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June 13, 2022   FinTech and Alternative Finance, Fintech International, Fintech Opinions, Innovation and Resources, Legal Issues, Regulation, Consultation   No comments

Why is FinTech so hard to regulate? 5 Challenges for Regulators

Cube | Jennifer Clarke | May 11, 2022

5 challenges regulators face - Why is FinTech so hard to regulate? 5 Challenges for Regulators1. Growth of the FinTech sector

The FinTech sector is booming. In 2020 there were around 2,500 FinTech companies in the UK and between 2011 to 2016 the number of FinTech companies grew by 21% year on year.

The diversity of the FinTech sector is a success story for UK businesses, but it can be a headache for regulators.

The high street big banks and financial companies of yesteryear have been joined by hundreds of smaller niche FinTech businesses. The Financial Conduct Authority (FCA) is now responsible for overseeing over 59,000 businesses and their sister organisation, the Prudential Regulation Authority (PRA), watches over 49,000 firms.  In many ways, their freedom to operate outside of the regulatory framework has allowed innovation to flourish. But this innovation can also pose a challenge for regulators.

2. New Fintech Products

New financial products may fall outside the existing regulatory framework or regulators may need to adapt existing legislation.

See:  Regulating financial innovation – going behind the scenes

  • 2021, found the use of Buy-Now Pay-Later (BNPL) products nearly quadrupled in 2020 to £2.7 billion. The Government plans to change the law to bring some of the current forms of unregulated buy-now-pay-later products under FCA regulation.
  • Cryptocurrency: since January 2020, crypto businesses in the UK have had to comply with the 2017 money laundering regulations but specific crypto legislation is currently thin on the ground and more specific regulation is expected in the near future.
  • Open banking: new online banks and existing banks taking their business online has opened up new risks for consumers. Robust processes are needed to prevent money laundering, identity theft, data protection violations, cybercrime and financial terrorism.
  • Robo advisors: robo advisors that give guidance to investors are increasingly common. The FCA warns that, “imported robo advice models may not meet UK regulatory requirements such as suitability, pensions switching and anti-money laundering requirements” and may therefore need to be adapted to the local environment.

3. Additional Risks for Consumers

  • New financial providers: this makes it harder for consumers to work out which providers are regulated, and which are offering legitimate products and returns.
  • Quick decisions: consumers may make quicker financial decisions online as products can be bought more quickly with no face-to-face contact. This means that potentially vulnerable customers may take on financial risks they don’t understand or make quick decisions without taking time to consider their suitability.
  • Increased complexity: the array of available choices can cause consumers to sign up to multiple financial products and to lose sight of their overall financial position.

See:  Penrose Report: Power to the People: Stronger Consumer Choice and Competition

  • Tech risks: there are more security risks as sensitive data is held by even more businesses. Data and passwords can be stored on mobile phones or laptops and customers may be tempted to duplicate passwords, leaving them open to identity or other financial fraud.
  • Accessibility and exclusion: some consumers without access to new technologies may not be able to access new financial products. Others might be access new technologies but may not have the funds or income to support their spending choices.
  • Social media: research shows that new investors with under 3 years’ experience are more than twice as likely to rely on YouTube or other social media for researching new investments.

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NCFA Jan 2018 resize - Why is FinTech so hard to regulate? 5 Challenges for RegulatorsThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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