Fintech Law and Compliance

Fintech Law and Compliance

Notwithstanding the looming shadow of Brexit, the UK fintech market is on the grow. It has been reported that investment in fintech firms in Europe could top $2bn this year. Indeed, despite the chancellor’s Autumn Budget 2017 slashing the UK’s economic growth forecast, the Government pledged a £21m investment over the next four years into the Tech Nation initiative, to secure the UK’s position at the forefront of technological innovation.

The fintech market remains relatively new and untapped and technology startups will continue to emerge and seek funding to develop and market their innovative technological solutions for the financial services industry. With this in mind, what legal and compliance issues are fintech startups in the UK likely to face? Below, South Bank Legal looks at some of the most common legal issues arising for startup firms in this sector.

  • Financial services regulation

One of the first things a fintech startup should consider is whether its intended business activities are of the sort requiring authorisation from the UK’s Financial Conduct Authority (FCA). This is complicated area and will depend upon the nature and application of the technology solution being provided. The provision of digital banking alternatives for banks and asset managers will for example generally require FCA authorisation. Getting the regulatory question wrong and conducting a regulated financial activity without appropriate authorisation could catch the attention of the FCA’s Enforcement Division. Startups should not however approach the regulator with much trepidation; the FCA has been very supportive of fintech firms in the authorisation process.

  • Data protection and the forthcoming GDPR

The General Data Protection Regulation (GDPR) comes into force throughout Europe in May 2018. Consumers will have enhanced rights as regards the privacy and protection of their personal data and firms will face fines for non-compliance of up to €20m or 4% of their global turnover (whichever is more). Fintech solution providers will have to understand the GDPR and provide systems that can protect sensitive personal data such as customer financials and cardholder data. The right approach to compliance should ultimately however be a selling point for fintech startups, enhancing the value of their business and creating a smoother path to raising venture capital.

Commonly startups will outsource the development of the front and back end components of their fintech solution to one or more software development firms. Care must be taken in contracting with independent software developers and preferably the software development agreement will expressly vest all intellectual property rights in the developed work in the fintech startup. After the development phase, bringing a fully tested solution to market will bring its own IP-related sensitivities, and whether sale and distribution occurs directly or via resellers, firms should use robust licensing agreements to safeguard and legally protect their copyright and trade secrets.

  • Fundraising and investment

Self-funding by the founders is no doubt realistic up to a point, but fintech founders may see private fundraising rounds as the preferred option for raising capital to fund expansion and to meet working capital needs whilst sales channels are being developed and closed. Prospective investors will need to be made aware of a fintech firm’s credentials and the key terms of the investment being sought. Care should be taken however to communicate with prospective investors either through a person authorised under the Financial Services and Markets Act 2000,  or under one of the statutory exceptions set out in the FSMA 2000 (Financial Promotion) Order 2005 (for example, where the communication is made to a certified high net worth individual). Once key terms are agreed with private vc investors, the terms upon which they take up shares in the company, and the terms of their ongoing relationship with the founder shareholders, will need to be carefully documented in a joint venture agreement or shareholders’ agreement.

South Bank Legal is a commercial law firm in London and our solicitors act for fintech startups as well as a host of other technology businesses. If you would like a confidential discussion about any of the matters above, then please feel free to get in touch.