Fintech Compliance

As on previous paper it was observed that the regulatory framework should encourage FinTech innovation and tackle regulatory barriers. Like majors’ markets are open, regulatory open-mindedness as a driver of financial innovation; supporting invention by taking action to protect consumers and markets[1]; hence on this paper we will continue with the review of the best ways to meet the regulatory requirement, if where are any, targeted to this ‘financial institution’.

Whereas it is already mentioned in our previous papers, that the new technologies such as machine learning, artificial intelligence (hereinafter – AI), blockchains, and cloud computing bring the positive impact into the current market as it is becoming digitalized and expanding into global market, especially when some countries, such regions like Baltic market, can offer the better solutions and legislation approval regarding this innovation[2].

However, fintech on the other side can be easily manipulated by fraudsters leaving it more susceptible due to the lack of synchrony in legislation and the potential risks of fintech is the challenge for policymakers is to maximize the benefits of fintech while minimizing potential risks for the financial system[3] Hence, it should not facilitate for criminals and terrorists to abuse the financial system for the purposes of money laundering or terrorism financing.

Therefore, on the current survey conducted by the Financial Stability Institute (FSI), is to provide a cross-country overview of the responses that financial authorities have pursued in relation to fintech. The paper is supplemented by a comprehensive review of published regulations and documents. Consequently, as we already appraised that with regulators extra scrutiny to these new innovative technologies, fintech’s and the banks that are in partnership with them are encouraged to be attentive with the regulations. We have excluded five best practice that every practitioner should pay attention to, when it comes to fintech compliance:

Digital businesses. There is still no common consensus reached from the regulator’s perspective on the management of this technological innovations. The suggestion from the United States Regulator (OCC) came that the efforts to hold chartered fintech companies to the same standards as banks, meaning that they need take all measurements to take as being treated the same as banks[4]. Still the debate is going on and regulators foreseen to be creating new rules on how digital-only banks and payment institutions should operate. On the recent publication of the United States Regulator (House Financial Services Committee also referred to as the House Banking Committee) on fintech, AI task forces, the proposal is placed on the focus of understanding on the ways how to utilize AI within the financial services industry leaving it better for protection of consumers.

AML Legislation. The importance of Know Your Customer (hereinafter – KYC) was specified in the European Union Directives, Financial Action Task Force (FATF) and Office of Foreign Assets Control (OFAC), leading to the proposals that the banks have to comply with these regulations, but fintech’s also apparently too must comply with these regulations[5]. The reasoning behind is that fintech becomes for money laundering attractive for offenders since it offers the increase in the rate of initiation of transactions in these systems, unlimited money flow, and the transaction of anonymous accounts facilitates money laundering for criminals[6].

Know Your Customer. Such as mentioned above, the KYC becomes mandatory for the fintech to identify the customer you are engaging the business with, as well as to prevent potential fraud. However, the application is costly and fintech also struggle with the demands of KYC procedure.

Priority to Costumer Vulnerability. The Same as it was mentioned previously that lack of regulatory framework leave consumers most exposed in this market of innovation, so the customers provision should come first in the considering taking all measurements in order to protect them. In the recent case that was published by the United States Regulator (Consumer Financial Protection Bureau (hereinafter – CFPB)), one fintech, a consumer lending company, was fined up to 6 million after the CFPB stated it violated consumer lending laws by not offering borrowers the proper opportunity to improve their credit or get loans and lower rates[7]. Since many official institutions partner with online lenders who are popular with consumers for their speed of issuing loans and digital nature, they need also show awareness to remain in this competitive market.

Future Developments. Being already notified that regulatory mindset is still in the developing process, meaning that they are still themselves trying to comprehend the impact of this innovation and the possibility to monitor it, we can predict to see increasing legislation out of them. However, the regulators are increasing with the approach with the terms how to make sure fintech companies are compliant in a financial regulatory framework. The suggestions will come from international bodies. For example, the European Union Regulatory Institution, like European Insurance and Occupational Pensions Authority (EIOPA), will assess the feedback of all recommendations in order to better understand the developments and risks and benefits related to that. It could also supplement EIOPA´s overall work on digitalization, including work on areas such as complex insurance value chain, insurance platforms and ecosystems, open insurance, digital ethics and RegTech/ SupTech[8].

[1] The Bank of England and fintech: public support for private innovation – speech by Dave Ramsden | Bank of England

[2] Are the Baltics the ideal marketplace for developing FinTech companies? – Lexology

[3] The House of Commons (HoC) Library, a guide on financial technology (FitTech)_England_CBP-9150 (2).pdf

[4] https://www.marketwatch.com/story/occs-fintech-charter-plan-draws-debate-2017-06-23

[5] https://www.crowdfundinsider.com/2016/04/83845-complying-with-aml-laws-challenges-for-the-fintech-industry/

[6] https://sanctionscanner.com/blog/anti-money-laundering-guidance-for-fintech-167

[7] https://www.bizjournals.com/sanfrancisco/blog/techflash/2016/09/subprime-fintech-lendup-sasha-orloff-fine.html

[8]https://www.eiopa.europa.eu/content/guidelines-outsourcing-cloud-service-providers_en

Inga Vaitkunskaite
Senior Compliance Officer