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Fintechs will be derailed by lack of governance, warns FSCOM chief

Jamie Cooke

Fintech startups are rushing headlong into legal problems in their anxiety to be first to market, warns a top compliance expert.

Maximum growth with minimum governance will be a disaster for many in the Fintech industry, according to Jamie Cooke, CEO at financial services compliance consultancy fscom.

Ignorance of compliance could see Fintech start ups die through either prosecutions or the withdrawal of their banking partners.

Too many start-up Fintechs at MoneyConf in Dublin seemed to be focused entirely on platform development at the expense of legal foundations, said Cooke.

Most start-ups are run by CEOs and CTOs with no compliance knowledge. They only focus on compliance after the venture capitalists get involved, by which time meeting all the relevant regulations becomes a lot more expensive and complicated.

To make matters worse the past 12 months have seen an unprecedented amount of new regulation which even corporate fintechs struggle with, said Cooke.“In 15 years I have never known a period with such significant regulation. The introduction of MLD5, PSD2, MiFID2, GDPR has made staying abreast of these regulations a challenge. Not to mention Brexit.”

As a guide to fintech entrepreneurs, fscom has published the most common shortcomings exposed by its audits. These include the failure to use controls that mitigate the risk of a compliance procedure failing, lack of internal compliance monitoring, terrible policy documentation and inadequate compliance management information.

Fintechs with poor compliance and governance risk losing their banking partner, said Cooke. By necessity, banks are applying an even higher standard of compliance than the supervisory authorities, according to Cooke. Having client trust accounts with an EEA banking institution is a condition of authorisation, so fintechs can quickly find themselves exposed.

Securing investment is another major concern. “Having been involved in some large regulatory due diligence projects for private equity and venture capital firms in recent months, it is clear that compliance with regulations is a critical point of consideration for these firms,” said Cooke.

The recent announcements by the Financial Conduct Authority indicate that is placing greater focus on the payments fintech sector with the establishment of the PSR supervision team. Fintechs that fail to shore compliance gaps are taking a fatal risk, said Cooke.

Fintechs will succeed and fail on brand reputation, Cooke warned. This is a double edged sword on which Fintechs will both live and die. User friendliness will win them a market through customer engagement, but a lack of compliance will leave them liable to abusers too, said Cooke.

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