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Managing regulatory risk

in FinTech Partnerships

Key findings

  • Just 7% of our survey respondents feel that the bank or asset manager they represent is industry-leading in digital innovation. A stark acknowledgement that large firms struggle to act as first-movers
  • Nearly one third of respondents (31%) expect to acquire a FinTech firm within the next 18 months
  • Of the remaining two thirds, 45% cite concerns about regulatory risk as a key deterrent
  • 51% say that uncertainty/lack of transparency about the regulatory status of the FinTech firm is a hurdle that needs to be overcome for banks and asset managers to feel confident about partnering with FinTech firms
  • Regulatory risk is the third biggest barrier to transforming digital innovation capabilities, after cybersecurity and talent/skills gaps
  • 72% of the largest firms say institutional rules are a challenge to collaboration
  • The industry sees the potential of allowing FinTechs to manage their compliance activity, but 67% say they would need much stronger assurances of FinTech firms’ credibility in order to entrust them with managing all of their regulatory compliance in future
  • 69% of respondents say increased transparency on FinTech firms’ KYC processes would significantly improve their capacity to partner with them.

What does that mean for your organisation?

Financial institutions and asset managers need to consider how to best address regulatory and related risk concerns in the context of partnering with third parties and, in particular, FinTech firms. This will require careful due diligence processes in relation to compliance, culture and controls in relation to the newly authorised structures i.e. peer to peer.

Some FinTech businesses also operate in newly regulated areas where there is a patchwork of new (and untested) regulation across different jurisdictions. A key area of risk mitigation is, therefore, to ensure that the FinTech business has a clear understanding of the regulatory landscape in which it sits and a strong compliance culture. Ideally, you also need advisors who understand how both new and existing regulations are being interpreted and applied by the regulators in this constantly evolving area. Where firms are operating on the perimeter of the regulatory landscape, it should be considered whether they have been involved with the FCA innovation hub and regulatory sandbox.

Financial institutions and asset managers need to consider how to best address employment challenges such as the senior managers’ regime which came into force for banks in March 2016, and is expected to replace the approved persons regime for asset managers from 2018. This will pay a pivotal role in changing culture within financial services and may therefore have a knock-on effect in addressing the cultural challenges of partnering with or acquiring a FinTech business.

This level of regulatory and risk concern is unsurprising due to the current nature of the regulatory landscape. The European Commission’s General Data Protection Regulation (GDPR) and revised Payment Service Directive (PSD2) both come into force in 2018 – means that financial institutions and asset managers must devote greater resources to data governance over the next few years.

How can we support you?

We are a leading firm in advising on regulatory risk with respect to FinTech given our unique position in the market in advising financial institutions, asset managers as well as some of the leading FinTech business. As such, we understand the perimeter issues which many FinTech firms face enabling us to advise those wishing to partner with or acquire such businesses more effectively in terms of mitigating risks of regulatory breach. Our international team and leading cross border practice is able to advise on the global risks and the regulatory framework in all major jurisdictions.

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