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A major fintech trade association has told the UK government that the sector ought to have separate rules to those applied to traditional financial institutions, due to differences in knowledge, resources and expertise.
Innovate Finance, an industry body representing fintech firms in the UK, has published its response to HM Treasury’s call for proposals on how UK financial regulators' competitiveness objectives can be best benchmarked and measured for success.
The Financial Services and Markets Act (FSMA), which received royal assent in June, introduces a new requirement for the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to promote competitiveness in UK financial services.
It also gives the Treasury the power to set performance metrics to measure success.
Innovate Finance, which boasts members such as SWIFT, TrueLayer and Klarna, has emphasised that supporting innovation in fintechs is key to ensuring competitiveness.
Specifically, Innovate Finance said that a resource gap can hinder start-ups’ ability to “anticipate, shape, navigate and fully understand” regulatory compliance requirements, which it argues are often designed for large and complex financial services providers.
Imposing identical rules, the trade body argues, fails to account for the unique challenges faced by start-ups and scale-ups, hindering their growth potential and innovation.
Instead, a more tailored and proportionate regulatory framework is needed to ensure that small and scaling firms can thrive and contribute to the overall competitiveness and innovation of the financial services sector.
Scale-ups, in particular, tend to face all the regulatory requirements of large, well-established firms, but might lack the established channels and contacts within regulatory bodies, like compliance teams and processes, in comparison to large institutions.
The industry body also said that start-up and scale-up fintechs can lack awareness of the help and support available to them, such as the direct support service from the FCA and external advisors.
“Whilst the new FCA Early and High Growth Oversight programme provides more dedicated support for newly authorised firms, it does not extend the ‘dedicated account manager’ approach to more established fintechs,” it said.
Every regulator, everywhere, all at once
Existing regulation, and the need to deal with multiple regulators at once, are also highlighted in the consultation response.
“Fintechs can struggle to adopt and process existing regulatory requirements and find it hard to keep up with compliance requirements during periods of rapid growth, which can outpace their ability to scale their compliance teams and infrastructure,” said Innovate Finance.
The trade body added that this results in bottlenecks in a fintech’s go-to-market strategy for innovative products and services.
A lack of clear thresholds and regulatory principles when applying appropriate and proportionate controls also means there is often a lack of obvious milestones or thresholds as firms grow.
As a result, meeting the necessary requirements while maintaining agility can be a significant challenge for start-up, scale-up and high-growth fintechs.
In addition to the FCA and PRA, Innovate Finance noted that fintechs must interact with the Bank of England, the Competition and Markets Authority (CMA) and the Payment Systems Regulator (PSR).
Plus the Information Commissioner’s Office (ICO), the Financial Reporting Council (FRC), the Advertising Standards Authority (ASA) and other quasi-regulatory bodies such as the Financial Ombudsman Service (FOS).
“Dealing with multiple regulators increases the compliance burden for fintechs which can be disproportionate relative to incumbents,” said Innovate Finance.
Regulators may also take different approaches to interpreting principles or enforcing some rules or principles.
This introduces uncertainty into fintechs’ compliance operations, exacerbating the issue of compliance burdens and the associated costs of doing business or securing funding and investment.
In light of the FCA’s new Consumer Duty, which requires firms to provide good outcomes for consumers, Innovate Finance has called for a review of all existing consumer regulations to assess any duplication or contradiction with the new Consumer Duty and repeal so-called "tick box" regulations.
The consultation, Financial Services Regulation: Measuring Success, ran from May 9 until July 4. This proposal is intended to help determine what additional metrics are most appropriate for the FCA and Bank of England to publish.
