The UK has been a hub for innovation in financial services in the last few years, and the fact that the FCA has always been very proactive when it comes to regulating FinTech has contributed to this - in fact, many European FinTechs opted to make London their home. Until now, FinTechs have not been subject to the same regulation as traditional financial services, but this is soon set to change.
However, in all regulated industries, compliance is crucial to protect the integrity of the organisations it governs and those it serves, but for a while now, in the financial industry, some FinTech companies have not been playing by the rules. In its annual business plan, the FCA announced that it is looking to put a stop to this kind of behaviour, with tighter regulations being placed on financial technology companies. The FCA clearly understands that while technology plays a fundamental and increasingly pivotal role in delivering innovative financial products and services, they must strike a balance between supporting innovation and ensuring that investors and consumers have adequate protection.
Many are speculating that the move to increase regulation comes following the collapse of Powa Technologies, who spent an estimated £152.6 million before going into administration at the start of 2016. While the FCA welcomes innovative finance solutions, it wants to ensure that in the future regulations don’t go unchecked. The concern is that next time it may be customers getting burnt rather than investors; increased regulation helps to minimise these risks.
Peer-to-peer (P2P) lending, an area which has seen increased investment in the last few years, has come under close scrutiny by the FCA lately, and will now have strict systems in place to protect investors, but as well as protecting investments, making sure that FinTechs are protecting the data of consumers is high on the list of priorities for the FCA. While innovation is encouraged, it also creates risks.
Incumbents have the benefit of years of experience in managing risk and have robust infrastructure to protect their customers’ personal information. FinTechs need to focus on meeting the security requirements when building their products and infrastructure to ensure that new technologies they develop not only benefit the end user - but also keep their data safe.
Achieving FCA compliance is often a long and arduous process, and some FinTechs may be developing new business models that fall outside of current regulation. One solution proposed by the FCA is a regulatory sandbox, introduced as a ‘safe space’ for companies who want to use technology to innovate in the industry. This means that organisations that meet their eligibility criteria have a safe space to test innovation without immediately having to meet all the normal regulatory requirements. In addition to this, the FCA is launching Project Innovate to provide support to FinTechs, helping them to understand regulatory frameworks, assisting with preparing and making applications for authorisation, and ensuring they understand what being FCA regulated means for them.
Overall, the FCA has managed to strike the perfect balance of supporting FinTechs while protecting the integrity of the financial industry, as well as its customers. These new regulations may also prevent investors from buying into FinTechs who are all mouth and no trousers by assessing whether they have a viable business model before they are touted as being the next unicorn.