Fintech Laws and Regulations: 2022/2023 Guide

Since some of the most well-known fintech companies have arrived in the financial services industry, laws and regulations have been created to ensure that they operate safely and with the proper checks and balances.

Fintech regulation forms its very own strand of rules that are followed by those operating within the financial technology industry daily.

As the industry continues to evolve, with the landscape’s transformation, fintech firms must adhere to and keep up with the changes. Sometimes, it can be hard to know it all, so we’ve broken everything down in this handy guide on fintech laws and regulations for 2022 and 2023.

What is Fintech Compliance?

Fintech compliance means adhering to laws and regulations that guide new business models and fintech companies. They are a set of guidelines that not only aids consumer protection but also keeps investors’ capital safe.

The main purpose of fintech compliance is to make the industry less vulnerable to attacks by malicious users. Essentially, it removes the risk factors surrounding data privacy, money laundering and cyberattacks.

Whether you’re a fintech company or a financial partnership, compliance helps to protect against three areas of risk: reputational, regulatory and unpredictable risk due to the fast-paced nature of the fintech industry. Therefore, it’s critical for fintechs to know precisely the rules and regulations they need to follow to stay compliant.

Fintech Compliance & Regulations in Different Places

Fintech compliance and regulations differ depending on where the fintech company is based and/or operates from. So whilst they also have the same foundations, it’s important to understand how they work in different areas worldwide – especially if you’re looking to expand into new territory with your service/product.

Fintech Regulators in the United Kingdom

Fintech regulation in the UK is considered the most “fintech-friendly”. Compared to larger territories like the US, the UK has a lot less ground to cover and doesn’t struggle with state-by-state regulatory differences, meaning that there are significantly fewer regulations to follow. 

However, there are still three main regulators that operate and have stringent measures for fintech companies to follow to operate in a compliant way.

• The Financial Conduct Authority (FCA). They are a legal-backed authority that operates freely of the UK government. The main responsibilities include regulating the fintech companies to maintain the market’s integrity.

• Prudential Regulation Authority. If you’re a mobile-only bank, this agency has specific regulations to follow. They ensure that the operations of fintech providers don’t conflict with governmental policies.

• Payment Systems Regulator. They operate as a branch of the FCA, with their role being to provide a framework that aids innovation amongst fintech businesses. Importantly, they also ensure that their operations align with the interests of society.

Fintech Regulations in the United States

The US has, arguably, the largest fintech ecosystem. Due to this, they also have one of the most extensive lists of regulatory compliance laws for fintech businesses and startups.

If your fintech is planning to launch within the US market, then you’ll be subject to checks from the following regulatory bodies:

• Consumer Financial Protection Bureau (CFPB) – enforces civil antitrust and consumer protection laws.

• Financial Crimes Enforcement Network (FinCEN) – gathers information regarding all financial transactions, which is used to prevent financial crimes.

• Office of the Comptroller of the Currency (OCC) – supervises fintech companies to ensure their activities align with fintech laws and regulations.

• Commodity Futures Trading Commission (CFTC) – regulates the derivatives market, including futures, swaps and specific types of options.

• Financial Industry Regulatory Authority (FINRA) – regulates member brokerage firms and exchange markets.

Depending on your service offering, you might also need to follow regulations set by the Federal Deposit Insurance Corporation, Securities and Exchange Commission and the Federal Trade Commission.

• The Federal Deposit Insurance Corporation is responsible for the regulation of mobile-only banks.

• The Securities and Exchange Commission looks after the regulations of trading platforms.

• The Federal Trade Commission designs the regulatory framework for financial markets while also approving new trading technologies.

Not conforming to any of the regulations listed below can bring disastrous consequences. Within these regulations, certain laws also need to be adhered to. They include:

• The Gramm-Leach-Bliley Act. This requires fintech companies to protect their consumer data while ensuring customers understand the privacy policies.

• The Electronic Fund Transfer Act. If you’re developing an online payment application, this will be useful to you, as it controls the authorisation procedures needed to make transactions online.

• The Bank Secrecy Act. This is in place for anti-money laundering (AML) compliance.

• The US Patriot Act. This helps financial technology platforms to train their workers to understand and follow the laws of Know Your Customer (KYC) and AML policies, among other identification standards.

• The E-Sign Act. This sets the standard and regulates electronics and signed documents.

• The Truth in Savings Act. This regulates the information on fees for lenders, peer-to-peer platforms and fintech companies.

• The Federal Affiliate Marketing Rule. This helps fintech companies understand the information they can use for marketing purposes.

• The Federal Reds Flag Rule. This regulates all financial institutions to set policies that prevent fraud and theft.

This list includes the main ones to follow. Still, there may be others to consider – for example, if your service is involved with health insurance or impacts children in any way, there will be additional regulations to adhere to.

Fintech Regulations in the European Union

Whilst specific regulations will differ in each country, the EU’s 27 member states are bound by European regulation. Even the UK, which left the EU in January 2020, still enforces many EU laws that it adopted whilst it was a member state. That’s why, if you’re launching a fintech product in Europe, you need to look at country-specific financial regulations to help you get set up.

The main regulations to understand to ensure compliance is met, are: 

• Anti-Money Laundering Directives. This produces and outlines the rules for financial entities operating in the EU, which helps to combat money laundering and terrorist financing.

• The General Data Protection Regulation. This helps to determine how organisations can gather information and what they can do with it.

• The European Union Directives and Financial Action. These regulations ensure that policies surrounding KYC and AML are followed.

• The New Payment Service Directive. This ensures compliance is at the highest standard within the European Economic Area regarding payment security.

How to become compliant?

Becoming compliant might appear to be a lengthy process, but each step is necessary to get up and running as soon as possible. If you’re looking to launch a fintech product in a new territory, it’s worth taking the time to understand what is involved.

We’ve broken down each of the steps to go through how to become compliant.

#1 Seek counsel before you do anything

This is the most important step. Experts will be able to inform you of all AML regulations and requirements you need to follow to become compliant.

Compliance is not easy to achieve and is extremely complex. However, seeking legal advice will help you develop a robust program that keeps your customers and your product safe from any threats.

#2 Consider your services and the way you collect user information

It’s very wise to have a clear picture of which regulations apply to your organisation specifically and how this affects your ability to collect user information. You’ll need to consider how you want to address them and how you’ll self-regulate in line with these requirements.

#3 Implement anti-money laundering procedures from day one

Having AML policies in place from the beginning will help keep things on track as you work, along with the rest of the regulations and rules. Not only that, but it indicates that you are serious about tackling fraud and financial crimes.

#4 Build a scalable compliance program

Next is to understand how your compliance policies can be scaled. As your business grows – and naturally evolves – you won’t have the time to spend on adapting your program to grow with it. However, by factoring in the scalability and the impact this will have on the overall business initially, you can rest assured that you’re compliant every single time.

#5 Consider your paytech and regtech partnerships

Regulations across different financial institutions are varied, meaning you’ll need to see how your partnerships are affected by them. Understanding how they affect every aspect of the business will ensure that any issues are dealt with promptly and correctly.

#6 Keep an eye on the future

Laws and regulations are constantly changing and evolving. In the modern world, they are vying to keep pace with new technology and an increase in customer demands, so it’s important to remain up-to-date with the changes.

How to Deal with FinTech Regulation as a Startup?

If you’re a startup looking to operate in an entirely new territory, it can feel impossible to keep up with everything, especially as different parts of the world have different regulations.

Whilst there are ways to ensure you stick within the rules, there are two ways to assist you with your everyday operations.

Get a Compliance Team

You might wish to employ a compliance expert to become part of your internal team. Whilst they learn about your specific fintech’s operations, you’ll also be able to have much more time with this person – or team – to ensure that regulations are being met. Having a substantial compliance team can also be helpful when putting your business forward for investment. Investors like to see that time and effort has been put into future-proofing the business for compliance issues as you scale.

Outsource your Compliance Duties

Typically, as a startup, you’ll be looking for ways to save money where you can. For example, hiring a team can be expensive, so a cheaper option could be outsourcing your duties. Enlisting in a partnership like this is a great way to cut back on spending in your initial launch stages, putting necessary resources behind what needs to be achieved.

Biggest Considerations with Laws and Regulations

1. Vulnerabilities or breaches in your data security

Your main task will always be to ensure consumer protection and data security. At a minimum, co-incident vulnerabilities in your product may cause problems for your users or serious consequences to your business in the form of personal data breaches.

Failure to comply with regulations can incur an enormous price in terms of reputational harm.

How to solve it:

A streamlined onboarding process and awareness of suspicious activity can help prevent breaches in your fintech.

2. Regulatory compliance is costly but necessary

Compliance encourages fintech businesses to stay ever-alert to rapidly changing regulations, evolving fraud schemes, and best practices to protect against malicious threats.

It helps combat fraud and money laundering through a rigorous, ongoing approach to suspicious activity, transaction monitoring and ongoing risk-assessment-based analytic efforts; and file, report, and manage various cases once identified. These efforts are complex and time-consuming, whether manual or automated.

3. Ensuring technology keeps pace with regulatory changes.

Having the most up-to-date tech can be one of the best protocols for achieving compliance with the current regulatory environment. As fraud schemes continue to evolve, it is paramount to have an efficient workflow and the correct processes and technology to account for new regulations and fraud threats.

How to do this:

There are a few options for this, including hiring a risk and compliance officer alongside an engineering team to reflect changes within the regulatory landscape or investing in solutions that help to apply changes in a tech stack.

4. Knowing the role of issuer processors

Issuer processors are a key part of the fintech ecosystem as they understand the regulatory requirements for financial institutions operating in the payments ecosystem. This level of detail and support around financial regulation can be crucial for fintechs as they look to expand into different territories.

Most issuer processors, like Carta Worldwide, can help fintechs to detect suspicious activities and work  to ensure they stay in line with the requirements of regulatory agencies. They also have knowledge of any federal laws and regulatory challenges that would prove valuable to a fintech.

5. Providing fraud alerts

Fraud risks can greatly impact a fintech company, especially if it’s in the startup stages when security and trust are crucial at the stage of launching a business. Having alerts set up will allow the business to identify when data and information might be at risk and, most importantly, how to rectify the problems.

How to ensure this happens? 

Working with an issuer processor like Carta Worldwide ensures you’re provided with a Fraud Portal. This tool can be used to view and monitor specific fraud alerts, which can be chosen or inputted by clients when setting up their project.

Fraud alerts are generated by a rules-based algorithm in the system, intended to spot different behaviour patterns which may indicate fraudulent activities occurring during a transaction. Rules can be set up by clients to either just alert or to alert and auto-suspend.

When a rule is broken, Carta Worldwide will automatically inform clients of the alert to proceed and rectify the problem.

How Will FinTech be Regulated in the Future?

With the ever-evolving world of fintech meaning new innovations are created on a daily basis, regulation hasn’t always kept up. Modern neobanks are constantly pushing the boundaries of our existing regulations, causing regulators to pause, take stock, and create new standards to ultimately protect end users. 

Regulatory bodies such as the FCA in the UK recognise that there is often a delay in how quickly they can respond to new ideas, resulting in fintechs having to change the way they operate to ensure they maintain compliance.

Regulators and fintechs need to work closer together to make sure it doesn’t become impossible for fintechs to exist within a higher competitive market. Regulations aren’t created for the sake of it, but when new ones are introduced, they need to have both the consumer and the industry in mind.

Conclusion

Whilst regulations vary depending on the part of the world you operate in and from, there are certain similarities. They all include the foundation regulations, but some additional laws and legalities surround them.

By understanding what needs to be followed and how this affects the operation of a fintech, compliance with regulations is a key to success in the future.