Compliance in fintech: What it is and why it matters

Fintech often means operating at the forefront of innovation. Fintech firms are continually exploring new technologies in the pursuit of disruption – finding novel and more efficient ways to bring financial services products and services to the masses. However, it’s important to do this in a way that is safe and responsible. This means ensuring fintech is compliant.

What is compliance in fintech

Fintech may mean the use of new technology in financial services, but at the end of the day this is still financial services and so must answer to regulatory requirements put upon the industry. Financial services is one of the most heavily regulated industries in the world, with thousands of rules in place across all areas.

The reasons for this are two-fold – first, it is imperative that people are treated fairly, and they get what they pay for. This goes beyond simple consumer protection and is about ensuring people are able to make the right financial decisions. For example, if someone applies for a mortgage – a major sum of money - the bank should from the outset verify that the borrower can afford repayments, the terms are right for them and that they understand the commitment they are making.

The second reason for financial services compliance is to do with the big picture. As an industry, it’s important for financial services firms to operate responsibly as if rules are not enforced then this can have dire consequences for the wider economy. The 2008 financial crash was caused by a few factors, but one of which was banks’ reckless sales-model which allowed mortgages to be sold to people who couldn’t afford them. Such mortgages were then packaged and traded widely. Long-story short, the situation was untenable, and the crash led to mass unemployment, market volatility and governments having to step in with massive bailouts.

This is why compliance is so important in financial services. People need money for everything, from putting a roof over their head to feeding their children. All financial services institutions are therefore thoroughly regulated and have to answer to the highest standards possible. Fintech may be new but must still uphold these standards – otherwise bad actors would use fintech solutions as a loophole to get around the rules but in place.

How compliance works

In the UK, financial services regulation is primarily overseen by the FCA, or Financial Conduct Authority. The FCA not only licenses financial services firms but also investigates malpractice and financial crime, carries out inspections, issues fines, designs rules and monitors industry-wide trends and behaviours with a view towards consumer protection and economic stability.

In recent years, the FCA has been working hard to understand fintech and how the financial services industry is rapidly evolving through these new technologies. In many ways, this is forcing the regulator to design regulatory frameworks and implement them at the same time! However, there are some common areas within financial services regulation all firms – from traditional players to new fintechs – must observe:

• AML – Otherwise known as anti-money laundering, AML is the requirement for firms to ensure they are carrying out checks to ensure criminals are not using their products and services to launder illegal crime proceeds. This is an incredibly important area to monitor, with criminals now very savvy at this, but firms have to scrutinise each transaction, nonetheless.
• KYC – Another acronym, this stands for Know Your Customer and is heavily linked to AML. Essentially, firms have to verify the identify of each consumer they work with. This means authenticating identities, ensuring these are real people, and then keeping security controls allowing access for that person and that person alone.
• Data management – This is an aspect impacting all firms, both within the financial services industry and outside. A person’s data can almost be as valuable as their money! For this reason, regulated firms have to have special controls in place to protect data, keep it secure and ensure they do not share it with third parties.
• Fair treatment – This is manifested in several ways in financial services, but ultimately the FCA wants consumers to be treated fairly and honestly. This means moving away from underhand tactics or high pressure, commission-based sales models to doing what is best for consumers. Advertisements must be clear, information has to be clearly displayed on websites, and consumers must have recourse to ask questions or make complaints.

Why compliance matters

As discussed, financial services regulation is crucial – for both consumers and the wider economy – but this has extra ramifications for fintech. Fintech solutions have become increasingly popular because these often are attractive to new generations of consumers coming through – i.e. younger, digital savvy consumers are more likely to bank with Starling Bank than Barclays.

As such, fintech solutions are becoming increasingly used by a larger population. This is great for fintech but brings an added responsibility. The financial services industry has a poor reputation with many due to scandals, bailouts and numerous crashes. It’s synonymous with greed and though fintech firms are still run as businesses for profit, it’s imperative they don’t repeat the mistakes of the past. Therefore, fintech firms must champion compliance and set a new standard for the wider industry in order to repair reputations and win over new consumers.

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