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What Is Expected from Fintechs Legally: The US vs Europe


9 min read

Regulations are still a terrible nightmare for the fintech industry. Why so? First, because of its natural barriers put to the banking businesses: you’ve got to do a lot of work to comply with all the prescribed standards. Second, the geo distinction matters seriously; thus, the legislation differences should be thoroughly accounted for at the initial stage not to complicate the further well-being of the company. Third, you should always stay in touch with the recent regtech updates not to miss out on something important and adjust your business’ accordance with these newly appearing details. So, how not be crashed by the waves of the regulatory demands and stay afloat?

In the first place, you need to grasp the contrast between 2 types of regulatory jurisdictions: rules-based and principles-based ones. The former is an embodiment of the US fintech landscape, while the latter describes the state of things in the UK and Europe, and this article is exactly to compare these opposites.

A rules-based system presupposes the creation of the financial statements under the set of commonly defined regulations like Generally Accepted Accounting Principles (GAAP). Though it’s often criticized for the complicated procedure, such transparency from the beginning mitigates the risk of false reporting errors.

In contrast to the rules-based regulation, the principle-based one relies on less rigorous guidelines, which leaves some flexibility for the fintech providers. However, this system is blamed for accounting inaccuracies and, consequently, the wrong portrait of the company’s financial position.

As you can see, both regulatory jurisdictions have their pros and cons but read our article to the end to decide which one is stronger in the fintech environment. Your guess? Go ahead!

The US: The Most Significant Fintech Regulators

Though there’s no single and accepted regulating authority in the US, the most important American leverages in the financial sector still can be named. According to Susanne Chiishti’s Fintech For Dummies, they include:

  • The Federal Reserve (“the Fed”) — the principal regulatory nucleus in the U.S. that spreads its jurisdiction on the questions of currency circulation, expansion, and inflation supervision through the interest rate vs bond price correlation. Besides, the Fed observes and controls the operation of bank holding companies and state-chartered banks to ensure the payment system’s efficiency and safety.
  • The Financial Stability Oversight Council (FSOC) — the constitutionally empowered proxy that is responsible for financial risks recognition and the corresponding troubleshooting. Its main function is to sustain the financial stability within the system.
  • The Consumer Financial Protection Bureau (CFPB) — the regulatory body that enacts the federal consumer laws for providing a safe financial services environment for the end-users.
  • The Federal Deposit Insurance Corporation (FDIC) — another American consumer’s rights legal advocate. Its scope of influence includes the institutions that don’t belong to the Federal Reserve System.
  • The Office of the Comptroller of the Currency (OCC) — the independent warden of the national banks and federal savings associations that represents the interest in safe and sound financial services, fair customer service, and compliance with the federal policies.
  • The Commodity Futures Trading Commission (CFTC) — the organization that isn’t purely the banking regulator itself but takes a part in the futures and swaps markets supervision.

Though this list can be extended, these are the major forces that determine the financial activity of American fintechs and should be examined in more detail if your business refers to the rules-based system. Better know these regulators as the back of your hand!

The UK & Europe: The Key Regulatory Bodies in Fintech

While you’re probably still coming to after the previous section, we’re ready to guide you through the UK and European regulatory situation to feel the rhythm of the principle-based system. Ready? Step forward!

Despite the leadership role varies on the local level, the UK and European regulatory space looks much simpler and less diversified. As for the key players here, we should state the Financial Conduct Authority (FCA) in the UK, the Authority for the Financial Markets (AFM) in the Netherlands, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in Germany, and the Autorité des Marchés Financiers (AMF) in France. In simple terms, their overall task comes down to the control over the industry stability and consumers’ protection.

Besides, each country’s financial services flow is also supervised by the complementary bodies that are common for all. They incorporate the following involved parties:

  • The European Commission (EC) — the management core of the EU’s overall strategy and policies. In the fintech framework, it inspects the EU policies’ consistency with both businesses’ and consumers’ needs.
  • The European Central Bank (ECB) — the union of 19 European countries that are aspired to keep the price stability and control the inflation for the safety of the banking system.
  • The European Securities and Markets Authority (ESMA) — the independent body that cares about the investors’ defence from disproportionate risks through public databases filling and regular quality checks.
  • The European System of Financial Supervision (ESFS) — the organization that executes the firm-level financial monitoring at the European scale. Its mission is to equalize the operational standards among the banks, pension funds, and insurance companies.
  • The European Systemic Risk Board (ESRB) — the regulator that is engaged in the macro-prudential problem-solving, or the elimination of risks to the financial system as an entity, within the European borders.
  • The Global Financial Innovation Network (GFIN) — the association of 50 organizations that are driven by innovational betterment and global fintechs’ cooperation. Their mission is to build the common ground between the financial services regulators and incite their experience sharing for global growth.

All these auxiliary regulating bodies primarily operated on the passporting rules, permitting the companies to switch from one European jurisdiction to another so that to provide their services to the new market. One of the prominent examples was Revolut who successfully applied this approach for a long time. Meanwhile, the UK’s exit from the EU can significantly change the rules of the game. As London still possesses a solid position in the fintech marketplace, for now, it’s not clear whether the FCA will allow such a solution to be used further on. Only time will tell!

Why Do the US Lag a Way Behind the UK?

Some people consider China the massive customer-oriented fintech marketplace which masterfully combines banking, payment, and commerce into one dynamic ecosystem. The others claim that the US is rich for the tech giants that bring the financial services out to the new level of innovative achievements and technological development, especially in the payments sphere. At the same time, the solid part of the global community is still looking with adornment in the direction of the UK, which despite the Brexit and COVID realities, hasn’t only held this fort down but even strengthened its influence for the last few months. In particular, the investment into the UK fintechs appeared to go up in the Q1 of 2021, which takes almost half of the overall deal transactions. This piece of statistics leads to the clear conclusion that the UK is still calling the shots in the global digital banking industry, so let’s discuss the reasons behind it.

#1. Regulatory backup is a true changemaker

The UK is the first country that has succeeded in time reduction for banking users’ authorization by around 40%. This high bar was mostly set up by the FCA’s Regulatory Sandbox initiative, opening the door to innovation testing with real customers. Besides, the PRA also contributed to this by decreasing the minimal first capital deposit and providing restricted licenses to the new banks. As a result, 18 fledging UK banks gained banking licenses since that novelty’s introduction. For the sake of contrast, in the US, it’d call for the federal-level approval that is often accompanied by the court proceeding.

#2. Talent leads to innovation

Talents hiring is frequently a key to the quicker company’s innovation, but the UK doesn’t only know this truth but successfully applies it. As a way to restrain the financial crisis, the UK set a good example of what the fintechs could do for better customer service. The number of the newly appeared solutions just amazed the public within the UK Fintech Week 2021, especially when it came to the crypto assets regulation, ‘greening’ of financial services, the SPAC comeback, and open finance.

#3. Tax initiatives matter no less

The UK is also known for its varied tax incentives that are the basic fuel to launch the innovation growth in fintech. The investment in startups is a big part of this plan, and only the first half of 2018 confirms the $16bn funding in the UK fintech from the inside, which outruns the US indices for this period — $14.2bn. And though the pandemic has affected the state of affairs in the country, London is still in favour.

#4. Eliminate barriers and you’ll rock

Another way to strive for innovation is to get rid of the barriers blocking its natural path. One striking case is the UK Open Banking regulation that has made its 9 biggest banks share customer data with authorized fintech providers. Though this measure always meets some criticism, it works well when we’re thinking about the APIs and the related customer experience amelioration. That’s why the EU joined the initiative with the Payment Services Directive 2 (PSD2) to give rise to the higher fintech standards.

What’s The Situation in the European Fintech?

As you already see some correlation between the UK and the European fintech trends and regulatory measures, it’s time to dwell on Europe separately. What for? To identify the impact the UK regulation system has made on the European fintech. Let’s dive into the most tangible consequences of this interplay!

  1. High-level consumer protection. The spreading of open banking in Europe inevitably led to stricter regulation, including the Strong Customer Authentication law (CSA). All is done with the pursuit of ensuring safer online/contactless transactions, preventing cybercrime attacks, and diminishing the potential damage to the end-users.
  2. Mobile payments leadership. This is the niche Europe still dominates with such powerful players as Klarna, TrasferWise, Funding Circle, and many others. However, the focus isn’t limited to payments. European fintech is also good at robo-advisers, automated loans, and investment management tools.
  3. SME businesses targeting. Except for the UK, Germany and France are also becoming the solid financial hubs for software companies’ investment. At least this concerns the SME businesses that prioritize SAAS solutions, AI & ML technologies, advanced accounting, and automation. Can you imagine that $300ml has been lately funded into such European firms in 2021?

And what all these outcomes are reminding us about? There’s a strong need to establish a unified regulatory framework for all businesses to be run and controlled smoothly and securely. Sounds good, isn’t it?

Is Regulatory Sandbox a Happy Future for World Fintech?

In a nutshell, the regulatory sandbox in fintech means the space where businesses can launch and develop their products/services under the sway of the regulatory authorities. The biggest pitfall here is that the jurisdictions’ distinctions lay the imprint on the sandbox’s flexibility. Nevertheless, the benefits outnumber any existing drawbacks. First, it’s the shortened time-to-market cycle, which, in its turn, drives the quicker business development stage and the lesser risk of business model copycatting. Second, it’s the better dialogue between regulators and companies that results in precluding possible misunderstanding and uncertainty. Third, the transparency should inspire the new experiments with technologies and stronger users’ protection. In other words, the regulatory sandbox is expected to oppose the usage of outdated and doubtful tools in favour of digitalization.

From this perspective, whatever you appreciate more — the rules- or principles-based system — if you have any possibility to choose between the two, regulations exist not in vain. Without them, the fintech would transform into an uncontrolled, messy area in which the businesses won’t be able to healthily compete or cooperate. All for the best!

If you have any doubts about how to adjust your young company to the specific regulatory system, don’t hesitate to contact DashDevs and we’ll readily release you from this pain!

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