Top 7 Compliance Rules For FinTechs

December 14, 2018

Fintech is an abbreviation for the term financial technology, which intends to design innovations to bring about a change in the conventional financial services. The amalgamation of the latest software technologies like cloud, SaaS, APIs, and mobile technology with the financial paradigm over the fast-paced internet has swiped off the outdated operations in money business and replaced the primitive processes with off-the-shelf yet customizable applications.

Both startups and established companies, whether small-scale or big, are using Fintech to intensify the use of financial services provided by traditional techniques. The agile development in the field of financial technology and abundance of customers’ data has increased the exposure to regulatory obligations, sanctions, and legal actions. While the staggering development in the FinTech has revolutionized the way FIs (Financial Institutions) are operating and have become customer-centric serving their tech-savvy generation, this has invoked the need for stringent regulations and compliances.

The industry of financial services is subject to a list of poignant guidelines, and it would be better to have an idea about the risk and regulations for the money business so that FinTech scan meet the compliance requirements resourcefully and effectively.

So, let’s have a look, what the top 7 compliance rules that a FinTech company should follow are.

  1. FCA and other regulatory bodies’ compliance

Every country has one or more government or nongovernment based financial regulators, which lay the compliance rules for FinTech companies.The aims of the financial regulators are market confidence, financial stability, and consumer protection. The FinTechs have to abide by these policies based on the region of operations.

USA has Financial Crimes Enforcement Network (FinCEN), U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) – to name a few but are not the only bodies. UK financial organizations follow the algorithm devised mainly by Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). Then there are the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and the Australian Transaction Reports and Analysis Centre (AUSTRAC) for Canada and Australia, respectively. China Banking Regulatory Commission (CBRC) and China Insurance Regulatory Commission (CIRC) create and measure the finance compliance rules in China.

Being compliant with these regulators will enable the customers and clients to be confident that they always get a fair deal and their interests are secured. These governing bodies secure a reliable degree of safety for the consumers and protect the integrity of the financial system of their respective countries. They authorize, supervise, and enforce the necessary guidelines and regulation on the Fintech companies.

2. Terrorist Funding/ Money Laundering policies

Fintech companies offer a vast range of products and services that may open the indirect doors for terrorist groups or criminals who have the aim of laundering money. These activities create financial courses that involve the deviation of resources from economic, social and productive use. These deviations can have adverse repercussions on the financial sector and stability of social strata. These disguised crimes can infiltrate the financial system of a country and cripple the whole economy, jeopardizing the growth. As a whole,they have a destructive, demoralizing effect on society and the economic system.

This is the reason why most of the judicial authorities have imposed regulations and customers or users need to fill in specific details that enable the business owners to maintain a database for them. Know your customer (KYC), Counter-terrorist funding (CTF) ,and Anti-money laundering (AML) are few of the measures that help in detectingsuspicious actions by customers.

AML – The set of rules laid by the financial regulators to mar the practice of generating money from illegal methods. The Anti-money laundering rules help the FinTechs to identify and report the malicious financial activities, which manipulate the source of income. The FIs must file a suspicious activity report (SAR) against suspicious transactions.

Money laundering activities mostly go hand in hand with terrorist funding.

CTF – The act that came into prominence after 9/11 attack asks the companies involved in the finance system to conduct due diligence of the customers, monitor their transactions and maintain the right records. To check the illegal sourcing of funds to the terrorist organizations, CTF rules should be followed across the borders too.

KYC – The ‘Know Your Customer’is a mandatory policy while onboarding the customers or after associating with them. FinTechs and FIs thoroughly identify and know the clients or the users,what activities they are performing and the associated risks they bring to the business and the mitigation plans.

Countries such as the USA have a set of regulators like the Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the Securities and Exchange Commission (SEC). There are the UK’s Financial Conduct Authority (FCA), the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), and the Australian Transaction Reports and Analysis Centre (AUSTRAC). These regulatory bodies design the AML, CTF and KYC policies for the FinTechs apart from banks and financial institutes.

3. Protection of the Data

Most of the countries have regulations pertaining to protect the data of all the users or consumers, and Fintech companies have to abide by that. Countries like Canada have the Personal Information Protection and Electronic Documents Act (PIPEDA), which ensures that all the personal details and information that the users provide are protected and stored most securely and should not be leaked or misused. The UK has enforced the Data Protection Act. Federal Trade Commission (FTC) in the US is an autonomous agency that aims to protect consumers and assures a robust competitive market by fortifying consumer security and antitrust laws. FTC is also responsible for providing privacy to the consumers.

Laws for data protection need to be followed in the FinTech industry so that the consumers’ data exposed to third-party exposure is used in the legitimate and ethical way. Data protection laws such as GDPR ensure that the FIs and other involved firms make sure to reveal the purpose of data collection to the clients.

GDPR is the latest entrant in the data protection laws in Europe that came into effect from May 2018. The Global Data Protection Regulation (GDPR) levies rigorous rules on the organizations in EU for handling clients’ data with confidentiality. All the financial organizations within European Union and outside the territory who wish to deal inside EU need to follow the rule books of GDPR. The rules enforce to mask a user’s data and save the complete information in a distributed manner, which will not allow the hackers for a quick access and hence the vulnerability of the system is reduced. This is highly recommendable in the FinTech organizations where the data vulnerability means higher stakes.

4. Secured payment systems

Payment systems are the threshold of the global economy at present. Across the world, payment systems are shielded by plenty of strict policies. Every country has its own set of rules, which maybe similar to the rest or maybe stringent for the FinTechs to abide by, but no matter what the case, they will have to comply with those to be able to carry out the transactions.

The erstwhile European Union had the provision of the Payment Services Directive which ensures the preservation of security while making the payments and maintaining the privacy of the consumers. The aim is to create a balanced system that aims to be fair to Fintech as well the traditional executives.

With the advent in the mobile payments and multiple wallet apps, the need for security in the payment systems has increased multifold. With the new payment methods in the financial ecosystem like e-wallets, P2P systems, in-app purchasing, and banking apps, the virtual payment system in one hand have evolved to smoothen the transactions seamlessly and on the other hand demand highly secured system, which should not allow the leakage of consumers’ data. The new ways of authentication using OTPs, NFC process based, and biometric solutions using mobile banking are the need of the hour and should be integrated with the payment gateways. These ubiquitous payment systems connect multiple tools from one enterprise to another and pose a risk of cross-platform contamination.

Hence, the FinTech companies need to take care of building up a secured channel for various payment modes that allow data security and prevents data leakage. The World Payments Report generated annually renders a helpful insight about a summary of the essential regulatory and industry initiatives for non-cash payments.

5. Effective Asset Management

Asset management and Insurance are the most disrupted areas of Financial Sector right now due to the vast opportunities available. The developing trends in the Fintech world drive many financial advisors to come up with the scenario to offer advice to the companies so that they can manage the growing assets and wealth of the entrepreneurs efficiently. These kinds of advisors in the Fintech organizations need to show compliance with specific sets of regulations for Anti-money laundering (AML), Know your customer (KYC), and Counter-terrorist funding (CTF).

The FinTech industry has seen a new wave of ‘Robo-advisors’ which use niche softwares and algorithms to provide an automated advisory for asset and wealth management with a negligible human intervention. These robo-advisers should be programmed to take care of the data protection and security issues equally.

6. Control on Peer-to-Peer (P2P) Lending

Peer-to-Peer (P2P) Lending is a niche in the FinTech industry where an online service finds a lender for a borrower (an individual or business). Such FinTechs have to be extra vigilant in authenticating and authorizing the borrowers because more often, debtors who could not obtain a traditional loan from the legacy banking or lending institutes due to lack of proper credit score hop to P2P lending mechanism.

P2P lending firms charge both the creditors and the mortgagors, some fee for using the platform. Since the lending system is at a marginally high risk of default, the payments that bounce back or delay are charged heavily.

It has turned out to be a profoundly controversial topic due to its precarious nature. China has drafted acrimonious rules to govern P2P lenders after repeated reporting of fraudulent activities in 2015 and 2016. The U.S. government is also reworking their existing regulations to meet these challenges in a more effective way. The UK already has defined new rules and processes rather than following a retrofitting way and these rules under FCA authority have been efficiently working while keeping a check on frauds in the Peer-to-Peer lending deals.

The failures in P2P lending in China and US has shown the regulators the risk of unregulated P2P lending. While peer to peer lending system is moving mainstream, the regulators need gearing up with the challenge of maintaining poise between anticipating the best interests of creditors and mortgagors equally and securing the innovative lending systems by weeding out the fraudsters.

7. Reward and incentives for controlling frauds

The ideal way to boost the esteem of the Fintech companies and attract the right entrepreneurial talent is with lucrative rewards that would motivate them to bed complaint to the norms and earn an excellent reputation for themselves. This can also ensure that there are lesser instances of fraudulent activities and money laundering cases.

With the constant growth of Fintech, a parallel branch came into existence, popularly called as RegTech or Regulatory Technology. RegTech is technological solutions that streamline and enhance regulatory methods. But RegTech is not a subcategory of Fintech. RegTech must be anticipated as a separate phenomenon. In contradiction to FinTech’s intrinsically financial focus, RegTech has the potential to be implemented in many regulatory contexts.

In the present day, business meets complex regulations and often, unpredictable working environments. Turn the tide to preserve and produce value and develop rules into an opportunity. Master the art of leadership, navigate and intrude to stimulate performance through adequate management of regulatory and operational risks. There is acall for partnerships and productive engagement connecting regulators, financial sector incumbents, clients, and FinTech firms. A holistic approach will create a standardized, unambiguous environment and support the expansion of extended market-ready innovative solutions for consumers across diverse segments.

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