Assertive regulators are bringing greater clarity and new challenges as they step up oversight of fintech innovation.
As the fast-growing fintech industry thrives, the sector has begun to attract greater regulatory scrutiny. We expect new legal and regulatory focus and oversight of those players operating on the unregulated perimeter of financial services.
While the level of supervision is set to increase and pose challenges for industry participants, a more robust regulatory environment could play into the hands of PE buyers and create opportunities for portfolio companies best able to navigate this rising regulation. In our view, PE firms must pay heed to the tone of more assertive regulators, but that approach coupled with new regulation will create a space in which firms in nascent fintech verticals can legitimately pursue their aims with greater certainty, no longer looking over their shoulders.
While the UK government is keen to stress that the new regulation will be applied proportionately, proposals are likely to result in the redirection of resources and attention of firms, and buyout firms should remain alert to changes that may impact a range of fintech investments.
Buy now, pay later (BNPL)
The BNPL sector was one of the success stories of the COVID-19 pandemic, as consumers sought short-term financing for online purchases. This popularity attracted attention and the UK government has now announced proposals to bring unregulated BNPL products within the (yet to be determined) scope of regulation. The proposals have potentially significant consequences for merchants who rely on these financing arrangements to convert baskets to sales, and regulated and unregulated lenders who are likely to see an increased compliance burden.
Payments and the crypto landscape
Elsewhere, HM Treasury’s (HMT’s) Payments Landscape Review has reviewed how regulation may develop for the payments sector. There is a clear indication that policymakers will continue to support the growth of open banking — which is dominated by fintech companies already attracting significant valuations — and they are prepared to remove regulation and legislation that could hinder its further adoption.
Suggestions that the Senior Managers and Certification regime be extended to payments firms is viewed by most as logical and will result in increased accountability for individuals running fintech businesses. Sponsor investor directors must be aware of the significant personal implications of being in scope.
Proposals to formalise a new regime for cryptoasset marketing may give a level of certainty to market operators, but appear overly strict and likely impractical for the sector. Wider proposals for new stablecoin and cryptoasset licensing and supervisory regimes offer certainty and opportunity, but they also bring the spectre of greater scrutiny and increased compliance costs.
Unregulated technical service providers
In addition, HMT and the Bank of England are looking at technical service providers that play, for example, a technological role in clearing or settlement within payment chains. Currently, many of these companies do not require a regulatory license, but they are increasingly viewed as having the potential to pose systemic risks. While formal oversight has been suggested in the HMT review and as part of the EU’s Retail Payments Strategy, we expect legal and regulatory changes will take time to be implemented and monitoring is advised.
A changing supervisory approach
The FCA’s formal transformation programme and intention to be more assertive should be noted and a stricter regulator prepared to “test [its] powers to the limit” should be expected. This development is already being seen in practice through:
- A higher bar for, and more careful scrutiny of, authorisation and registration applications (e.g., for crypto and payments firms) resulting in mass rejections and severe delays
- Delays to the assessment of other regulatory notifications and applications
- The use of the Brexit temporary permission regime review process to reassess firms
- Transferring certain important decision-making powers (e.g., on licensing and criminal and civil matters) to the FCA and away from the industry-led Regulatory Decisions Committee that operates separately from the FCA.
Overseas regulators are equally expected to adopt more regulation and heightened supervision as the global fintech market grows. EU initiatives including MiCAR, covering the cryptoasset market, and the EU Retail Payments Strategy, are expected to lead to greater and more sophisticated regulation and increased supervisory focus of the sector as a whole.