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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.
Financial Conduct Authority (UK)
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.
Reserve Bank of India (RBI)
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.
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