• Kevin Harabasz, Senior Manager |
3 min read

Which financial activities are regulated and what challenges do fintechs face on their regulatory journey?

UK scaleups attracted record levels of venture capital investment in the first quarter of 2021. And fintech businesses were among those attracting the largest deals. That’s in line with what we’re seeing on the ground. The financial services market is a thriving hotbed for new start-ups and rapidly growing companies.

That’s at least partly thanks to the FCA acting on its competition agenda and encouraging newer businesses to engage with the regulatory environment. It’s rolled out initiatives like the regulatory sandbox and opened up more routes by which businesses can gain authorisation to be regulated. And that’s having an impact.

But fintechs still face challenges. If they’re carrying out regulated activities, they’re (in most instances) subject to similar regulatory requirements and challenges as much larger incumbents.

Are you carrying out regulated activities?

It’s important for fintechs to determine whether or not they’re carrying out regulated activities (or will be doing so). If you are, you need to understand what type of authorisation is required. That stands if you’re launching a fintech firm, in the early stages of funding an existing idea, or considering diversifying your current operations.

So, which businesses fall within the regulatory perimeter? The diagram below should help you determine if you do or not.

You should also consider what the resulting regulatory implications are as you develop and grow. Here are some key questions you should ask yourself:

  • Does our business (or proposed business) fall within the regulatory perimeter? If so, what permissions are/will be required? Are our existing permissions up to date?
  • Do we know the full implications of being FCA regulated? Do we have the correct documents in place (e.g. policies, governance documentation) to ensure compliance?
  • Do we have the skills or sufficient resource to ensure ongoing compliance against regulations and standards?
  • Are we confident that our governance arrangements – around senior hires, non-executives and structure – will be adequate and appropriate as we grow?

Common regulatory challenges for fintechs

Being prepared for the challenges ahead will help you navigate more smoothly through a fast-moving regulatory landscape. So what challenges are you most likely to face?

We’ve found that fintechs can struggle to identify the types of authorisation and permissions they need to trade. Even when they do, the authorisation process itself can be time consuming and require regulatory expertise to ensure FCA expectations are met. Making a poor impression on the regulators can be costly – delaying submission and contingent funding rounds.

Where a fintech’s plans are loss-making for several years during the growth period, or where growth is forecast to be very rapid, the FCA may apply a greater level of scrutiny. That can exacerbate the almost inevitable culture clash between the FCA and fintechs. Operating as a regulated busines can feel at odds with the innovative, entrepreneurial and fast-paced nature of a fintech. And fintechs can find it challenging to develop compliant approaches to sales and post-sales, marketing and client communications when using innovative media.

The regulatory journey of a fintech

Being regulated may feel like it’s slowing you down, but it provides incentives for building sustainable and well-governed businesses. And this helps increase confidence among investors and customers – vital to your growth.

Of course, with that growth comes further regulatory touchpoints. Changes to permissions, personnel and strategies typically open up businesses to heightened regulatory scrutiny at key points. The diagram is a helpful visual guide to how these interactions usually map onto the regulatory journey.

Want to smooth your interactions with regulators and expedite your growth milestones? It pays to make sure your operational, governance and compliance arrangements are appropriate and ready at these key stages.

If you have any queries regarding financial regulation for your business, do not hesitate to reach out to us for an introductory conversation with one of our specialists. We offer a range of services, including perimeter studies, regulatory training, authorisation support and general ad-hoc advice.