Regardless of the difficulties it presents, FinTech regulation is absolutely essential — and not just for
customers. While these laws are primarily put in place to protect consumers, they benefit FinTech companies
as well, namely by driving fair competition and ensuring financial stability across the sector. This article will
explore how these businesses can work with regulators to the benefit of all.
FinTech and Operational Risk
Companies across all industries should have an appreciation of the risks involved in running a business, and
FinTech operations are no exception. From cyberattacks and outages to data handling and consumer
protection to firm governance and compliance — financial technology presents us with a veritable minefield
of potential dangers and pitfalls. Proper management of these risks is also of the utmost importance.
Consider the example of Santander. In December 2022, the FCA fined the bank £154 million for repeated
anti-money laundering failures between 2012-2017. These failures included poor handling of anti-laundering
systems and failed attempts to address issues that came about as a result, creating a severe financial crime risk.
Santander agreed on an early settlement and received a fine reduction of 30%, ultimately paying a £107.8
million fine instead.
As we can see from this example, risk management and compliance go hand-in-hand. This highlights the
importance of rules and regulations within FinTech, an industry full of all sorts of dangers.
The Role of Regulators in the FinTech Sector
The purpose of FinTech regulators is to watch over the industry and see to it that firms comply with all
relevant regulations and guidelines, thereby ensuring these companies operate in a safe, responsible manner.
These laws are put in place for the protection of consumers, institutions, and the wider economy, while also
providing a safeguard against financial crime. By setting such firm foundations, regulators manage the
inherent volatility of the FinTech industry, allowing companies to innovate and explore safely.
In addition to promoting innovation, FinTech regulation encourages competition by levelling the playing field
and ensuring that competing firms all follow the same rules and meet the same challenges. By the same token,
these bodies also promote business growth; by adhering to relevant laws and regulations, FinTech companies
show themselves to be reliable, which helps to foster trust. This, in turn, makes it easier for them to grow and
expand into new global markets.
How Collaborative Regulation Can Enable Mutual Success
By enabling the free exchange of resources, knowledge, and experience, collaborative efforts between
businesses and regulatory bodies can help pave the way for progress, allowing for the development of
innovative new solutions in the realm of financial technology. In fact, in a recent paper, the World Economic
Forum reported that more than 60% of FinTech startups claimed that regulatory collaboration would have
the biggest influence on their overall growth.
Regulatory sandboxes are a great example of collaborative regulation at work. Otherwise known as innovation
hubs, these platforms allow for real-time testing of new products and technologies in a controlled space
overseen by a regulator. One such initiative is the FCA’s Regulatory Sandbox. Introduced less than a decade
ago, this programme has already had a demonstrable impact on the UK’s FinTech industry, helping many
startups find their feet in the market. Participants have praised this initiative for providing an easily accessible,
cost-effective route to regulatory authorisation, as well as promoting trust between firm and regulator.
Access to such initiatives also leads to an increase in capital, according to a report published by the Bank for
International Settlements. More than fifty countries around the world have launched regulatory sandboxes of
their own; in an attempt to chart their impact on the financial landscape, BIS evaluated their efficacy, using
the FCA as a case study. Their research revealed that companies saw an average increase in capital of 15%
after entering the initiative, with the probability of raising capital going up by half. Additionally, sandbox entry
was shown to lead to a much higher survival rate, as well as increased patenting activity.
On the continent, efforts of collaboration have also aided in the development of key regulatory frameworks,
with FinTech companies and regulators coming together to create standardised protocols in open banking.
An example of this is the EU’s Revised Payment Services Directive (PSD2), which helps to ensure
interoperability, privacy, and security in the payments industry.
Research published in the Journal of Economic Behavior and Organization has shown that the introduction of
PSD2 has had a positive impact on FinTech, as the PayTech market has seen a greater number of entrants
since its adoption. Immediately after its introduction, there was a 70% increase in the amount of newly
incorporated start-up businesses. After the initial hype, this decreased by about 36%, but still remained at a
higher level compared to before PSD2 came onto the scene.
Conclusion
The importance of compliance in the FinTech industry cannot be overstated. In addition to protecting both
consumers and service providers, regulators exist to promote fair competition and business growth through
the implementation of laws and guidelines. Adhering to these rules is, therefore, the safest and most sensible
option and the most beneficial.
With that being said, as advantageous as compliance might be, collaboration with FinTech regulators offers
even more benefits to businesses. For one thing, these bodies can allow companies to test out new products
in a controlled environment, helping them to innovate and develop without taking unnecessary risks. They
can also provide useful information and guidance regarding compliance, assisting firms through the all-
important regulatory authorisation process. Finally, such collaborations have been shown to increase capital
and provide startups with more opportunities to enter the market.
As FinTech continues to grow, so will the need for regulation. In the end, the companies that can meet this
challenge will be the ones willing to collaborate with regulators, taking advantage of their knowledge and
expertise.
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