One of the most important and challenging aspects of launching a Fintech project is regulatory compliance. Fintech doesn’t fit well into the existing regulatory framework created for traditional finance, and new legislation is still underway. Different regions oblige you to follow different rules that you need to know before launching a new product. The good news is that Fintech regulation aiming at protecting users and service providers has gotten off the ground in recent years. So, in this article, we take a look at the current landscape of Fintech regulations around the world.
Table of contents:
- Fintech industry regulation challenges
- The Main Fintech Legal Issues
- Fintech regulation around the world
3.1 UK
3.2 USA
3.3 Europe
3.4 Other countries - What is the best country to start a fintech company
- The bottom line
Fintech and compliance regulation challenges
Fintech has long been a part of our daily life. Solutions such as blockchain, digital payments, Robo advisors, digital banks, and budgeting apps have opened the door to a more efficient financial world with reduced costs, improved transparency, and more alternatives for users. According to Statista, the value of the investment in Fintech companies worldwide reached approximately 105 billion U.S. dollars in 2020. But even with this rapid development, the industry is still balancing between innovation and regulation.
The main challenges of Fintech regulation around the world are associated with the difficulties of introducing new financial technologies into the current regulatory framework. For example, e-wallets and cryptocurrencies are new solutions that don’t fall under the legislation of traditional financial institutions. They require new laws. It takes time to create and implement such fintech regulations, while fintech continues to bring new and new tools to the market. As a result, there is not always a clearly defined model for the operation of Fintech services within the legislation of a particular state.
The main goal of Fintech regulation is to make the industry less vulnerable to attacks by malicious users. Mostly the legal framework is designed to calculate and prevent the use of financial technology instruments for illegal activities, thereby protecting both service providers and users. Each new Fintech solution carries not only opportunities but also threats. According to the World Bank and the Cambridge Center for Alternative Finance (CCAF), Fintech providers faced a 15% increase in cybersecurity threats during the pandemic. Regulation of fintech must be a powerful tool to prevent attacks, while at the same time it must meet the needs of market players. Therefore, while the current rules in the field of Fintech differ from region to region and are constantly updated, this creates additional difficulties for Fintech companies.
The Main Fintech Legal Issues
With the growing digitalization of financial services, various legal challenges have emerged for fintech companies. From data privacy to licensing categories, these legal issues demand careful attention and adherence to regulations to ensure both customer protection and business success. In this context, we will explore some of the main legal issues faced by fintech companies, shedding light on the critical areas that require diligent compliance and proactive risk management.
1. Data Privacy
Fintech companies handle vast amounts of sensitive financial and personal data, making data privacy a top concern. Complying with data protection regulations, such as GDPR (General Data Protection Regulation) in the European Union or CCPA (California Consumer Privacy Act) in the United States, is crucial to safeguarding customer information and avoiding legal repercussions.
2. Cyberattacks
The fintech industry is a prime target for cyberattacks due to its valuable financial data and transactions. Ensuring robust cybersecurity measures is essential to prevent data breaches, financial fraud, and unauthorized access. Compliance with industry standards and regulations is vital to protect both the company and its customers.
3. Licensing Categories
Fintech companies often navigate complex regulatory landscapes as they operate across various financial sectors. Understanding the licensing requirements for each specific service or product offered, such as payment processing, lending, or digital asset exchange, is essential to avoid potential legal and regulatory challenges.
4. Payment Systems
Fintech companies involved in payment processing must adhere to regulations like the Payment Services Directive 2 (PSD2) in the EU or the Dodd-Frank Act in the U.S. These regulations aim to enhance payment security, promote competition, and protect consumers. Complying with such regulations is essential to provide reliable and legally compliant payment services.
Navigating these legal issues requires fintech companies to stay abreast of evolving regulations, work closely with legal experts, and prioritize robust security and data protection measures to build trust with customers and regulatory authorities alike.
Fintech regulation around the world
UK
The UK is considered one of the best locations for the development of Fintech projects. UK Fintech adoption rate is 71%, according to The Global City. And UK startups like Revolut and Monzo are famous all over the world. However, like many other countries, the UK doesn’t have a single legal framework that regulates Fintech. Instead, companies can be regulated by different authorities depending on the nature and size of their business.
The main financial regulators in the UK are the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). Many financial activities require a license, such as accepting deposits, investments, lending and insurance, payment services, and electronic money. For example, FCA is responsible for authorizing and regulating UK consumer lending firms, including peer-to-peer (P2P) lending, and payment services. Any UK payment service company must apply to the FCA to become either a Registered Small Payment Institution (SPI) or an Authorized Payment Institution (API).
The regulation of crypto assets in the UK is a rather complex issue. Despite the fact that the work of cryptocurrency exchanges is not officially regulated, there are certain licenses for exchanging cryptocurrencies that companies can obtain at will. For example, Coinbase got an E-Money license in 2019. Since 2020, FCA began to monitor crypto assets more strictly in order to analyze and eliminate potential risks associated with cryptocurrency, as well as encourage and develop innovations in the interests of consumers in this area.
Covid-19 has also not gone unnoticed for the UK Fintech industry. In their statements, regulators recognize that the role of alternative financial instruments in society has increased and that there is a need for a clearer legal framework for their regulation in order to protect users. Therefore, in the near future, it is expected to adopt a number of new laws related to the regulation of financial technologies.
USA regulatory frameworks governing fintech
The USA is the region with the largest number of Fintech projects. According to statistics, in February 2020, there were 8,775 Fintech startups, which is more than in Europe, Africa, and the Middle East combined (7,385). However, even despite such a rapid development of the industry, the United States still doesn’t have a unified regulatory framework for Fintech, therefore, the activities of Fintech companies are regulated by laws at the level of a particular state. This is a rather problematic and time-consuming moment for startups that need to obtain all the necessary permits to provide services in the USA.
There are several major regulators in the United States, but each of them serves as a regulator for certain types of financial services. Depending on the financial activities of companies, they may be subject to certain laws and requirements. For example, in New York State, companies providing virtual currency services need to obtain Bitlicense.
The main USA regulators for the Fintech industry include the following:
| Regulator | Regulation object |
| Federal Deposit Insurance Corporation (FDIC) | Banks that are not members of the Federal Reserve System. FDIC manages the federal deposit insurance fund. |
| Office of the Comptroller of the Currency (OCC) | Regulates the activities of regional banks, federal savings banks, and branches of foreign banks licensed at the federal level, as well as Fintech companies that accept deposits, paychecks, or carry out lending activities. |
| Securities and Exchange Commission (SEC) | Regulates securities market, including exchanges, brokers, and dealers; investment advisors; and mutual funds. |
| Commodity Futures Trading Commission (CFTC) | Supervises the implementation of the law on commodity exchanges. Regulates the work of intermediaries in the derivatives market, brokers, swap dealers, retail currency dealers, and commodity pool operators. |
| Consumer Financial Protection Bureau (CFPB) | Regulates financial services offered by service providers to consumers. |
| Financial Crimes Enforcement Network (FinCEN) | Engaged in combating money laundering, terrorist financing, and financial crime. Regulates compliance with US anti-money laundering (AML) regulations. |
| Financial Industry Regulatory Authority (FINRA) | Dedicated to investor protection and regulates businesses offering investment activities, including crowdfunding. |
Also, there are some common regulations that every Fintech company has to follow. For example, US Anti-Money Laundering regulations (AML), Financial Modernization Act, etc. It is also known that the United States plans to create a unified regulatory framework for Fintech in the near future. This will save Fintech companies from licensing in every state, making it easier to enter the US market.
Europe
Despite the fact that Covid-19 caused a decrease in investment in European Fintech, established companies have shown not only resilience but also growth. Therefore, European Union regulators are actively working to improve the regulatory framework for the industry. The European Securities and Markets Authority (ESMA) is the main authority responsible for initiatives to promote investment in the financial sector. In addition, some countries have their own domestic regulators for foreign and local financial companies. For example, ACPR and AMF in France, BaFin in Germany, and so on.
According to The European Union’s 5th Anti-Money Laundering Directive, released in January 2020, all platforms offering exchanges in virtual currencies or cryptocurrencies, including e-wallet providers, will be subject to stricter controls. Exchanges are now required to register with the relevant competent authorities and сonduct customer due diligence to comply with AML/KYC. Until 2024, the European Commission also plans to expand the legal framework for Fintech. In particular, it is planned to introduce a legal framework for digital identification, create a new structure allowing the introduction of blockchain technology and crypto assets in the Fintech sector, create a regulatory framework regarding operations with cryptocurrency, and so on. In general, by the end of 2024, unified rules of Fintech regulation are expected to be created for all EU member states.
Other countries
As for Fintech regulation in other regions, the situation is similar. Most countries don’t have a clear legal framework aimed exclusively at the financial technology industry, however, there are regions where things are much better.
For example, Switzerland is one of the most popular destinations among European Fintech startups, where the industry is supported at a government level. Therefore, many financial companies open their offices here. The main regulator of the Swiss financial market is the Swiss Financial Market Supervisory Authority FINMA, which sets the licensing requirements. In 2019, the country’s authorities introduced a new Fintech license for the development of the Fintech sector, the requirements for which are more loyal than for traditional financial institutions.
In China, the government is also actively involved in regulating the Fintech industry, but there is no single regulatory framework as well. Local authorities play an important role in regulating the Fintech market, but the main regulator is People’s Bank of China. At the end of 2019, China, with the support of the People’s Bank, began testing the sandbox mode for Fintech companies operating in Beijing, and in 2020 the sandbox was expanded by 6 more cities.
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Indonesia has clear rules regarding the financial technology market, which attracts investors and developers of Fintech solutions. Indonesia has regulations laying down rules for almost every industry of Fintech, including payment systems, P2P lending, crypto exchanges, open banking, crowdfunding, and blockchain. The main regulators are Bank Indonesia (BI) and the Indonesian Financial Services Authority (OJK).
In Australia, the main financial regulators are the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA). The regulation covers companies engaged in activities such as financial services, consumer credit lending, registering and disclosure obligations, crowdfunding service, etc. To conduct these types of activities, a company must acquire an Australian Financial Service License (AFSLs). If a company is involved in any credit activity, it must obtain an Australian Credit License (ACL). Also, any company engaging in banking services must apply for an Authorized Deposit Taking Institution (ADI).
Emerging Trends in Fintech Regulations
There is a growing emphasis on creating unified global standards for fintech regulation. International collaborations between regulatory authorities aim to streamline fintech regulations, making it easier for companies to operate across borders while ensuring consistent standards for data protection, cybersecurity, and consumer rights. Let’s review a few of the upcoming trends that will stay for a while on the market.
Data Protection and Privacy Standards
With the increasing reliance on data in fintech operations, regulators are focusing on strengthening data protection and privacy standards. Stricter regulations will be implemented to ensure the secure handling and processing of sensitive financial and personal data to safeguard customer privacy.
Open Banking Regulations
Open banking initiatives are gaining traction globally, requiring fintech companies to comply with standardized APIs and data-sharing protocols. Regulators are implementing guidelines to ensure secure and transparent data sharing while promoting competition and innovation in the financial industry.
AI and Automation Oversight
The increasing use of artificial intelligence (AI) and automation in fintech services is prompting regulators to address potential risks and ethical concerns. Expect regulations that promote responsible AI use, transparency in algorithms, and accountability for AI-driven decisions.
Regulatory Sandboxes
Regulators are continuing to establish regulatory sandboxes to foster fintech innovation in a controlled environment. Startups and fintech companies can test new products and services within these sandboxes, allowing for more agile experimentation while adhering to specific fintech regulatory framework.
What is the best country to start a Fintech company?
Entrepreneurs often study fintech regulations around the world in order to determine what is the best country to start a Fintech company. Let’s try to figure out this issue. According to the Savills European Fintech Occupier Index, the five most attractive EU cities for Fintech companies are Berlin, Paris, Barcelona, Madrid, Dublin.
More generally, the United States, as the country with the largest number of Fintech projects, is an excellent region to build your startup. In Europe, the countries with leading fintech regulations are the United Kingdom, Switzerland, the Netherlands, Sweden, Lithuania, and Estonia. In the Asia Pacific region, India is one of the world’s fastest-growing Fintech markets. We advise you to study the regulatory framework of each region if you want to choose the best country to incorporate a Fintech startup. There are pros and cons everywhere.
The bottom line
Since financial technology is a relatively new industry, Fintech regulation around the world is still under development. The more important role Fintech solutions play in the life of society, the more attention they receive from regulators. The main task of regulators is to create the necessary conditions for the development of the market and to protect its players. While Fintech regulation is very different from region to region, it is difficult for startups to enter a new market and scale. The situation is expected to change in the next 5 years.
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If you are at the stage of development of your Fintech product, remember that you need to take into account the regulatory requirements of the region with which you intend to work. An experienced development team will help you implement your idea in the best possible way, both from a technical and legal side.
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