Though there are currently no separate or specific fintech laws in the UK, it’s important to stay on top of the legal frameworks that apply to fintech businesses. The UK is at the forefront of global financial technology (second only to the US), with an estimated 1,600 firms active in the sector – a number set to double by 2030. And, as Ron Kalifa put it, FinTech is not just a niche or sub-sector, it’s fundamentally ‘changing the way we do finance’.
Given the strength and potential of the FinTech space, it’s understandable that the government is scoping out improvements to the existing regulatory structures. This article explores the latest trends in FinTechs, as well as existing and proposed FinTech regulations in the UK, giving you a full picture of the laws that govern this exciting industry (and how to stay compliant).
Before we look at FinTech Regulations, let’s take a step back to look at what FinTech is. FinTech refers to Financial Technology. This is technology that is aimed at the financial services sector, focussing on changing, innovating, automating and improving certain workflows and operations. The industry has seen growing momentum and serious shifts, growing initially from tech that integrated more into the back-end of big institutions to now more customer-facing solutions. It is an exciting space that comprises payments technology, cryptocurrencies and assets, big data, distributed ledger technology, and more.
As we mentioned earlier, there are currently no specific fintech laws and regulations that specifically govern fintech businesses.This also means there are no ‘prohibitions or restrictions that are specific to fintech businesses in the UK’. Instead, businesses in the sector will be party to the same laws as most other businesses offering financial services. Here are the most important regulations you need to be aware of:
By nature of the sector, financial technology businesses will be subject to regulation by the FCA which is responsible for protecting competition and consumers and making sure that all businesses are operating compliantly.
As it stands, the UK’s laws are only relevant to certain types of cryptoassets. For instance, all crypto asset exchanges and cryptowallet providers are required to comply with money laundering regulations such as registering with the FCA and undertaking identity checks.
However, in recent months, the UK government has moved to amend the Financial Services and Markets Bill to give the FCA authority to regulate promotions for all cryptoassets.
In early 2021, an independent report on the UK FinTech Sector executed by Ron Kalifa OBE was published. This report offered strategic recommendations for how to regulate and manage the FinTech sector moving forward. The report gives a good picture of what we might expect for the future trajectory of fintech regulation in the UK.
Amongst his proposals, Kalifa called for a digital finance package that establishes a new regulatory framework for emerging tech and a Digital Economy taskforce.
In relation to policy and regulation, Kalifa proposed establishing a policy and regulatory approach that both protects consumers and cultivates competition – as exemplified in the ‘regulatory sandbox’.
A regulatory sandbox aims to encourage and stimulate innovation without posing restrictive barriers to entry. Regulatory sandboxes essentially give innovators (whether they’re seasoned organisations or newcomers) the opportunity to test out new ideas, whilst consulting with regulatory experts, without regulatory liability.
Kalifa recommended consolidating the various different stakeholders that currently have a say in steering fintech policy and regulation into a single body.
The report also called for more rigorous regulation of the use of AI and machine learning models in financial services by providing clearer guidance about how existing rules are applied. Additionally, Kalif suggests looking into the development of a specific legal framework for AI further down the line.
The review also called for the development of a new regime for the regulation of cryptoassets that is created with their particular risks in mind.
The report also highlighted that ‘payments’ are a big part of fintech, but that existing regulations are insufficient for stimulating competition and protecting consumers. Hence, the reports calls for a review and reassessment of current regulatory schemes’ suitability.
London is seen to be amongst the top ‘fintech friendly’ cities in the world, which provides a strong environment for early stage businesses in the sector. In terms of funding, there are multiple options available including IPOs.
In December 2021, following the Kalifa Review, new rules were introduced relating to listing Fintech companies on the public market. By allowing ‘dual class share structures within the premium listing segment’, these rules seek to stimulate innovation by coaxing companies to list sooner thus diversifying the investment market. Additionally, FinTech companies now only have to issue 10% shares to public hands.
Other funding options include equity fundraising, crowdfunding, as well as tech-specific bank loans.
Though there key bodies are moving towards developing specific FinTech regulations, this hasn’t come to fruition yet. Industry stakeholders understandably want to ensure that any future regulation ‘strikes a balance between encouraging the growth of FinTechs and allowing innovation to flourish…whilst also ensuring financial stability.’ Given the regulatory and compliance landscape is likely to change swiftly and substantially, it’s worth working with an expert lawyer who keeps their finger on the pulse. That way, you’ll always know that you’re working within the law even as you scale and grow your business.
As we’ve seen, there’s currently no fintech-specific regulatory framework in place in the UK. That being said, these kinds of businesses are most certainly governed by existing legislation, and there is likely to be some specific regulations put in place in the coming years.
There are many different types of Financial Technology. Some major examples include banking, payments, and wealth management.
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