to an individual. To build a unicorn often requires equity-based remuneration to be for higher amounts than this to attract and retain talent in a globally competitive market. Separately, a company no longer qualifies for EMI when its assets exceed £30m or it employs more than 250 staff. A number of Unicon Council members no longer qualify. EMI works for early stage companies but not for later stage companies, and the alternatives (unapproved option scheme or CSOP) are viewed as inadequate due to their structure and/or tax treatment.

The recommendations

• EMI, EIS, SEIS: the market has changed significantly since the excluded activities were defined, and there is no regulatory reason for excluding these activities from EIS : we recommend removal of the exclusion on banking, lending and insurance in order to incentivise the next generation of Fintech start-ups in these sectors.
•  EMI: Individual limits – To incentivise employees and founders the threshold could be raised to £500,000 over 3 years, and £1m over 3 years for any company that has raised capital at a valuation exceeding £100m. Company caps – increase these to assets of £100m and 750 staff.

6. VAT

The problem

Where income is derived in part or in whole from exempt financial services, the inability to recover VAT is punitive for a start-up and disadvantages the company versus non-financial services start-ups. In effect, a regulated Fintech start-up must raise 20% more capital to fund to break-even than a standardrated start-up in any other industry. Additionally, multinational tech firms benefit from structuring their businesses to minimise VAT burden, thereby skewing the competitive playing field. The playing field could be levelled for VAT recovery.

The recommendation

• VAT-exempt Fintech start-ups should be given a rebate of VAT suffered for their first 5 years, and a partial exemption for scale-ups thereafter. Given the technical challenges of trying to amend the VAT rules this could be provided as a parallel rebate outside of the VAT system but using VAT accounting, and would differentiate the UK as an attractive start-up environment versus other countries.