Fintechs: How to navigate financial regulations Fintechs: How to navigate financial regulations
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.