Fintech entrepreneurs are squandering start-up funds, having to give away share capital and being beaten to market because they are too slow to engage with the Financial Conduct Authority.
Financial technology regulation expert Gilbert van Roon, founder of newly-launched consultancy FinTech Compliance, has seen products developed without early consideration of regulation fall foul of costly delays and even failure.
He said: “Fintech entrepreneurs prefer to throw all of their energies into development and imagine getting regulatory authorisation is like sending off a passport application. Often the regulator will require additional information and sometimes changes to a product or service before giving approval. That can mean the process takes six months or more.
“For many fintech start-ups, delays are a disaster. Money is nearly always tight so delays in turning on the revenue tap can be fatal, leading to uncomfortable negotiations with funders and the risk of ceding competitive advantage.
“Securing regulatory approval is one of the biggest hidden threats for start-up fintech firms – compliance cannot be treated as an afterthought.”
Van Roon is quick to defend the Financial Conduct Authority (FCA) which is grappling with a fast-changing environment.
He said: “Fintech, by its very nature, challenges traditional ways of doing business, which means existing guidance may not fit comfortably with evolving business models. The FCA’s responsibility is to look after the consumer, and innovation adds complexity to an already difficult job.”
A typical scenario, described by Van Roon, involves a fintech entrepreneur waiting until they believe a product is 75% complete before applying for FCA authorisation.
Then, they may find that the FCA is uncomfortable with one or more elements so developers have to unpick their work and spend additional time redesigning software.
Van Roon said: “In fairness, in our experience, the FCA is more than happy to speak to those in quite early stages of developing fintech propositions to offer guidance and support on regulatory matters but this message doesn’t always get through to start-ups.
“Naturally, there are costs associated with applying for FCA authorisation but that expenditure can be limited by engaging with the FCA at the earliest opportunity.
“It is considerably more expensive for start-ups to have to spend additional time in development. These costs eat into seed capital and regularly force entrepreneurs to go to their backers for more cash.
“Some end up having to give away extra share capital which can be a painful experience in itself, especially given that it may have been avoidable by engaging with the FCA earlier.
“At best, this delays the point at which a firm starts trading: at worst, a company’s backers will run out of patience and pull the plug so the product never sees the light of day.”
FinTech Compliance is one of the first businesses dedicated to gaining Financial Conduct Authority approvals for fintech firms and supporting with ongoing regulatory compliance issues.
The business is also helping to tackle money laundering, having developed an online training platform that ensures employees understand obligations to raise the alarm when suspicious activity is recorded.
The launch of FinTech Compliance comes at a time when there is a growing expectation for stand-alone fintech firms to wrestle market share away from established players. The PwC Global Fintech Survey 2016 reported that within five years, fintech firms could take up to 24% market share from banks if the established players did not respond to the evolution of the financial services sector.