For many years, fintech’s were underregulated in many countries. Regulators and regulations have focused on traditional banks and banking. Regulations have developed alongside the industry and did notinitially fit the new breed of fintech’s.
This has changed, and fintech’s in most countries are now regulated by main national financial regulators. Regulations have, in many cases, been adapted to cater to fintech’s.
The regulation of the fintech industry is more complicated than for financial institutions. FinTech’s are typically much smaller but still subject to the same intense regulation. They are also likely to operate across several jurisdictions (possibly from an early stage) and will need to comply with different regulations in each region or country.
In the UK, for example, regulatory compliance for fintech’s means complying with the FCA or PRA, and the Proceeds of Crime Act 2002. In the EU, the AMLD regulations (currently implemented up to 6AMLD)are supervised by national regulators, for example, BaFin in Germany through the AML Act (GwG).
Fintechs may also offer services in many different areas(including cryptocurrency and decentralized finance) and, as such, will be more or less affected by AML or other financial regulations. FinTech’s with a full banking license (or with an e-money license and planning to scale up), for example, will face much the same regulation as banks. regulations have evolved to protect financial institutions, their customers, and the wider economy from financial crime. AML and KYC regulation are frequently updated to reflect changes in fraudulent and criminal methods.
Where fintech’s have operations in the financial services industry, customer verification, or transactions support, they should ensure the same checks and security as the major financial institutions.
Protection and compliance are vital – but there are other good reasonsfor regulation for fintechs:
Credibility and trust are vital for any financial-related company, andcompliance with regulations helps to establish this.
Companies operating in the same area must meet the same requirements and challenges, supporting fair competition.
This could include offering new products and services, moving to a fullbanking license, or expanding into new countries..
Regulation in this area has been in place for decades and has continually been updated as criminal and fraudulent methods have changed. KYC and AML regulations aim to prevent fraud, Money Laundering, and other financial crime. Any customer (individual or corporate) needs to beverified to ensure they are who they claim to be, and any suspicious activity needs to be identified and reported.
In the EU, requirements are well defined through the AMLD regulations. The latest updates to these came in 2020 (5AMLD) and 2021 (6AMLD).5AMLD introduced a new focus on the sources of finance and the concept of PEP checking and monitoring. 6AMLD focuses on consistent understanding and treatment across the EU. In the UK, AML is controlled largely through the Proceeds of Crime Act and the Electronic Identification and Trust Services for Electronic Transactions Regulations.
The Payment Services Directive 2 (PSD2) regulations are EU and UK regulations for electronic payment services. These aim to make payments more secure whilst also promoting competition and innovations in the sector.
Decentralized finance (DeFi) is a growing sector for fintechs and onewhere regulation still needs to catch up. The use of cryptocurrenciesand smart contracts largely avoids current KYC regulations, butregulators are likely to make changes soon and fintechs should stayahead of this.
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