By Tetyana Golovata, 14 October 2024
Regulation continues to play a critical role in shaping the FinTech landscape. From Consumer Duty and the UK Financial Conduct Authority’s annual risk reporting, to Authorised Push Payment (APP) fraud reimbursement, the tectonic plates of the sector are shifting.
According to a survey by fraud prevention FinTech firm Alloy, 93% of respondents said they found it challenging to meet compliance requirements, [1] while in a study by financial services consultants Davies, a third of financial leaders (36%) said their firms had been penalised for compliance breaches in the year to June [2]. With the FCA bringing in its operational resilience rules next March, it is more important than ever to ensure your company makes the grade on compliance.
Lessons from history
Traditionally, the foreign exchange market has struggled with the challenge of reporting in an ever-developing sector. As regulatory bodies catch up and raise the bar on compliance, responsible providers must help the industry navigate the changes and upcoming deadlines.
FinTechs and payments firms are entering uncharted waters – facing pressure to beat rivals by offering more innovative products. When regulation hasn’t kept pace in the past, gaps in legislation have allowed some opportunists to slip between the net, as seen in the collapse of FTX [3]. Because of this, implementation and standardisation of the rules is necessary to ensure that innovation remains seen as a force for good, and to help identify and stamp out illegal activity.
Tone from the top
Culture has become a prominent factor in regulatory news, with cases of large fines and public censure relating to cultural issues. As the FCA’s Chief Operating Officer, Emily Shepperd, shrewdly observed in a speech to the finance industry, ‘Culture is what you do when no one is looking’ [4].
Top-level commitment is crucial when it comes to organisational culture. Conduct and culture are closely intertwined, and culture is not merely a tick-box exercise. It is not defined by perks like snack bars or Friday pizzas; rather, it should be demonstrated in every aspect of the organisation, including processes, people, counterparties, and third parties.
In recent years, regulatory focus has shifted from ethics to culture, recognising its crucial role in building market reputation, ensuring compliance with rules and regulations, boosting client confidence, and retaining employees. The evolving regulatory landscape has significantly impacted e-money and payments firms, with regulations strengthening each year. Each regulation carries elements of culture, as seen in:
- Consumer Duty: How do we treat our customers?
- Operational resilience: How can we recover and prevent disruptions to our customers?
- APP fraud: How do we protect our customers?
Key drivers of culture include implementing policies on remuneration, conflicts of interest, and whistleblowing. However, for it to become embedded, it must touch employees at every level.
This can be showcased from the top down, by senior stakeholders and heads of departments facilitating close relationships with colleagues across a company’s sales, operations, tech and product teams to build a collaborative environment.
Finance firms must recognise the trust bestowed on them by their customers and ensure that the protection of their investments and data is paramount. Consumer Duty may have been a wake-up call for some companies, but progressive regulation must always be embraced and these requirements seen as a baseline rather than a hurdle.
Similarly, the strengthening of operational resilience rules and the new APP fraud regulation are to be welcomed, increasing transparency for customers.
Addressing vulnerabilities early
Those who perhaps view following regulatory laws as a financial and resource drain, need to remember that without proper compliance companies are vulnerable to situations where vast amounts of money can be lost quickly.
A case in point is the proposed reimbursal requirement for APP fraud, which will mean payment firms could face having to pay compensation of up to £85,000 per case.
Complying not only safeguards the client and their money, but also the business itself. About nine in ten (88%) financial services firms have reported an increased compliance cost over the past five years, according to research from Steeleye [5].
Embedding compliance earlier in business cultures can be beneficial in the long run, cutting the time and money needed to adapt to new regulations and preventing the stress of having to make wholesale changes rapidly.
Building a cross-business compliance culture
Compliance is a key principle at IFX, and we strive to be a champion in this area. In response to these challenges, the business restructured, establishing dedicated risk and regulatory departments, along with an internal audit function.
Regulatory compliance aims to support innovation by developing and using new tools, standards, and approaches to foster innovation and ensure product safety, efficacy, and quality. It has helped the firm to navigate the regulatory landscape while driving growth and maintaining high standards.
This organisational shift allowed each business line to take ownership of its own risk, with departments partaking in tailored workshops designed to identify existing, new, and potential risk exposure. Shared responsibility for compliance is the only way to create a culture which values it. Ultimately, this will enable organisations to drive innovation while sticking to the rules.
Tetyana Golovata is Head of Regulatory Compliance at IFX Payments
[1] https://www.alloy.com/state-of-compliance-benchmark-report-2023
[2] https://ifamagazine.com/36-of-uk-financial-services-firms-penalised-for-compliance-failures-in-past-year/
[3] https://www.investopedia.com/what-went-wrong-with-ftx-6828447
[4] https://www.fca.org.uk/news/speeches/zeroes-heroes-how-culture-financial-services-can-change-everyones-benefit
[5] https://www.steel-eye.com/white-papers-and-e-books/annual-compliance-health-check-report