A FinTech Entrepreneur’s Guide to Regulation

Kylie Greeff

FinTech is one of the fastest growing industries in the world; since 2008, global investment in the sector has tripled from $928 million to $2.97 billion, with experts forecasting further growth of up to $8 billion by 2018. FinTech is evidently the new big thing for tech entrepreneurs. From apps that add consumer purchases or investment analysis to full financial services (FS) 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; in others, entrepreneurs have broken new ground. In the UK, for example, the Financial Conduct Authority is in the process of extending laws to cover emerging branches of financial services.

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. We have worked with FinTech entrepreneurs with various levels of professional experience, and have identified a few key tips for setting up a regulated FinTech platform.

1.      Consider the Appointed Representatives option

If you’re new to financial services, consider whether you truly do need to tackle the regulation maze on your own. If you are required to attain regulatory authorisation, do review the direct routes to authorisation with your relevant regulator, but also explore options that might increase your speed to market, as well as assist you with regulatory responsibilities.

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

Starting out as an AR will not prevent you from attaining your own full authorisation at a later date, but will provide you with the stepping stone you might need at the outset; particularly helpful if your background is not in FS.

2.      Seek to first understand the principles not the rules

Attempting to learn verbatim all the rules that apply or might apply to your company is a futile task, particularly as a starting point. We recommend that instead, you get to grips with the mission and objectives of the regulating body. The FCA provides the UK FS industry with 11 Principles of Business. These range from ‘firms should conduct its business with integrity’ to ‘firms should pay due regard to the information needs of its clients’ and ‘deal with the regulator in an open and cooperative way’.

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 FCA to catch out a firm, should they fall foul of the rules.

3.      Create a culture not a regime

From our experience, the best run regulated FS 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.

4.      Rules vs. proportionality

Multi-national FS 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 FS 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.

5.      Lest we forget

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 FS.

At WLCF, we offer pre-project consultancy and post-launch support to all our customers. As part of this, we can put interested clients in touch with compliance professionals who are available to provide support and advice. We also work in collaboration with partner company rebuildingsociety.com to offer an Appointed Representative initiative. Find out more in the Services section of our website.

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