The UK has always been a safe haven for fintechs, thanks to its huge existing financial sector and (mostly) tech-friendly governments. But a sweeping set of regulatory reforms coming into force at the end of this month, designed to better protect customers, is making more than a few fintechs nervous.
Many fintechs that may not have had to consider the impact of their products on consumers will now have to.
A prime example is the payments sector; the Financial Conduct Authority (FCA), Britain's financial watchdog, has said the duty will apply to across the whole distribution chain, including acquirers. This means even companies like Checkout.com and Stripe, which handle payments processes from end to end, will have to think about how their services impact consumers — it's not just the neobanks and wealth managers that hold customer deposits.
The new bundle of “consumer duty” reforms from the FCA apply to about 60k banks, asset managers and insurers in the country, requiring them to prove that they are acting fairly and delivering “good outcomes” to their customers.
It’s a top priority for the FCA, which has signalled serious penalties for companies that don’t comply. But it’s crept up on the financial sector fast; the FCA only published full details of the new rules this time last year, even though they were originally proposed in 2021.
What are the new rules exactly?
The FCA’s consumer duty consists of 121 pages of guidance for any company that touches retail consumers’ money (a light summer read!).
In short, companies must act to deliver "good outcomes" for retail customers.
The FCA says this should “prompt firms to ask themselves questions such as, 'Am I treating my customers as I would expect to be treated in their circumstances?' [and] 'Are my customers getting the outcomes from my products and services that they would expect?'" when deciding on products and services, as well as their own business models and company culture.
Companies also need to follow rules to deliver on these good outcomes. The rules set out more detailed expectations for companies as it relates to their relationship with customers.
Bigger fintechs are more prepared to deal with new regulation
In a recent FCA survey of over 1,000 regulated financial services companies, a third said that they wouldn’t be fully compliant by the deadline. So where does that leave fintechs?
Put simply, the more resources a company can devote to the job the better, and lawyers say that larger, well-capitalised fintechs are streaks ahead of their smaller peers.
“Larger firms like the challenger banks are much more used to regulatory scrutiny, so have whole teams of people that are keeping them up to date on the initiatives that are coming in. They’ve been looking at this kind of thing for years,” says Charlotte Hill, partner at law firm Taylor Wessing.
Hill says she’s seen a number of implementation plans from larger fintechs that are sufficiently detailed, but many from smaller companies fall short of what’s required.
“I’ve even seen just one side of A4, which is totally insufficient and not appreciating the level of detail that needs to go into this,” she says.
It applies to more fintechs than you’d think
Another catch in the recent regulation: some fintechs without an e-money licence or banking licence could find themselves within regulatory scope for the first time.
Lawyers point out that car finance providers — such as Cinch, which acts as an intermediary between the lending bank and the consumer — smaller credit brokers and smaller payments companies are the kind of startups that may not be thinking of themselves as affected but whose operations come under the new duty’s scope.
“If you look at the FCA’s intentions it’s focused on the smaller sectors where these firms haven’t typically had that history of engagement with the regulator that could help them,” says Becky Critchley, a financial regulation lawyer at Latham & Watkins.
She says that licensed banks will have already gone through MiFID II (Markets in Financial Instruments Directive) — a 2018 EU regulation focused on increasing financial services transparency and reducing costs for the end investor — which will give them some preparation, but companies without this kind of regulatory experience may struggle.
And the big fintech grey area? Buy now, pay later, which is currently unregulated but has its own set of sector-specific regulation being introduced by the FCA imminently. Klarna, the biggest player in the space, says it’s developed an implementation plan to abide by the new duty, even though the regulations don’t directly apply to it yet.
“When it comes to firms like that, the FCA is particularly looking at things like affordability and forbearance [temporary pauses on loan repayments for borrowers struggling with repayments],” Critchley says. “It’s almost ‘regulation by stealth’ for the sector.”
For Divido, a startup offering white-label buy now, pay later lending to merchants, that's meant working closely with the regulated banks it uses for the lending component to make sure its communications at the point of sale comply with the new rules.
“It’s not something that we weren’t thinking of before, but it’s clear that the key focus now is on the customer — so we’re having to become even more aware of that now,” says Edo Volta, Divido’s chief revenue officer.
“So that’s things like, how do we get the customer to really understand what the repayment looks like, and the penalties and consequences of missing payments,” he adds. “Ultimately, it’s making the sector much better.”