An Overview of How FinTech can Thrive in a Regulated Business Environment

Will FinTechs grow amidst challenges posed by new and more regulatory compliances in the future? This blog covers a detailed overview of the same. Check it out!
the future of fintechs amidst risks and regulatory compliances | Binmile

Though the future of FinTech shows promising growth, it also brings increased exposure to regulatory compliances, requirements, sanctions, and legal formalities. Meaning, that the players in the FinTech landscape have to grapple with regulatory and industry developments, subjecting them to more scrutiny and a new set of rules.

Let’s understand these compliances and what they mean for the FinTech industry.

What does regulatory compliance stand for in FinTech?

FinTech compliance means adherence to regulatory laws that dictate or govern new business models and financial technologies. These laws are the set of guidelines, rules, restrictions, and regulations requiring mandatory compliance for FinTech companies. In practice, these laws differ from one to another company. It may also appear wading through a labyrinth of legal formalities and protocols for a FinTech startup.

These legal guidelines are meant to protect the interests of consumers and investors’ capital. They are meant to provide security to companies, their clients, and customers to avoid costly or potentially ruinous penalties for defaulting or failing to meet regulatory standards.

These compliances may seem pesky but they are in practice to discipline the wrongdoers.

Therefore, every FinTech startup is expected to have a better understanding of financial laws and their legal implications set out by their local and international government regulators. You can either hire a compliance expert or a team at your side to get to the bottom of the regulatory guidelines to avoid risks in the future.

What are the risks FinTech regulations are supposed to consider?

a) Data Breach

The regulatory bodies ensure that any FinTech company responsible for non-compliance about data leaks, like customers’ account numbers & security info, and personal data, such as name, social security numbers, contact info, etc. is appropriately penalized.

The penalty consists of a defaulter’s two to three percent of revenue, as per the law. The motive behind the penalization is to make FinTech companies more responsible and vigilant about maintaining the data safety of their customers, clients, stakeholders, etc.

b) Cyberattacks

The regulatory authorities concern themselves with the vulnerability of both FinTech and traditional banks to cyberattacks. Therefore, they have relevant laws in place for these financial companies to protect the interests of customers and their sensitive data from unauthorized access. Remember that the nature of cyberattacks also varies. Some target the data while some aim to completely paralyze the whole system until a ransom is paid.

c) Money Laundering

According to the report, around $800 billion to $2 trillion is laundered every year. The report indicates different stages of money laundering adopted by criminals, such as –

  • Placement (i.e. transacting money from direct criminal association).
  • Layering (i.e. concealing the trail to thwart pursuit)
  • Integration (i.e. seemingly legitimate sources but making the money available to the criminal).

It is believed that companies and government agencies suffer more than $2 trillion in annual losses due to money laundering. Regulatory bodies in place ensure synergizing data and operation to fight against money laundering.

A Review Of FinTech Regulatory Compliances

With regulatory compliances for financial companies getting more stringent, many experts believe that law enforcement agencies will come up with more legal terminologies and laws to ensure that the compliances are maintained.

Here is our brief review of these regulations covering four different regions, including the US, UK, Australia, and Western Europe.

FinTech Regulations In The United States

The United States is known to have the largest FinTech ecosystem and one of the largest varieties of legal formalities to be followed by FinTech startups. The Consumer Financial Protection Bureau (CFPB), a government agency that safeguards consumer protection in the financial sector, is authorized to enforce consumer protection in the financial sector and protect consumers in the financial marketplace.

For instance, if your FinTech is centralized around focusing on the US marketplace, your company will come under the purview of CFPB. The regulatory body also monitors financial markets for new risks to consumers and researches customer experience of using financial products.

Other regulatory bodies

  • The Financial Crimes Enforcement Network (FinCEN)
  • Office of the Comptroller of the Currency (OCC)
  • Commodity Futures Trading Commission (CFTC)

These regulatory bodies perform their responsibilities according to how they are authorized by the US government.

Here is a brief rundown on each of them and other regulatory bodies –

 
Regulators Responsibilities
FinCEN It combats money laundering, protects the financial system from illicit use, and maintains financial transaction data to prevent financial crime in the future.
OCC It is an independent bureau of the U.S. Department of the Treasury that regulates and monitors banks to ensure that they work safely and soundly.
CFTC It maintains a robust enforcement program, such as making rules and taking action against fraud, market manipulation, disruptive trading, and violations of regulatory compliance.
FDIC The Federal Deposit Insurance Corporation is authorized to maintain stability and public confidence in the financial systems of the United States. It monitors banks for safe and sound banking, along with ensuring consumer protection.
SEC The Securities and Exchange Commission monitors security exchanges, investment advisors, securities brokers, dealers, etc. to encourage fair dealing, prevention of fraud, and disclosure of key market information.
FTC The Federal Trade Commission is authorized to protect against unfair, deceptive, and fraudulent business activities. For this, it conducts investigations, collects reports from consumers, takes legal actions against law-breakers, and makes regulations to maintain a fair marketplace. The regulatory framework also educates consumers and businesses about their rights and responsibilities.

Mind that breaking these federal regulations results in serious penalizations for the perpetrators. For instance, if a company doesn’t report stock fraud on its online trading platform, it will be penalized up to $775,000. Also, the laws detailed above are not an exhaustive list, as there are many more of them you will find after conducting extensive research.

FinTech Regulations In The UK

The UK policymakers don’t impose stringent regulations on FinTech companies. The UK is the most FinTech-friendly destination having no specific legislation to safeguard the FinTech industry.

However, there are laws to be followed by FinTech businesses or those who develop banking applications.

For instance, the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) regulates the startups that come under the purview of the Financial Services and Markets Act 2000 (FSMA). The goal of this regulatory body (FSMA) is to prohibit unauthorized people from conducting regulated activity in the UK.

A brief review of FinTech regulators in the UK

1. Financial Conduct Authority – It is a financial regulatory body but it works independently of the UK government. It regulates financial services firms or FinTech firms and financial markets and is committed to safeguarding consumers, enhancing marketing integrity, and promoting competition consistent with the interests of the consumers.

2. Prudential Regulation Authority – This is a financial services regulatory body that regulates and monitors banks, credit unions, building societies, insurers, and major investment firms. According to the rules set forth by the regulatory body, financial firms are required to maintain enough capital and sufficient risk controls in place. It also monitors insurers, ensuring that they are protecting policyholders satisfactorily.

3. Payment Systems Regulator – It works with the vision of ensuring payment systems are safe, accessible, and value for money, it aims at revolutionizing the payments industry, injecting innovation where it is required the most, and safeguarding the interests of people and businesses using the payment systems.

FinTech Regulations in Western Europe 

1. The General Data Protection Regulation – Considered the strongest privacy and security law in the world, it governs how companies or organizations should process and transfer the personal data of people in the EU. The regulation covers the fundamental rights of people in the digital age, methods to ensure compliance, sanctions on violators of the rules, etc.

2. European Anti-Money Laundering Directives – The AMLD intends to accentuate the exigency of preventive steps against money laundering by setting up a consistent regulatory environment across the EU.

3. The New Payment Service Directive – The PSD2 works with objectives, such as ensuring a more integrated and efficient European payments market, and safe and secure payments, protection for consumers and businesses.

FinTech Regulation in Australia

It should be borne in mind that FinTech companies operating financial services in Australia are supposed to have a financial service license in the country or obtain a direct exemption from the onus of owning one.

This sort of regulation is authorized by the Corporations Act of Australia which regulates the formation and operation of companies, duties of officers, takeovers, and fundraising.

According to the law, you as a FinTech startup will come under its purview if you create a financial product that offers financial advice operate registered schemes, and provide custodial or depository services.

A brief review of FinTech regulators in Australia:

1. The Australian Transaction Reports and Analysis Centre – It is responsible for detecting, deterring, and responding to the abuse of the financial system to ensure that the community is protected from serious and organized crime through strong regulation and enhanced intelligence capabilities.

2. The Australian Securities and Investments Commission – It is an independent Australian Government body with various roles, including maintaining and improving the performance of the financial systems, administering the law effectively, and making information about companies available to the public.

3. The Australian Prudential Regulation Authority – The APRA employs a wide spectrum of tools to monitor FinTech businesses to ensure the establishment of a broader financial system. According to its rules, regulated financial institutions should comply with requirements, such as financial soundness, governance, and risk management.

Don’t Miss This: Right Time for FinTech Revolution in India to Achieve Financial Development 

What Is The Future Of FinTechs?

No doubt the future of FinTech startups is highly promising, though it is also not without stringent regulations and legal bottlenecks. In the context of the United States, the country’s Federal Reserve has come up with a new service called FedNow to help FinTech startups make faster payments.

It should also be noted that FinTech companies must have robust risk management tactics in place, irrespective of the approach they take to regulated markets, such as becoming a chartered institution or being what they are.

Granted that the FinTech startups are in for challenges in the form of regulatory compliances and their mandatory compliances, but once they get the hang of legal compliances, ensure data security, and serve customers well, they will be more trustworthy in the eyes of the public.

The lingering fear of compliance is on those financial companies who default or show contumacy to the laws through violations. Otherwise, they are bound to drive great revenue growth in the market and stay competitive in their niche.

Conclusion

When it comes to determining the future of FinTech startups, we can safely say that it is promising. However, it doesn’t mean that the future will go easy on them, considering the more rigorous and legal bottlenecks they would have to deal with in the future.

On prima facie, these financial laws may seem too daunting and herculean to wade through, understand, and comply with, but once they are understood, doing business wouldn’t be a problem at all.

The mere existence of regulatory compliances means making FinTech institutions more responsible for consciously serving their clients along with safeguarding their interests and sensitive data.

Instead of conjuring up the negative assumptions of legal norms, a financial institution should create value, evolve regulations into opportunity, and learn to lead, navigate, and disrupt to improve performance by employing effective management of regulations and operational risks.

Lastly, for FinTech firms, choosing a FinTech app development company would mean reaping the benefits in terms of automated efficiency in their core business functions. Binmile is your trusted resource for a broad spectrum of custom software solutions meant to streamline your internal processes so that your business can stay ahead of the curve.

Author
Binmile Technologies
Simon Beck
Content Contributor

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