April 6, 2016
Enormous development in FinTech has challenged the regulatory authorities. FinTech companies are on the rise while the regulations around them are still unclear. It is considered that the regulatory approach has not kept pace with the developments in the industry. This article focuses on the key developments which have taken place when it comes to regulating FinTech. The focus here has been on regulatory authorities who have done well to cope with the emerging FinTech landscape.
The UK’s financial regulator the FCA has been very proactive when it comes to regulating FinTech. The annual business plan released early this week by the FCA emphasizes on greater compliance among FinTech firms. This comes at the backdrop of the failure of Powa Technologies, which ran out of cash earlier this year. The authority welcomes innovative finance solutions but wants to ensure that regulations don’t go unchecked.
The regulator supports the FinTech industry and provides transparency by creating a level playing field. They have many supporting measures; the important ones are listed below:
Tax measures: Numerous tax incentives are provided by the government to encourage innovation in FinTech. They include the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), Entrepreneurs’ Relief (ER), R&D tax credits, the Employee Share Scheme (ESS), the Patent Box scheme, whereby companies pay a lower rate of corporation tax on profits earned from their patented inventions and other innovations.
Project Innovate: As part of the project, the FCA has said that it will open its doors to any company that is developing new business models that fall outside of current regulation. Through Project Innovate, the FCA offers the following:
— A dedicated team and contact for innovator businesses
— Help for these businesses to understand the regulatory framework and how it applies to them
— Assistance in preparing and making an application for authorization to ensure the business understands FCA’s regulatory regime and what it means for them
— A dedicated contact for up to a year after an innovator business is authorized
Market inputs: The FCA regularly calls for inputs from market participants. One of the recent cases where inputs were called was in the area of RegTech.
— Virtual currencies—like bitcoin—were banned in many countries while others levied a form of VAT or other tax on its use. After careful consideration, the UK chose not to introduce any taxes on bitcoin, demonstrating an open mind when it comes to innovative FinTech.
— Responsibility for regulation of the peer-to-peer lending (or crowdfunding) industry has now been passed to the Financial Conduct Authority. Crowdfunding platforms will have strict systems in place to protect investors. The move—which enables new business models to be developed whilst protecting consumers—has been broadly welcomed by the industry
— The UK Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC) have inked an agreement to support innovative businesses seeking to gain entrance into each other’s markets.
— FCA also plans to offer a regulatory sandbox (where businesses can test innovative products, services and business models) without incurring normal regulatory consequences. This initiative is expected to reduce the time to market at potentially lower costs.
The Reserve Bank of India has been slow and steady when it comes to regulating FinTech. The authority has taken many steps towards empowering FinTech firms to develop market-relevant solutions. The following are the key initiatives taken by the authority:
Payment banks and small banks: The Reserve Bank of India paved the way for niche banking by issuing guidelines for two new categories of banks: small and payments. The idea was to enhance financial inclusion in India. Payment banks can issue ATM/debit cards, but cannot issue credit cards as they are not empowered to carry out lending activities. This type of bank can be highly useful for migrant laborers, low-income households, small businesses and other unorganized sector entities. Last year, RBI licensed 11 payment banks and 10 small banks in India.
Banking facilitators and microfinance: The Reserve Bank of India allows banks to employ two categories of intermediaries—business correspondents (BCs) and business facilitators (BFs)—to expand their outreach. BCs are permitted to carry out transactions on behalf of the bank as agents. The BFs can refer clients, pursue the client’s proposal and facilitate the bank to carry out its transactions, but do not transact on behalf of the bank.
Open contests: The Reserve Bank of India (RBI) has also launched a contest to find innovative solutions to prevent financial fraud, reduce the cost of transactions and develop e-payment infrastructure in India. The contest, which will be organized by the Institute for Development and Research in Banking Technology (IDRBT) (the technology arm of the RBI), will allow for participation of individuals, groups and startups in the space. Startups taking part in the contest will be rewarded with citations and a small cash prize.
The authority has openly asked financial institutions to partner with FinTech firms. Banks have responded well to this statement. All top three banks in Singapore run their own accelerators/incubators where they have partnered with a bank.
FinTech & Innovation Group within MAS: The Monetary Authority of Singapore (MAS) has formed a FinTech & Innovation Group (FTIG) within its organization structure last year. The group will be responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to manage risks, enhance efficiency, and strengthen competitiveness in the financial sector. FTIG will comprise of a payments & technology office, a technology infrastructure office and a technology innovation lab.
Platform to support Singapore as FinTech hub: The MAS, along with National Research Institute, plans to set up a FinTech office in May 2016. The office is being set up to assist FinTech businesses planning to open shop in Singapore to seek advice through the Office on various FinTech and technology-related government grants and schemes.
FinTech-focused funds: The Monetary Authority of Singapore has committed $166.48 million over the next five years to growing the FinTech segment of the startup ecosystem in Singapore. The funds will be used to incentivize banks to establish R&D and innovation labs as well as other infrastructure. The FSTI will also go towards supporting major institutional and industry projects. Examples of such possible projects are decentralized record-keeping systems for trade financing based on blockchain technologies, cyber risk test-beds and natural catastrophe data analytics exchanges.
Organization of FinTech conferences: In partnership with Association of banks in Singapore, MAS held a two-day conference to pave the way for financial technology (FinTech) innovation in Singapore, benefiting consumers, financial institutions (FIs) and FinTech developers. The event was attended by more than 100 key decision-makers across the financial services value chain. The agenda of the event was API strategy, implementation experience and key insights on information security and data governance in their API journey.
Hong Kong’s FinTech is making steady headway. HKMA has revised guidelines issued on e-banking, payments systems and others that will provide more flexibility for a range of banking services.
Payments System Ordinance to boost financial soundness and public confidence: The Hong Kong Legislative Council passed the Payments System and Stored Value Facilities (SVF) Ordinance and has since come into effect on 13 November 2015. Under this ordinance, the Hong Kong Monetary Authority (HKMA) will be regulating all multipurpose SVF (MPSVF), which are basically device- or non-device-based SVF that allows the use of cards or devices to pay for goods and services from third parties. This does not include SVFs such as Starbucks cards or bank cards.
Steering committee on FinTech: The government of Hong Kong has set up a steering committee to advise the government on developing and promoting Hong Kong as a FinTech hub. The steering committee recently has come up with an elaborate plan to achieve its objectives. The committee plans to set aside a dedicated space of 3 000 square meters in Cyberport's Smart-Space for FinTech activities and rolling out a designated incubation program for 150 FinTech startups over the next five years in addition to arranging for 300 university students, through Cyberport, to join FinTech training camps in overseas universities to gain more in-depth understanding of career prospects in the sector. Other initiatives include encouraging the industry and relevant organizations to explore the application of blockchain technology in the financial services industry, and establishing dedicated platforms at the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission and the Office of the Commissioner of Insurance to enhance communication between regulatory authorities and the FinTech community.