A FinTech Entrepreneur’s Guide To Regulation

FinTech is one of the fastest growing industries in the world with global investment in the sector tripling from $928 million in 2008 to $2,97 billion today. Experts forecast further growth of up to $8 billion by 2018.

From apps that add consumer purchases or investment analysis to full financial services companies, it seems like where there’s an idea one day, there is a FinTech firm capitalising on it the next.

With all the glitz and glamour and seemingly endless opportunity the FinTech sector offers, it’s easy for an entrepreneur to get caught up in the hype and fail to consider everything involved in running a FinTech business.

One aspect that might often come as an afterthought or be completely forgotten at the outset is that of regulatory compliance. Whilst many FinTech companies are born from an idea to skirt round the current regulatory framework or set up in a wholly unregulated sector, it is often the case that eventually the regulation will catch up to the industry and the company will need to make a shift in attitude and policy and process.

Other FinTech companies, meanwhile, set out to tackle an already regulated area in a new and revolutionary way. In some countries, laws already loosely regulate similar activity whilst in others, entrepreneurs have broken new ground.

Unless you are an entrepreneur with previous financial services experience, setting up and operating a regulated FinTech company can come as a bit of a shock – especially if you fail to give it any forethought or consideration.

New entrants to the financial services market should seriously consider the appointed representative option. They shiuld consider whether they truly do need to tackle the regulation maze on their own. If they are required to attain regulatory authorisation, they need to review the direct routes to authorisation with the relevant regulator, but also explore options that might increase their speed to market, as well as assist with regulatory responsibilities.

Many financial services regulators allow firms to become Appointed Representatives (AR) of an already regulated financial services firm. Choosing to go to market as an AR of another firm will not only allow one to potentially skip a long and arduous application and authorisation process, but can also provide one with regulatory know-how and support.

Starting out as an AR will not prevent them from attaining full authorisation at a later date, but will provide them with a stepping stone they might need at the outset; particularly helpful if their background is not in financial services.

In addition, attempting to learn verbatim all the rules that apply or might apply to one's company is a futile task, particularly as a starting point. Instead, one should get to grips with the mission and objectives of the regulating body.

These principles are an excellent starting point for any FinTech entrepreneur when trying to determine whether a new product, service or even process will be suitable in a regulated firm. They not only act as guidance for the conduct expectations of a regulated firm but also allow the financial services authority to catch out a firm, should they fall foul of the rules.

From our experience, the best run regulated financial services companies are those, no matter their size, where the leaders of the firm build compliance into the firm’s DNA and ethos. Implementing stringent new rules to an existing company rather than building it into the firm’s attitude and treatment of clients is bound to be met with resistance and disinterest from staff already accustomed to existing processes.

Similarly, a new firm requiring employees to study a 200-page thick compliance manual is bound to be both ineffective and inefficient. If you can allow your staff to recognise how a few changes to policy and process might potentially improve customer trust and satisfaction, or how changes might protect the firm from a fraud, they are more likely to embrace compliance and naturally consider its application to their daily individual roles.

Multi-national financial services firms have entire floors of people responsible for the company’s compliance; the thought of which can put aspiring FinTech entrepreneurs off starting their firm in the first place.

"Don’t give up. Take a deep breath, seek to understand the principles, make a start on creating a culture of compliance and then get to know the rules that apply to each section of your business. If you already have operational processes, then start building the rules into your current processes and policies – if you don’t need to reinvent the wheel, don’t,"

If you’re just starting to flesh out your systems, draft out what you imagine is the most efficient way to achieve the end result, apply the rules, then back test the process against the rules.

Regulators do not expect all regulated firms to invest the same level of resources into their businesses. They do expect financial services firms to always act in the best interest of the consumers, in line with principles, and to always apply a proportional, risk-based approach regarding the development of systems and when determining the level of resource required to meet the rules.

Once you have understood, built a culture and applied a proportional risk-based approach to your firm, do not make the mistake of thinking that the job is done. As the leader of the firm, you will likely be ultimately responsible for any significant compliance failings. Keep your finger on the pulse, not only in terms of the growth of your business, but also regarding its culture of compliance and general compliance with the rules.

If you are not directly involved in the day-to-day compliance of the firm, ensure that you request and closely review management information. Look for trends and signs of weaknesses; prevention is always better than cure in financial services.

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