A “leading global FinTech hub”
A “thriving ecosystem”
An “international talent pool spanning the whole country”
So says Department for International Trade in its recent report on the UK’s FinTech industry titled the “FinTech State of the Nation”, prepared with the support of Innovate Finance. One can safely assume that one of the purposes of this report was to demonstrate the UK's attractiveness as a FinTech destination. But it also contains interesting information and insight into:
- the current state of FinTech in the UK (including a regional analysis);
- the key areas for future development and innovation (e.g. technology demand, talent/ skills and regulation & policy); and
- the eight technologies viewed as essential to FinTech (blockchain, drones, 3D printing and artificial intelligence to name only four).
Interest in technology to develop financial products and to deliver financial services is not confined to the government, regulators and “Silicon Roundabout” companies, entrepreneurs and investors. Traditional financial institutions and intermediaries involved in the (syndicated) loan market are looking to get in on the act too, recognising FinTech’s potential to improve efficiency and to promote transparency and liquidity in the loan market.
It was against this background that the Loan Market Association (LMA) held its inaugural FinTech conference in May 2019, which brought together loan market professionals and technology experts with the aim of combining market (whether from a commercial, legal or regulatory perspective) and technological expertise and the sharing of ideas on how FinTech could revolutionise a product that has historically been associated with manual processes.
In this alert we report back on some of the key themes to emerge from the conference:
- an early Slido poll revealed that 88% of conference attendees were excited by the potential opportunities and future impact that FinTech (or wider general technology) may have on (syndicated) lending;
- but a general trend across all the panels was that human input will remain a crucial and central part of the loan structuring & origination process, documenting loan transactions and loan operational & portfolio management, with FinTech augmenting and helping rather than replacing human input (at this juncture at least). An excellent example of this was given: automating the production of a 300 page LMA leveraged senior/mezzanine facilities agreement first draft via the use of detailed questionnaires populated by lawyers and clients, which would give, say, an “80% draft” with the remaining 20% and other bespoke requiring direct input from the draughtsman;
- some legislative & regulatory obstacles were also identified, such as the need to ensure that appropriate consumer protection safeguards are included in new FinTech generated products and services. The Financial Conduct Authority’s (FCA) regulatory sandbox was applauded here as delivering real value to FinTech firms by enabling them to test their business models, products and services in the market with real consumers and to obtain feedback from the FCA on the regulatory implications of doing so and the authorisations & other permissions required to do so;
- the issue of “critical mass” was debated at length, being seen by many conference participants as one of the largest challenges facing a successful adoption, implementation and application of FinTech in the loan market. Put simply and succinctly, advanced tech is great, but useless if you are the only one using it!;
- the debate then turned to the question of what could be done to overcome the “barriers to entry” and reach a perceived “critical mass” of FinTech users in the loan market and on loan market transactions. Two key points were revealed by Slido polls:
- 68.5% of attendees felt that they did not know as much as they need to about FinTech given its potential impact on their businesses, and
- 60.7% of those individuals felt that they had a big knowledge gap about how the practical application of FinTech will or could meet their business needs
So further education is required here…….
- Relatedly, but conversely, concerns were raised about the systemic risk presented by the idea of market participants being “too connected to fail” or otherwise being over-reliant on the technology. "If we are all connected and reliant on FinTech products, services and systems, what do we do if it goes wrong?", surmised one attendee. Investment in technology (such as cloud based rather than physical servers and cyber-security tools) will help but this is a valid point. We all know how paralysing it can be (not to mention frustrating) when the e-mail or document management system goes down – usually in the run up to or, worse still, during a deal completion!
The take away from the conference is that FinTech is coming to a deal near you soon, but this will not happen overnight. For many there is still a learning curve to climb before its use becomes widespread, whilst others need some convincing before they fully embrace the available technologies.
Just in the last week we have seen the value of Bitcoin, the world’s biggest digital currency, go on a rollercoaster ride. But this hasn’t discouraged Facebook from announcing plans to launch its own cryptocurrency, Libra, next year, which tells its own story in terms of the interest this industry is attracting. Cryptocurrencies are of course just one example of FinTech, but they are amongst the most high profile and for as long as there are stories circling such as the recent outage experienced by Coinbase, a cryptocurrency exchange, some will be nervous about stepping into this territory.
The above said, the City of London Law Society recently published its response to the UK Jurisdiction Taskforce’s consultation on the status of crypto assets, distributed ledger technology and smart contracts under English private law. The response includes an analysis of the enforceability of smart contracts and whether crypto assets can be characterised as property as a matter of English law. It is beyond the scope of this alert to delve into the real detail of the response, but suffice to say that whenever lawyers start focusing on the detail (as they now appear to be doing with FinTech) that is usually a good sign of an industry that is here to stay!
Andrew Dodds