The fintech industry is evolving at an astounding rate. The need for fintech firms to adapt is drastically increasing, as are the number of complications that firms face when trying to stay compliant. A lack of proper compliance can be detrimental to the success of a fintech firm.
Just like any other industry, fintech firms have to comply with certain rules and standards that govern their behaviour. However, the fintech industry is constantly evolving and adapting, thus making compliance a daunting task.
There are, however, certain ways through which fintech firms can mitigate their compliance risk before it becomes a problem. This article will outline the five most effective ways of managing compliance for fintech companies.
Create a compliance plan
Creating a compliance plan will help a fintech firm identify and address potential problem areas. Through a compliance plan, a fintech firm will define what its compliance strategy will be and which policies and procedures need to be upheld in order to stay compliant.
The plan will also identify potential areas that could be problematic and ways through which the fintech firm can mitigate those risks.
A compliance plan should, at a minimum, include business objectives, risk tolerance, policies such as email retention policy, code of ethics, and investigatory and reporting procedures. The plan should also include an overview of regulatory requirements that might affect a fintech firm, as well as cybersecurity requirements.
Coordinate with existing regulatory bodies
Fintech firms should coordinate with other regulatory bodies. Doing so allows fintech firms a better understanding of the rules and regulations that are applicable to them and helps fintech firms anticipate any possible issues before they arise.
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are some of the main regulatory bodies that regulate fintech firms in the UK. Fintech firms in the US coordinate with the Financial Industry Regulatory Authority (FINRA), Consumer Financial Protection Bureau (CFPB), Securities and Exchange Commission (SEC), and others.
Coordinating with regulators allows fintech firms to:
- Demonstrate a sense of responsibility
- Gain a deeper understanding of the rules and regulations
- Receive guidance on what regulators expect of them
- Receive an update on regulatory changes
- Allow regulators to better understand what fintech firms do
- Ensure compliance with regulations and mitigate risks
Identify potential compliance risks
Identifying and preparing for potential regulatory risks is one of the most effective ways of managing compliance.
Risk management helps fintech firms identify and address potential risks. These risks can be related to reputation, regulations, or technology.
Reputational risks are a risk that an organisation’s reputation could be harmed by the actions of its employees, management, or third parties. Technology risks are risks that arise from the use of technology.
Risks can be also related to regulation. Regulatory risks are risks that arise from failure to comply with laws, regulations, license requirements, or codes of conduct.
Use technology to mitigate the risks
Technology has made it easier for fintech firms to stay compliant. With the help of technology, fintech firms can automate various processes, which will not only mitigate the risks of non-compliance but also help fintech firms reduce costs.
For example, automating processes such as data archiving (with the help of a third-party service provider) will free up a lot of time for the fintech firm’s employees, which would, in turn, allow them to focus on more strategic and revenue-generating activities. Not only can automation help save valuable time, but it also mitigates the risk of human errors related to data retention policies and eDiscovery requests.
Technology can also help detect errors or anomalies in the data. Fintech firms are data-driven organisations, and any discrepancies or irregularities in the data can adversely impact the business. Therefore, using data validation tools can help a fintech firm mitigate the risks.
Besides implementing the right technology, fintech firms should ensure that their employees have the necessary knowledge, training, and access to technology. This can be done by creating a compliance manual, which outlines the firm’s compliance policy and procedures.
A fintech firm can also train its employees on topics such as anti-money laundering (AML), anti-bribery, and fraud prevention.
Employee education is particularly important in firms operating in highly regulated markets.
Fintech firms can use technology to help employees gain the necessary knowledge. For example, they can implement a knowledge management (KM) system. This can be useful for onboarding new employees and allowing them to learn more about the company.
Compliance is an integral part of the fintech industry. Compliance issues can prove to be detrimental to a fintech firm’s success. If a firm fails to comply with regulatory requirements, it may face increased regulatory scrutiny or fines.
Regulations are constantly evolving, with new regulatory requirements coming all the time. The fintech industry is therefore facing new challenges and must adapt to these changes.
Author, Alex Morgan