While the United Kingdom is seen as one of the best locations to start a fintech business, many are discouraged by the UK’s complex regulations. However, these regulations have been designed to facilitate innovation and safeguard customers rather than to set severe restrictions.

In this article, we explore the main fintech compliance regulations across the UK and Europe, examine the major challenges created by fintech regulations, and explain why the UK is such a popular destination for fintech companies.

The main fintech compliance regulations

There isn’t any specific regulatory framework for fintech businesses — they operate within a regulatory perimeter that covers traditional financial services. Here are some major regulations stipulating the conduct of fintech businesses across the UK and the EU.

FSMA (UK)

According to the Financial Services and Markets Act 2000 (FSMA), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are the primary regulatory bodies governing the financial services sector in the UK.

The FCA focuses on regulating the activities of financial services firms and markets, ensuring they operate with integrity, fairness, and transparency. The PRA, on the other hand, is responsible for prudential regulation, aiming to ensure the safety and soundness of financial institutions.

The FCA’s and RPA’s rulebooks are pretty extensive. They contain detailed regulations, standards, and guidance that financial institutions, including banks, investment firms, and insurance companies, must follow to operate legally and responsibly. These rulebooks cover various areas such as risk management, capital adequacy, payment services, consumer protection, market conduct, and more.

Non-compliance can lead to enforcement action by the FCA and/or the PRA and penalties such as fines and prohibitions from working in the financial sector.

Although the FCA and PRA financial regulations are generally technology-neutral, the recent growth of cryptoasset businesses triggered the adoption of new regulatory developments.

One of them is the Final Guidance on Cryptoassets issued by the FCA in 2019. This document aims to clarify the regulatory approach to cryptoassets and, in particular, helps cryptoasset businesses understand whether their financial activities are subject to FCA regulation. If so, such activities require authorisation from the FCA (in certain circumstances, also from the PRA). Otherwise, carrying out these activities without applicable authorisations may result in a criminal offence.

Anti-money laundering requirements (UK and EU)

Fintech businesses provide a wide range of financial services, including payments, lending, investment, and crowdfunding, which can be susceptible to money laundering activities. Consequently, fintech services fall under anti-money laundering (AML) requirements.

In the UK, AML requirements are governed by the Proceeds of Crime Act 2002 (POCA) and the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the MLRs). These laws outline the regulatory framework for combating money laundering and terrorist financing activities. They require financial institutions, including fintech organisations, to implement robust AML controls, monitor transactions, conduct customer due diligence, and notify relevant authorities of suspicious activities.

According to these laws, both money laundering and the failure to report suspicions of money laundering are criminal offences.

The Fourth Money Laundering Directive (4MLD) and the Fifth Anti-Money Laundering Directive of the European Parliament and of the Council (5MLD) enacted by the European Parliament and the Council of the European Union provide the regulatory framework for combating money laundering and terrorist financing across the EU.

Similar to UK’s AML regulations, these directives require financial organisations to take anti-money laundering measures, carry out enhanced customer due diligence, report suspicious transactions to the relevant authorities, etc. 5MLD also widened the scope of 4MLD to stipulate the conduct of cryptoasset exchange and custodian wallet providers.

PSD2 (UK and EU)

The Payment Services Directive 2 (PSD2) regulates payment services in the EU and the UK, including conducting payment transactions, issuing and acquiring payment instruments, and money remittance. PSD2 aims to promote financial innovation, competition, and security in the payments industry while enhancing consumer protection.

Fintech companies operating in the payments sector must comply with various regulatory requirements under PSD2, including licensing, registration, operational standards, and consumer protection measures. Here are some major implications of this document in the context of fintech compliance:

• Access to Account (XS2A). One of the key provisions of PSD2, the Access to Account (XS2A) requirement, mandates banks to provide third-party providers, including fintech firms, with access to their customers’ account information with the customer’s consent.
• Payment Initiation Services. PSD2 introduced the concept of Payment Initiation Service Providers (PISPs), which are fintech organisations authorised to initiate payments on behalf of consumers directly from their bank accounts.
• Strong Customer Authentication (SCA). PSD2 requires the implementation of Strong Customer Authentication (SCA) for electronic payment transactions to enhance security and reduce fraud. According to this provision, customers must authenticate their identity using at least two factors from different categories (e.g., knowledge, possession, inherence) when initiating electronic transactions.
• Open Banking. PSD2 promotes the development of an open banking ecosystem by encouraging collaboration and data sharing between banks and fintech firms. Banks provide access to customer account data through APIs (Application Programming Interfaces), enabling fintech companies to create innovative digital banking solutions.

GDPR (EU)

GDPR is an extensive data protection regulation that applies to the processing of personal data of individuals within the EU and the European Economic Area (EEA) and to the transfer of personal data outside the EU and EEA.

GDPR sets out principles, rights, and obligations concerning the collection, storage, use, and sharing of personal data by businesses and organisations. It has significant implications for fintech compliance since fintech companies’ operations often involve handling vast amounts of personal data.

Under GDPR, fintech companies must obtain explicit and informed consent from customers before gathering or processing their personal data. This includes providing clear and transparent information about data processing purposes, how data will be used, and individuals’ rights regarding their data. Fintech companies must also offer mechanisms for individuals to withdraw their consent.

GDPR requires businesses to only collect and process personal data necessary for specified, legitimate purposes. They must not retain data for longer than necessary and should delete or anonymise data when it is no longer needed for its original purpose.

Fintech companies operating across borders must ensure that personal data is adequately protected when transferred to countries outside the European Economic Area (EEA).

GDPR mandates fintech companies to promptly notify relevant authorities and affected individuals in case of a personal data breach.

UK GDPR

UK GDPR is the domestic version of GDPR that applies within the United Kingdom. GDPR came into effect in 2018 when the UK was part of the European Union. After Brexit, when the UK left the EU on January 31, 2020, it incorporated GDPR into its domestic law with necessary modifications to make it compatible with the UK legal framework.

While UK GDPR and GDPR share many similarities, there are some differences:

• The UK GDPR applies to organisations based in the UK or those processing data of individuals in the UK.
• While the EU GDPR mandates each member state to establish Supervisory Authorities, the UK has a single regulator, the Information Commissioner’s Office (ICO), responsible for overseeing data protection.
• The UK GDPR aligns with the UK legal system and introduces modifications, such as replacing EU references with UK equivalents. Accordingly, modifications to the EU GDPR undergo the EU legislative process, while the UK has autonomy in updating the UK GDPR, maintaining alignment with the EU framework.
• The UK is considered a separate jurisdiction under the EU GDPR, requiring additional safeguards for data transfers from the EU to the UK.
• The EU GDPR requires organisations outside the EU to appoint EU representatives. In contrast, the UK GDPR mandates representatives for organisations processing UK residents’ data without requiring a physical presence in the UK.

Major challenges of fintech regulations in the UK

While generally facilitating innovation and growth within the fintech sector, fintech regulations in the UK also create several challenges.

Complex regulatory environment

Fintech regulations are often complex and subject to frequent updates and changes. Each fintech business must continuously monitor the evolving regulatory landscape, stay up to date with new requirements, and ensure compliance with multiple regulatory bodies, including the FCA, the PRA, and others.

Compliance costs

Fintech regulatory compliance can be costly, particularly for startups and smaller fintech firms with limited resources. Compliance costs include legal fees, regulatory consulting, and ongoing monitoring and reporting obligations.

Data protection and privacy concerns

Maintaining compliance with data protection requirements such as the GDPR adds another layer of complexity for the fintech industry players. It requires robust data security measures, transparent data processing practices, and mechanisms for obtaining valid user consent.

AML and KYC regulations

One of the key fintech regulatory issues is compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. For financial services firms operating internationally, staying compliant with these regulations means navigating different AML and KYC requirements across jurisdictions. Moreover, remote onboarding complicates verifying customer identities and detecting fraud. Compliance with these regulations also requires handling sensitive personal data and raising privacy and security concerns.

Why is the UK so attractive for fintech organisations?

The UK is considered one of the most attractive destinations for financial technology businesses, mainly due to its favourable regulatory approach to financial innovation. Let’s explore the primary reasons behind the thriving fintech ecosystem in the UK.

Robust fintech regulation landscape

The UK has a robust regulatory framework that welcomes fintech innovation. Regulatory bodies like the FCA provide a supportive environment for fintech startups with initiatives such as regulatory sandboxes, which allow companies to test innovative products and services in a controlled environment.

Access to top talent

London is a global financial innovation hub with a highly skilled workforce and a diverse talent pool, including finance professionals, software engineers, data scientists, and regulatory experts.

Ample business opportunities

The UK offers a favourable business environment for fintech market participants, with easy access to venture capital, investor-friendly regulations, and strong support for entrepreneurship and innovation.

Vibrant fintech ecosystem

The UK boasts a thriving fintech ecosystem with many startups, accelerators, incubators, and industry associations. This ecosystem fosters collaboration, knowledge sharing, and networking opportunities for fintech companies.

Global connectivity

The UK’s geographical position and strong international connections make it a perfect location for fintech companies looking to expand globally. With easy access to European markets and a time zone that overlaps with Asia and the Americas, fintech firms in the UK can serve customers across different regions and time zones.

A regulation-savvy fintech team is just a call away.

If you’re looking for a fintech development team with the relevant regulatory expertise, consider DeepInspire. In addition to 20+ years of experience in banking software development and a comprehensive technology stack, we know all the ins and outs of fintech regulations in the UK and Europe. Book a consultation to discuss how we can help.

FAQs about fintech regulations

Who regulates fintech companies?

In the UK, fintech organisations are primarily regulated by the Financial Conduct Authority (FCA). The FCA regulates various aspects of fintech activities, including payment services, electronic money issuance, crowdfunding, peer-to-peer lending, and more. Fintech firms must obtain authorization from the FCA and comply with its regulatory requirements.

On the other hand, fintech organisations operating across the EU are subject to regulation by multiple regulatory bodies, depending on the nature of their activities and the jurisdictions in which they operate. The primary regulatory frameworks relevant to fintech in the EU include:

• European Banking Authority (EBA). The EBA is responsible for promoting harmonisation and consistency in banking regulation across EU member states. It develops regulatory standards and guidelines for banks and other financial institutions, including fintech firms engaged in banking activities.
• European Securities and Markets Authority (ESMA). ESMA regulates securities markets and ensures investor protection across the EU, developing regulations and standards for securities trading, investment services, and financial market infrastructure.
• European Central Bank (ECB). The ECB oversees monetary policy and financial stability in the Eurozone, which includes regulating payment systems.

It’s also worth noting that Each EU member state has its own national regulatory authorities responsible for overseeing financial services within their jurisdictions, such as BaFin in Germany, the Autorité de Contrôle Prudentiel et de Résolution in France, the Banca d’Italia and the Commissione Nazionale per le Società e la Borsa in Italy, etc.

Why is regulation important for fintechs?

By establishing rules and standards, regulations primarily aim to safeguard consumers. Businesses offering fintech products and services are required to ensure transparent pricing, fair treatment of customers, data protection, and mechanisms in case of disputes or fraud. In addition, regulations promote market integrity by setting standards for business conduct, preventing market abuse, and ensuring fair competition among fintech firms.

How do regulations help create a future-proof fintech?

Regulations set rules for business conduct and establish clear expectations for compliance, which allows fintech companies to make informed business decisions and effectively plan for the future. In addition, regulations help build consumer trust and confidence by setting standards for transparency, fairness, and data protection.