If you are a start-up or scale-up tech company in the financial services sector, there are numerous areas where you may fall within the parameters of financial regulation. And it’s important to know whether you are regulated sooner rather than later.
What do you need to think about?
In the fintech sector, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are the relevant regulators.
Almost any involvement in a financial transaction will likely involve some element of regulated activity – e.g. if you’re involved in bringing transacting parties together, giving advice to someone, offering a product which promises some sort of payout in certain circumstances, or handling payments.
If you fall within the regulatory perimeter, suddenly, you need to think about a lot of things you probably hadn’t thought about before:
- your team (in terms of their qualifications and experience (‘fitness and properness’) and conduct);
- your shareholders (anyone exercising significant control over the company will need to be scrutinised by the regulators)
- the capital requirements of your business e.g. is there a minimum amount of cash you need to hold at the bank to satisfy the regulators; and
- your policies and processes e.g. do you have a conflicts of interest policy; a complaints procedure; could the Financial Ombudsman get involved, etc
As a business grows and its products and services become more complex it is all too easy to miss the fact that you are operating in territory which is regulated.
The safest approach is to be pro-active and take specialist advice early on regarding where you’re at, where you want your business to go, and how it might look in the future. That way you can factor in any regulatory requirements and give yourself enough time to meet these.
What can go wrong?
The FCA are taking an increasingly pro-active and paternalistic approach to protecting retail investors in particular. They are well resourced and have the power to investigate thoroughly and take significant action against firms who get things wrong.
A topical example is the use of so called “finfluencers” – often celebrities who promote financial products online. There are strict promotional rules for financial products and online promotion by such finfluencers is unlikely to satisfy these requirements without appropriate safeguards. One approach to sanctioning such a breach would be for the regulator to shut down a company’s entire online marketing department until such time as it was satisfied they were compliant – this could be many months and is something we have seen play out in practice.
Why regulation might be a good thing for your business
But regulation isn’t all stick; there is a carrot as well! Being regulated can be a real “value-add” when it comes to your business, demonstrating credibility and helping you build trust more quickly with clients.
Even if you are not at the stage where you have to be regulated, exploring this early shows you are prepared to go the extra mile and that you are a well-organised, pro-active organisation. In a crowded market it could be the USP which helps you stand out from your unregulated competitors.
How we can help
If you are in the fintech sector and have questions about regulation, compliance or dealing with the regulators, our fintech specialist, Natalie Connor, can help. Please get in touch: info@legaledge.co.uk
