Bank regulation is older than you think. The ancient Code of Hammurabi, which predates Moses and the Biblical legal code of the Pentateuch, includes rules for interest-bearing loans (not more than 30% interest for past due loan repayments!) Since then, review
of the history of banking shows that regulation of financial services has become
more and more complex and extensive.
In conversation yesterday with Bryan Cave regulatory lawyer Dan Wheeler, it struck me that many FinTech startups may be underestimating the value of hiring regulatory counsel. This is understandable. Lawyers aren’t cheap and they’re not generally quick –
we all know the jokes.
When I was running a commercial mortgage company a few years back, I worked with all sorts of lawyers – litigation, bankruptcy, contract, employment, etc. But the most important long-term relationship was with our primary regulatory attorney. He knew all
the regulations we were subject to (and there were many), was aware of changes, interpreted case law implications, and helped us when we were in disputes with investors, borrowers and regulators. He wasn’t cheap. But he was invaluable (and remains a good friend).
Banks know this of course. They all have internal and external counsel, and extensive budgets. They also know what happens when they don’t follow regulations – massive fines, reputational damage, and sometimes restrictions on their ongoing business (such
as cease-and-desist orders).
But this applies to FinTech companies as well, particularly those that are offering services in competition with, or complementary to, the banks. For example, although Dodd-Frank is considered primarily to be banking regulation,
marketplace lenders are now also under the purview of the
Consumer Finance Protection Bureau. Prominent FinTech companies been recently been fined for
misleading advertising,
poor security practices, and
failure to register as an MSB, among others.
But even FinTech companies looking to partner with banks need to be clear about the regulatory environment they are touching and playing in. Their bank customers expect it of them. And their investors should expect it too, since there are often regulatory
risks for the FinTech itself.
What do regulatory attorneys do for FinTech companies?
- They advise on the legality of a proposed business model. Sometimes disruption is only possible because bank regulations don’t allow the banks to do what the FinTech is proposing to do. In this case, the FinTech itself will sooner or later be under equivalent
regulation. A good example is the heightened attention paid by the US CFPB to marketplace lenders.
- They advise on the applicability of different regulations for particular businesses. There are 10 bodies
regulating banking activities at the US Federal level, in addition to regulators in every state, and many differences from country to country around the world.
- They help certain FinTech companies navigate complex and time-consuming registration requirements with regulatory agencies (state of national).
- They help FinTech companies to understand the regulatory context in which their bank partners are operating. This allows the FinTech to speak to the real bank challenges surrounding a solution, and to partner with the bank to refine the solution as needed.
- They can help with the design of RegTech products, specifically focused at helping banks to address regulatory challenges like Anti-Money Laundering, sanctions checking, customer due diligence, capital adequacy reporting, stress tests, and transparency.
- They advise on specific regulations impacting product design (for example cyber security and privacy requirements for products and services in a particular jurisdiction).
- They represent FinTech clients when things go wrong (which can still happen with the best of up-front planning).
For some FinTech companies the need may be as little as a confirmation that they are not directly impacted by regulation, and that they are not partnering with banks in highly regulated activities. At the other extreme, it may be worth hiring a regulatory
expert on a fractional basis to join the team. But for most FinTech firms, consulting with and retaining regulatory counsel now will have several benefits:
- Significantly reduce the risk that the FinTech itself falls foul of regulators.
- Provide the understanding necessary for a FinTech to take into account bank regulations when designing holistic solutions for a bank.
- Represent a FinTech when regulatory questions arise.
- Provide legal support in regulation-related litigation.
Worth checking out, surely?