Regulation for FinTech Firms is Intensifying

Regulation for FinTech Firms is Intensifying

The FinTech industry has grown exponentially over the last decade, with the rise of non-traditional banks – otherwise known as neobanks – and many other FinTech companies offering products like digital wallets, mobile investment services and more.

During the rapid digital transformation of the financial sector, governments have encouraged the FinTech boom, so much so that the implementation of proper regulation to protect customers, businesses, and the FinTech firms themselves has not always been a priority.

Why is the regulation of FinTech companies necessary?

The lax attitude towards financial tech is changing due to increasing concern about cybersecurity, data privacy, consumer protection, and other factors. Not to mention the need to put anti-criminal – and especially anti-money laundering – practices in place.

Especially since there have been hundreds of FinTech unicorns – and some of these firms are competing with long-established financial entities like traditional banks – they become a greater target for cyberattacks and are associated with greater risks financially for their customers.

Additionally, more and more traditional financial entities are aligning themselves with FinTech services, making them susceptible to vulnerabilities if sufficient regulation isn’t exercised.

What regulations have been developed for FinTech?

Regulation for FinTech companies is, albeit slowly, being implemented across the world. 

The demand for transparency surrounding operations and governance is increasing. Data gathering about these FinTech firms is being taken more seriously, and the sale of some financial products by FinTech companies is being limited, to name a few of how regulation is beginning to catch up with the fast-growing FinTech industry.

What’s more, in addition to ensuring data protection and protection against cyberattacks, data privacy – and data ownership – has become a big concern in FinTech and is being tackled by regulatory implementations accordingly.

For example, the regulatory entity ICO found numerous businesses in the UK offering credit reporting services that had sold their customers’ data to marketing companies without their permission.

In response to regulatory bodies and governments becoming aware of how valuable data is in our economy and how much it was being traded without the knowledge of those it pertained to, it implemented important legislation in 2018 to tackle this.

For example, the EU’s GDPR (General Data Protection Regulation) and the ePrivacy regulation considerably impact the way FinTech companies can share customer information.

Moreover, legislation such as Mexico’s FinTech Law and the Payment Services Directive – implemented to improve the security of payments – seeks to seal other vulnerabilities that FinTech products and services pose.

In the past, loan and investment-centred FinTech companies’ regulations focused on disclaiming clear information to customers about the risks. Whereas more and more stringent regulations are providing more protection for customers belonging to these FinTech firms. 

In particular, ensuring that capital is put aside to protect users – and make sure that operations are governed and standardised to ensure a fair customer experience, including making complaints and handling an essential department within the firm – is becoming vital for companies in FinTech.

More than regulations and governance rules for FinTech firms themselves, there is increasing pressure on businesses aligned with – or using – FinTech to prove their awareness of the risks and show evidence they’re taking action to ward against these increased risks. 

As regulators put more rules in place for FinTech – and businesses using these firms’ services – they consider the interconnectivity of FinTech with other entities. More than this, they’re putting measures in place to ensure that those in positions of power in business (such as high-level management) are in a position to understand and safeguard against FinTech-associated risks.

What does the future look like for the regulation of FinTech?

As we advance, FinTech companies will need to comply with a list of growing regulations and anticipate those likely to be implemented in the future.

One such area suspected to undergo greater regulation relates to FInTech companies’ financial stability, calling for more liquidity, risk management and more significant insurance on consumer capital/deposits in the case of decentralised finance entities.

While regulation for FinTech companies is certainly ramping up, the regulation imposed upon these firms is unlikely to be globally agreed upon under one set of laws. It will instead rely on national-level – or even state-level, as in the US – implementation of legislation and guidelines.

Although, across the board, thorough reporting and in-depth analysis of these companies’ data will be a cornerstone of FinTech regulation.

However, to continue to facilitate FinTech innovation in the light of intensifying regulations – and to avoid discouraging FinTech firms nervous about successfully complying with them – governments and similar bodies will host ‘sandboxes’.

These will allow FinTech start-ups to explore potential products without worrying about being penalised for failing to comply with regulations (and ensuring they can comply).


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