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As the UK fintech space continues to expand at lightspeed rates, compliance teams have often struggled in the background to keep up with the pace of change. With the promise of a more agile Financial Conduct Authority (FCA) and the nascent digital currency space, compliance teams are facing a number of challenges.
The growth of digital payments across the world has soared in recent years allowing both new market entrants and existing players to scale fast, both domestically and through global expansion.
According to the latest estimates from dealroom.co, in collaboration with London & Partners, the UK's technology ecosystem is currently worth $1trn, in which fintech growth plays a significant role. Fintech funding accounted for 46 percent of all London investments in 2021 and the UK is home to 13 technology decacorns, a business with a valuation exceeding £10bn, nine of which are related to financial services, such as WorldPay, Checkout.com, Revolut and Wise.
These trends look set to continue, with VIXIO’s trend analysis showing that payments firms are shifting from the challenges posed by the pandemic to a focus on growth.
"Whether that is doubling down on digital payments or innovating on the customer experience, payments companies will be looking to refocus, reprioritise and recapture lost business" the report notes, which also found that 73 percent of compliance executives are “very optimistic” about growth opportunities in 2022.
Katherine Long, principal analyst, author of VIXIO’s 2022 trends report, said: “Our findings categorically show growth is back on the agenda for payments firms after two tumultuous years of firms adjusting to COVID-19.
“But during that time, compliance has become significantly more important for firms and more challenging for them to grapple with, with regulators concerned over new payments sectors such as cryptocurrency, buy now pay later (BNPL), controls on money laundering and data privacy.”
Although the growth of the fintech space is a welcome development, the speed of scaling up may pose significant challenges for compliance teams.
A recent example is German neobank N26, which has faced regulatory actions in Italy and Germany, imposing a cap on customer onboarding due to a lack of safeguards and compliance.
The restrictions on acquiring new customers are intended to limit the challenger bank’s growth while it places more focus on strengthening customer identification processes, transaction monitoring and suspicious transaction reporting.
Compliance teams are often facing a number of challenges as firms rapidly grow, such as issues around operational resilience and customer duty, while the potential extension of the senior manager regime to payments firms could bring new accountabilities to the leadership of fast-growing firms.
Customer duty - scaling the right way
Last December, the FCA opened a consultation to ensure that financial services companies hold up to higher and more consistent standards of customer protection.
The new rules, expected to be issued by the end of July 2022, will “fundamentally shift the mindset of firms”, the regulator said.
It represents a change in the approach from “avoiding customer detriment” to “ensuring customer outcomes”, Aneesha Tawakley Banerjee, lead regulatory counsel at Curve, explained while speaking at a webinar organised by the Payments Association last week.
Customer duty requires businesses to move away from simply treating customers fairly, that is to make sure that nothing wrong is happening to the customer, to the FCA expecting firms to plan and prepare, and that electronic money institutions (EMIs) are responsible for ensuring that their customers are doing well, she added.
“It’s bringing the focus back so it’s not about earning money but it’s about earning money the right way, scaling the right way, especially for younger businesses.”
It also tells payment firms and EMIs, which may have millions of customers, that the FCA expects them to act in a certain way and to be part of the financial ecosystem.
Operational resilience - the black swan moment
New operational resilience rules came into effect in the UK on March 31, requiring firms to identify important business services, set impact tolerances and carry out self-assessment.
This just comes after two years when a row of unforeseeable events, such as the pandemic or the large-scale Russian aggression against Ukraine, placed many businesses under a real stress test.
Also speaking at the Payments Association event, Oliver Tonkin, co-founder of BCB Group stressed that these developments highlight that compliance teams must prepare for the unthinkable.
“It’s one of those black swan events — unknown unknowns — which in the last few weeks have really shown that the scenarios we thought would be inconceivable even two months ago are more conceivable than one thinks.”
“You really have to think the unthinkable,” Tonkin said.
As VIXIO’s The Paradigm Shift Towards Growth report notes, priorities of compliance teams at payments firms are shifting from dealing with the impact of the pandemic towards growth, with product licensing and new market entry being at the centre of their thoughts.
Therefore, businesses need to focus on understanding their key business areas and what the impact tolerance has been, Tawakley Banerjee said.
“A lot of the EMIs are fairly young and therefore operational resilience and building in that impact assessment is easier to do. It’s really a question of the FCA telling you to do it now versus assuming or expecting that it should be done,” she said, adding that “that’s the change in focus more than anything else”.
Senior manager regime - accountability back to the centre
In its latest perimeter review, the FCA hinted at plans to potentially extend the UK’s Senior Managers and Certification Regime (SM&CR) to payment and e-money firms.
This means that senior managers of payment institutions and EMIs would be liable for the conduct of their businesses, hence increasing accountability when firms grow fast.
“When we do the blitz-scale,” said Tawakley Banerjee, describing it as the phrase of the day on the Payments Association webinar, “accountability and responsibility get lost very quickly and that is not the way the FCA [expects businesses] should work”.
The senior manager regime and the training that comes with it will help businesses re-focus on how they need to act to align with what their responsibilities are, she added.
The future is digital
The regulatory landscape in payments has been rapidly changing in recent years, and with the increasingly prevalent question of digital currencies, it is unlikely that these changes will slow down.
As Tawakley Banerjee pointed out, “if we just generally talk about regulatory change in the payments world, we cannot make that connection without talking about digital currencies”.
“With the increasing adoption of cryptocurrencies, stablecoins, central bank digital currencies (CBDC), there is going to be a sea change in the next five to seven years and we are going to be facing a whole different regime in the next couple of years-time with the focus being on anti-money laundering (AML) but also on understanding how payments work in a different ecosystem,” she added.
The FCA and the Bank of England are currently looking at, and struggling with, understanding where the perimeters are, and what they can and cannot regulate.
“We will see a lot of change specifically in that space,” Tawakley Banerjee said, emphasising that “the FCA being a hands-off regulator is no longer a reality”.
