Finance & FinTech

One way or another, UK’s FinTech powerhouse status is indisputable, and the Chancellor’s plan to build on that makes perfect sense. Brexit is the elephant in the room, because by leaving the single market, the UK created a barrier for the free movement of talent where there was none before. Brexit also arguably sent a less-than-positive message to the traditionally globalised / internationalised FinTech industry at large. On the other hand, there is some chance that Brexit could enable UK’s FinTech’s a more global (as opposed to EU-focused) expansion, although this claim can and will only be verified over time.

To his credit, Ron Kalifa approached his review from the “to do list” perspective of actions and recommendations rather than analysis per se. As a result, his document is highly actionable as well as reasonably compact.

The Kalifa Review is broken into five main sections:

1. Policy and Regulation – which focuses on creating a new regulatory framework for emerging technologies and ensuring that FinTech becomes an integral part of UK trade policy (interestingly, this part includes a section on regulatory implications of AI as regards the PRA and FCA rules; this is the highest profile official UK publication to address these considerations that I’m aware of. Prior to the Kalifa Review AI regulation in financial services has been discussed at length from the GDPR perspective in ICO’s publications, but those do not directly feed into government policies).
2. Skills and Talent – interestingly, the focus here is *not* on competing for Oxbridge / Russell Group graduates nor expansion of finance and technology Bachelor’s and Master’s course portfolio at UK universities. Instead the focus is on retraining and upskilling of existing adult workforce, mostly in the form of low-cost short courses. This aligns with broader civilisational / existential challenges such as the disappearance of “job for life” and the need for lifelong education in the increasingly complex and interconnected world. Separately, Kalifa proposes a new category of UK visa for FinTech talent to ensure UK’s continued access to high-quality international talent, which represents approx. 42% of FinTech workforce.
3. Investment – in addition to standard investment incentives such as tax credits, the Kalifa Review recommends improvement of the UK IPO environment as well as creation of a (new?) global family of FinTech indices to give the sector greater visibility (this is an interesting recommendation for anyone who has ever worked for a market data vendor; indices are normally created in response to market demand and there are FinTech indices within existing, established market index families. Creating a new family of indices is something different altogether).
4. International Attractiveness and Competitiveness.
5. National Connectivity – this point is particularly interesting, as it seems solely focused on countering London-centric thinking and recognising and strengthening other FinTech hubs across the UK.

The Kalifa Review makes a crucial sixth recommendation: to create a new organisational link which the Review proposes to call the Centre for Finance, Innovation, and Technology (CFIT). The Review is slightly vague on how it envisions the CFIT structurally and organisationally (it does mention that it would be a public / private partnership but does not go into further details). CFIT is one recommendation of the Kalifa Review which seems more of a vision than a fully fleshed-out idea, but Ron Kalifa himself spoke about prominently in his live appearances and gave the impression of CFIT being the organisational structure upon which the delivery of his recommendations would largely hinge.

Upon release, the Kalifa Review was met with a great deal of interest from the financial services industry, as well as legal profession, policymakers, business leaders and academics. Ron Kalifa made multiple appearances in different online presentations on the topic, and most brand-name law firms carefully analysed and summarised his report. That, however, was the visible and easier part. The real question is to what extent the recommendations made in the Kalifa Review will be reflected in government policies for years to come.

You can read the report in its entirety here.

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(1) Rishi Sunak took over the job of the Chancellor of the Exchequer from his predecessor, Sajid Javid, less than a month prior to the publication of Budget 2020. Consequently, it can be debated whether the FinTech report was Rishi Sunak’s original idea, or one he inherited.

I’d say that – based on the way it is often referred to as a cult – transhumanism is currently going through the first stage of Schopenhauer’s three stages of truth. The first stage is ridicule, the second stage is violent opposition, and the third stage is being accepted as self-evident. I (and the sci-fi-loving kid inside me) find many of the transhumanist concepts interesting. I don’t concern myself too much with how realistic they seem today, because I realise how many self-evident things today (Roomba; self-driving cars; pacemakers; Viagra; deepfakes) seemed completely unrealistic, audacious, and downright crazy only a couple of years / decades ago. In fact, I *love* all those crazy, audacious ideas which focus on possibilities and don’t worry too much about limitations.

Humanity+ is… what is it actually? I’d say Humanity+ is one of the big players / thought leaders in transhumanism, alongside David Wood’s London Futurists and probably many other groups I am not aware of. Humanity+ is currently led by the fascinating, charismatic, and – it just has to be said – stunning Natasha Vita-More.

Transhumanist movement is a tight-knit community (I can’t consider myself a member… I’m more of a fan) with a number of high-profile individuals: Natasha Vita-More, Max More (aka Mr. Natasha Vita-More aka the current head of cryogenic preservation company Alcor), David Wood, Jose Cordeiro, Ben Goertzel. They are all brilliant, charismatic, and colourful individuals. As a slightly non-normative individual I suspect their occasionally eccentric ways work can sometimes work against them in the mainstream academic and business circles, but I wouldn’t have them any other way.

During the 2020 event Max More talked about UBI (Universal Basic Income). I quite like the idea of UBI, but I appreciate there are complexities and nuances to it, and I’m probably not aware of many of them. Max More definitely gave it some thought, and he presented some really interesting thoughts and posed many difficult questions. For starters, I liked reframing UBI as “negative income tax” – the very term “UBI” sends so many thought leaders and politicians (from more than one side of the political spectrum) into panic mode, but “negative income tax” sounds just about as capitalist and neoliberal as it gets. More amused the audience with realisation (which, I believe, was technically correct), that Donald Trump’s USD 1,200 cheques for all Americans were in fact UBI (who would have thought that of all people it would be Donald Trump who implements UBI on a national scale first…? Btw, it could be argued that with their furlough support Boris Johnson and Rishi Sunak did something very similar in the UK – though these cheques were not for everyone, only for those who couldn’t work due to lockdown; so this was more like Guaranteed Minimum Income).

The questions raised by More were really thought-provoking:

• Will / should UBI be funded by taxing AI?
• Should it be payable to immigrants? Legal and illegal?
• Should UBI be paid per individual or per household?
• What about people with medical conditions requiring extra care? They would require UBI add-ons, which undermines the whole concept.
• Should people living in metropolitan cities like London be paid the same amount as people living in the (cheaper) countryside?
• How should runaway inflation be prevented?

Lastly, More suggested some alternatives to UBI which (in his view) could work better. He proposed an idea of universal endowment (sort of universal inheritance, but without an actual wealthy relative dying) for everyone. It wouldn’t be a cash lump-sum (which so many people – myself included – could probably spend very quickly and not-too-wisely), but a more complex structure: a bankruptcy-protected stock ownership. The idea is very interesting – wealthy people (and even not-so-wealthy people) don’t necessarily leave cash to their descendants: physical assets aside (real estate etc.) leaving shares, bonds, and other financial assets in one’s will is relatively common. Basically the wealthier the benefactor, the more diverse the portfolio of assets they’d leave behind. The concept of bankruptcy-protected assets is not new, it exists in modern law (e.g. US Chapter 13 bankruptcy allows the bankrupting party to keep their property), but to me it sounded like More meant it in a different way. If More meant his endowment as a market-linked financial portfolio whose value cannot go down – well, this can be technically done (long equity + long put options on the entire portfolio) – but only to a point. Firstly, it would be challenging doing it on a mass scale (the supply of required amount of put options could or could not be a problem, but their prices would likely go up so much across the board that it would have a substantial impact on the value and profitability of the entire portfolio). Secondly, one cannot have a portfolio whose value can truly only go up – it wouldn’t necessarily be the proverbial free lunch, but definitely a free starter. Put options have expiry dates (all options do), and their maturity is usually months, not years. Expiring options can be replaced (rolled) with longer-dated ones, but this would come with a cost. Perpetual downside protection of a portfolio with put options could erode its value over time (especially in adverse market conditions, i.e. underlying assets values not going up).

If More had something even more innovative in mind then it could require rewriting some of the financial markets rulebook (why would anyone invest the old-fashioned way without bankruptcy protection when everyone would have their bankruptcy-protected endowments?). I’m not saying it’s never going to happen – in fact I like the idea a lot (and I realise how much different my life could be from the material perspective had I received such endowment when I was entering adulthood), I’m just pointing out practical considerations to address.

And one last thing: speaking from personal experience, I’d say that this endowment *definitely* shouldn’t be paid in full upon reaching the age of 18 (at least not for guys… I was a total liability at that age; I’d squander any money in a heartbeat); nor 21. *Maybe* 25, but frankly, I think a staggered release from mid-20’s to mid-30’s would work best.

My research into ML in the investment management industry delivered some unobvious conclusions:

• The *actual* level of ML utilisation in the industry is (as of mid-2020) low (if not very low).
• There are some areas where ML is uncontroversial and essentially a win/win for everyone – chief among them anti-money laundering (AML), which I discussed a number of times in meetups and workshops like this one [link]. Other areas include chatbots, sales / CRM support systems, legal document analysis software, or advanced Cybersecurity.
• There are some areas where using ML could do more harm than good: recruitment or personalised pricing (the latter arguably not being very relevant in investment management).
• There is curiosity, openness, and appreciation of AI in the industry. Practicalities such as operational and strategic inertia on one hand and regulatory concerns on the other stand in the way. It’s not particularly surprising nor unexpected, and attitude towards this situation is stoical. Investment management has once been referred to as “glacial” in its adoption of new technologies – I think the industry has made huge progress in the past decade or so. I think that AI / ML adoption will accelerate, much like the adoption of the cloud had in recent years.
• COVID-19 may (oddly) accelerate the adoption of ML, driven by competitive pressure, thinning margins (which started years before COVID-19), and overall push towards operational (and thus financial) efficiencies.

I was confident about my findings and conclusions, but I welcome three industry publications, which surveyed hundreds of investment managers among them. These reports were in the position to corroborate (or disprove) my conclusions from a more statistically significant perspective.

So… Was I right or was I wrong?

The joint FCA / BoE survey (conducted in Apr-2019, with the summary report^[1] published in Oct-2019) covered the entirety of UK financial services industry, including but not limited to investment management. It was the first (chronologically) comprehensive publication concluding that:

• Investment management industry as a subsector of financial services industry has generally low adoption of AI compared to, for example, banking;
• The predominant uses of AI investment management are areas outside of investment decision making (e.g. AML). Consequently, many investment management firms may say “we use AI in our organisation” and be entirely truthful in saying so. What the market and general public infer from such general statements may be much wider and more sophisticated applications of the technology than they really are.

The CFA Institute survey was conducted around April and May 2019 and published^[2] in Sep-2019. It was more investment-management centric than the FCA / BoE publication. Its introduction states unambiguously: “We found that relatively few investment professionals are currently exploiting AI and big data applications in their investment processes”.

I consider one of its statistics particularly relevant: of the 230 respondents who answered the question “Which of these [techniques] have you used in the past 12 months for investment strategy and process?” only 10% chose “AI / ML to find nonlinear relationship or estimate”. I believe that even the low 10% figure represented a self-selected group of respondents, who were more likely to employ AI / ML in their investment functions than those who decided not to complete the survey.

Please note that for any of the respondents who confirm that their firms use AI / ML in investment decision-making (or even broader investment process) it doesn’t mean that *all* of their firm’s AUM will be subject to this process. It just means that some fraction of the AUM will be. My educated presumption is that this fraction is likely to be low.

Please also note that both FCA / BoE and CFA Institute reports relied on *self-selected* groups of respondents. The former is based on 106 firms’ responses out of 287 the survey was sent to. 230 respondents answered the particular question of interest to me in the CFA Institute report – out of 734 total respondents the survey was sent to.

The Cambridge Judge Business School survey report^[3] (published in Jan-2020) strongly disagrees with the two reports above. It concludes that “AI is widely adopted in the Investment Management sector, where it is becoming a fundamental driver for revenue generation”. It also reads that “59% of all surveyed investment managers are currently using AI in their investment process [out of which] portfolio risk management is currently the most active area of AI implementation at an adoption rate of 61%, followed by portfolio structuring (58%) and asset price forecasting (55%)”. I believe that Cambridge results are driven by the fact that the survey combined both FinTech startups and incumbents, without revealing the % weights of each in the investment management category. In my experience within the investment management industry, the quotes above make sense only in sample dominated by FinTechs (particularly the first statement, which I strongly disagree with on the basis of my professional experience and industry observations). I consider lumping FinTech’s and incumbents’ results into one survey as unfortunate due to extreme differences between the types of organisations.

That Cambridge Judge Business School publishes a report containing odd findings does not strike me as particularly surprising. It is, frankly, not uncommon for academics to get so detached from the underlying industry that their conclusions stand at odds with observable reality. However, the CJBS report has been co-authored by Invesco and EY, which I find quite baffling. Invesco is a brand-name investment management firm with USD 1+ Tn in AUM, which puts it in the Tier 1 / “superjumbo” category size-wise. I am not aware of it being on the forefront of cutting-edge technologies, but as is the case with US-centric firms, I may simply lack sufficiently detailed insight; Invesco’s AUM seem sufficient to support active research/implementation of AI. One way or another, Invesco should know better than to sign off on a report with questionable conclusions. EY is well on the forefront of the cutting-edge technologies (I know that from personal experience), so for them to sign off on the report is even more baffling.

Frankly, the Cambridge Judge report fails to impress and fails to convince (me). My academic research and industry experience (including extensive networking) are fully in line with FCA / BoE’s and CFA Institute’s reports’ findings.

The fact that AI adoption in investment management stands at a much more modest level than the hype would have us believe may be slightly disappointing, but isn’t that surprising. It just goes to show that AI as a powerful, disruptive technology is being adopted with caution, which isn’t a bad thing. There are questions regarding regulation applicable to AI which need to be addressed. Lastly, business strategies take time (particularly for larger investment managers), and at times the technology is developing faster than business can keep up. Based on my experiences and observation with cloud adoption (and lessons seemingly learned by the industry), I am (uncharacteristically) optimistic.

[1] https://www.fca.org.uk/publication/research/research-note-on-machine-learning-in-uk-financial-services.pdf

[2] https://www.cfainstitute.org/-/media/documents/survey/AI-Pioneers-in-Investment-Management.ashx

[3] https://www.jbs.cam.ac.uk/wp-content/uploads/2020/08/2020-ccaf-ai-in-financial-services-survey.pdf

Renewable energy is not a controversial topic in its own right (unless you’re a climate change denier or a part of the fossil fuel lobby, especially on the coal side). It’s a controversial topic along the lines of disruption of powerful, established, entrenched industries (mostly mining and petrochemicals) and also along the lines of disruption of life(style) as we know it. Most of us in the West (the proverbial First World, even if it doesn’t feel like one very often) want to live green, sustainable, environmentally-friendly lifestyles… as long as the toughest environmental sacrifice is ditching a BMW / Merc / Lexus etc. for a Tesla, and swapping paper tissues for bamboo-based ones (obviously I am projecting here, but I don’t think I’m that far off the mark). Us Westerners (if not “we mankind”, quoting Taryn Manning’s character from “hustle and flow”) love to consume, love the ever-expanding choices, love all the conveniences we can afford – the prospect of cutting down on hot water, not being able to go on overseas holidays once or twice a year, or not replacing our mobiles whenever we feel like it, is an unpleasant one. Renewables, with their dependency on weather (wind, solar) and generally less abundant (or at least less easily and immediately abundant) output are an unpleasant reminder that the time of abundance (when, quoting Michael Caine’s character from “Interstellar”, “every day felt like Christmas”) might be coming to an end.

Furthermore, even for a vaguely educated Westerner like myself, renewables are a source of certain cognitive dissonance. On one hand we have several consecutive hottest years on record, floods, wildfires, disrupted weather patterns, environmental migrants, the prospect of ice-free Arctic ocean, Extinction Rebellion etc. – on the other hand we have seemingly very upbeat news like “Britain goes week without coal power for first time since industrial revolution”, “Fossil fuels produce less than half of UK electricity for first time”, or “Renewable electricity overtakes fossil fuels in the UK for first time”. So in the end, I don’t know whether we’re turning the corner as we speak, or not.

There is no shortage of credible statistics out there – it’s quite a challenge for a non-energy expert to understand them. According to BP, renewables (i.e. solar, wind and other renewables) accounted for approx. 9.3% of global electricity generation in 2018 (25% if we add hydroelectric). Then, as per the World Bank (spreadsheets with underlying data from Renewable Energy), in 2016 all renewables accounted for approx. 11% of global energy generation (35% if we add hydroelectric). Then, as per IEA, in 2018 renewables accounted for measly 2% of total energy production (rising to 12% if we add biomass and waste, and to 15% if we add hydro).

2% looks tragic, 9.3% looks poor, 25% or 35% looks at least vaguely promising – but no matter which set of stats we choose, fossil fuels still account for vast majority of global energy generation (and the demand is constantly rising). Consequently, my anxiety remains well justified. It was the reason I went to the event in the first place – to find out what the future holds.

The panellists were:

• Equinor, Head of Corporate Financing & Analysis, Anca Jalba
• Glennmont Partners, Founding Partner, Scott Lawrence
• Globeleq, Head of Renewables, Paolo de Michelis
• Camco, Managing Director, Geoff Sinclair

The panellists made a wide range of observations, depending on their diverse geographical focus and nature of their companies. You will find a summary below, coupled with my personal observations and comments. I intentionally anonymized the speakers’ comments.

One of the panellists remarked that in the last decade a cost of 1MW of solar panels went from EUR 6-8m to EUR 3.5m to EUR 240k, and at the same time ESG went from being a niche area in investment management to being very much at the core (I echo the latter from my own observations). At the same time, according to research, in order to meet Paris Accord targets, by 2050 50% of global energy will need to come from renewables. So no matter which set of abovementioned statistics we choose, we’re globally nowhere near 50%.

The above comments are probably fairly well known, sort of goes without saying. However, the speakers made a whole lot of more targeted observations.

The concept of distributed renewables (individual households generating their own electricity, mostly using solar panels on their roofs, and feeding surplus into the power grid) was mentioned. This is being encouraged by some governments, and the speakers noted that governments are the key players in reshaping the energy landscape. They were also quite candid on there being a lot of rent seeking behaviour in the (established) energy sector (esp. utility companies). Given the size and influence of the utility sector, it is fairly understandable that they may have mixed feelings towards activities that may effectively undercut them. At the same time, one would hope that at least some of them see the changes coming, and appreciate their necessity and inevitability by adapting rather than opposing. Interestingly, emerging markets where energy infrastructure and power generation are not very reliable were mentioned as an opportunity for off-grid renewables.

We were also reminded that electricity generation is just part of the energy mix. It’s a massive part, of course, but there is also automotive transport, aviation, and shipping – all of which consume vast amounts of energy, with very few low-carbon or no-carbon options. Electric vehicles are a promising start (not without their own issues though: cobalt mining), but aviation and shipping do not currently have viable non-fossil-fuel-based options (except perhaps biofuels, but I doubt there is enough arable land in the whole world to plant enough biofuel-generating crops to feed the demands of aviation and shipping).

The need for (truly) global carbon tax was also raised. I think (using tax havens as reference) it may be challenging to implement, but, unlike corporate domicile and taxation, energy generation is generally local, so if governments would tax emissions physically produced by utility companies within their borders, that could be more feasible. Then again, it could be quite disruptive and thus challenging politically (think the fight around coal mining in the US or gillet jeunes in France as examples).

On the technical side, intermittency risk is a big factor in renewables, and energy storage is not there yet on an industrial scale. It is a huge investment opportunity.

In terms of new sources of renewable energy, floating offshore wind farms were mentioned as the potential next big thing, even though it is currently not commercially viable. My question about the panellists’ views on feasibility of fusion power was met with scepticism.

In terms of investment opportunities, one of the speakers (prompted by my question) mentioned that climate change adaptation is also one. This echoes exactly what Mariana Mazzucato said at the British Library event some time ago (pls see my post “Mariana Mazzucato: the value of everything” for reference), so there might be something there. More broadly, there seemed to be a consensus among the speakers once subsidies disappear, only investors will large balance sheets and portfolios of projects will be in the position to compete, given capital-intensive nature of energy infrastructure.

I ended by asking a question about the inevitability and scale of impact of the climate change on the world as we know it and on our lifestyles. I didn’t get a very concrete reply other than there *will be* impact, and adaptation will be essential. It hasn’t lifted my spirit, but I don’t think I was expecting a different answer. In the end, it looks like the renewables are currently more of an evolution than revolution. Evolution is better than nothing; it might just not be enough.