Financial technology, also known as Fintech, is only getting bigger. Let's Talk Payments estimates that between July 2015 and January 2016 more than $5.5 billion of investments was made in the Fintech sector. Fintech offers the chance to transform financial products and services in payments, insurance, funds & trading and in raft of other connected areas. To fully capitalise on this opportunity business will need to manage the legal and regulatory challenges.
Pace of change
A lot of the technology underpinning Fintech is new and in early stages of development. The pace of change is incredible. Most of the financial services laws and regulations in place today were designed to govern ‘bricks and mortar’ financial institutions where centralised and limited processing was the norm. As more of our time is spent online, the existing laws and regulations are struggling to keep pace with concepts like crypto-currencies, blockchain, crowd-funding and mobile payments.
Ireland and the EU need modern and flexible laws and regulations to fully capitalise on the opportunity of Fintech. To achieve this, regulators and lawmakers need to take a balanced but pragmatic approach that ensures they do not over-regulate and stifle innovation, while at the same time making sure they protect end-users of Fintech.
One way of doing this for new technology is for governments to invite a number of business to test, develop and adapt their different Fintech technologies and products in a ‘sandbox’ test environment, away from live users. In parallel, regulators and policymakers could collaborate and work with those businesses to help develop an appropriate regulatory framework governing their new technology.
One of the biggest hurdles for a Fintech business setting up is determining how financial services regulations and licensing requirements apply to its products, services and governance. In Ireland, a Fintech business needs to know what criteria differentiate a non-regulated entity from one that requires authorisation or licensing by the Central Bank.
One of the benefits of regulation is that it tends to bring with it legitimacy that a Fintech business can promote as its market differentiator. On the other hand, if the Fintech business gets regulation wrong, it can face difficulty raising funding, criminal and regulatory sanctions, as well as damage to the value of its reputation and brand.
Technology law challenges
To ensure it is able to tap into future funding, a Fintech business must also understand the various technology-related issues that apply to its business model. If it does not adequately address data protection, cyber-security and IP protection, to name but a few, this may end up being a barrier to investment and it also creates legal risk.
With the recent introduction of a range of new EU and national legislation, along with corresponding penalties for non-compliance, a Fintech business must properly plan and seek legal advice before putting its ideas and products out into the marketplace. As Fintech touches many different areas of law businesses should seek legal advice from experts across a range of sectors, such as financial regulatory, technology, corporate and data protection.
9 out of 10 of the world’s top 10 technology companies are already located in Ireland. Ireland has talent on tap through its excellent universities. The legal system here is flexible and will be familiar to US and UK businesses. Setting up a company in Ireland does not involve a lot of ‘red tape’ and Ireland offers competitive tax policies.
These factors illustrate that Ireland has the competence and experience on the ground to allow it to become a leading global centre for Fintech innovation. Being a location that fosters Fintech innovation will, in turn, make Ireland attractive to businesses and has the potential to create thousands of new jobs.
On top of this, the UK’s impending exit from the European Union presents a massive opening for Ireland to become an EU Fintech and e-payments hub. This will require the various stakeholders such as government, regulators and the private sector to capitalise on the uncertainty in the UK financial services market. Their aim will be to promote Ireland as a gateway for Fintech businesses to enter or serve the European market. To accomplish this, the Irish Government needs to continue to fund and support Fintech in line with its priorities in its IFS2020 strategy. And the Central Bank of Ireland, through its words and actions, needs to demonstrate to Fintech businesses looking to passport through the EU from Ireland, that the Central Bank is an efficient, safe and collaborative regulator.
Where to from here?
There is likely to be a lot of innovation and more rapid change in the Fintech sector over the next 18 months. Brexit is likely to see Ireland, along with many EU countries, advertising the ability to become a centre for Fintech innovation. While the opportunities for Fintech are abundant, they also bring challenges as businesses seek ways of navigating the expectations of regulators and end users. Participants will need to successfully navigate these legal and regulatory challenges if they want to take full advantage of this brave new world of Fintech.