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The Emerging World of FinTech

Disclaimer: The views expressed are that of the individual author. All rights are reserved to the original authors of the materials consulted, which are identified in the footnotes below.


By Sophie Garnett

Section Editor for Technology & Media



What is Fintech?

FinTech, a portmanteau of "financial technology," is the application of new technological advancements to products and services in the financial industry [1]. This new and expanding industry has seen a close to three-fold increase in funding between 2014 and 2018, a testament to the growing relevance and importance of this sector across all domains [2]. Though to some degree technology has always been part of the financial world, with the introduction of credit cards in the 1950s for example[3], FinTech is increasingly dominating the financial market and therefore commercial law practices. According to CB Insights, there are currently 41 VC-backed fintech unicorns worth a combined $154.1B [4], many of which are emerging companies that require in-depth legal advice.

Legal Advice

These FinTech developments have necessitated rapid legal developments in order to regulate FinTech practices, requiring law firms to adapt in order to provide the most up to date advice to their clients. Radical financial legislation can be traced back to the 2008 financial crisis which dramatically altered how finance is regulated. In the US, the Dodd-Frank Act imposed broad and systemic regulation on the industry on a level not seen since the New Deal[5]. However, it was not until recently that emerging financial practices were seen as necessary to regulate in a new manner.

The challenge for regulators has been to ensure FinTech companies are encouraged to expand and grow while also balancing the need to regulate them properly [6]. FinTech lawyers have therefore found it necessary to advise clients on ever-changing regulation as well as taking into account the international scope of regulation due to the global expansion of many FinTech businesses. FinTech companies are required to comply with data protection laws including GDPR as well as having to prove that they have adopted appropriate cybersecurity practices [7], among many other regulations.


Regulators have faced a myriad of pressures in the regulation of FinTech including political pressure to curb excesses, increasing EU-centric regulations, and individual firms being simultaneously regulated in multiple jurisdictions and within multiple frameworks[8]. Much of the data now required, and the templates and means for its transmission, are mandated in E.U. law. This means that any agenda for regulatory reform ultimately needs to take place at the E.U. and international level[9]. This has caused issues for FinTech lawyers as they are required to work within the increasingly strict EU guidelines as well as within international regulation should their client do even minimal business within the EU.


Impact of regulation

The impact of this constantly changing and confusing regulation of FinTech has been to discourage innovation in new financial products that fall under the FinTech banner[10]. Some FinTech businesses have also felt the need to relocate to the outside of the EU in order to avoid some of the strictest regulations[11]. Law firms have taken a key role in advising FinTech clients on the best locations to practice, taking into consideration the different regulations across the globe.

Possible solutions

The challenge of regulating FinTech has been taken on by lawyers over the past few years as the market starts to emerge. However, some solutions have been suggested in order to make FinTech regulation more conducive with innovation and succinct legal advice. One suggestion has been the development of reporting standards in which common compliance tagging and reporting standards across multiple jurisdictions are set so as to support calls for the mandatory sharing of information between regulators with overlapping jurisdictions. Calls for harmonisation of national, European and global financial monitoring systems have also been made clear as this would allow FinTech companies to operate across a multitude of borders without having the burden of concerning themselves with conflicting regulations[12].


Firm’s direct issues with FinTech

However, it has not just been in the realm of legal advice that law firms have struggled with the increasing prevalence of FinTech; increased cybercrime has progressed alongside FinTech and has hit many firms hard. A report from the Solicitors Regulatory Authority revealed that money laundering reports from law firms increased by 67% from April 2017 to July 2018, cybercrime also increasing by 50% year on year with £20 million of client money lost across two years in 2016 and 2017[13].


One FinTech company, Shieldpay, is attempting to remedy these issues however by holding client money in a secure vault which can only be released when authorised by both sides, or at a pre-agreed milestone within the legal process[14]. Tom Squire, Enterprise Director of Shieldpay commented: “The handling of client money used to be a time consuming and archaic practice. Our new digital solution means that firms and their clients have full transparency over the status of client money at any point in time. Traditional payments processors often came at a high cost and with less visibility, but our custom-built platform means that firms can reduce costs and provide a transparent solution that will benefit their clients.”[15].

Conclusion

To conclude, the emergence of FinTech has without a doubt shaken the legal industry, calling for vast new regulation across multiple jurisdictions as well as specialist FinTech lawyers. Also interesting however is the direct impact FinTech has had on law firms themselves, something that is unique to FinTech in comparison with other legal developments.

The world of FinTech will surely advance over the coming years, aided hopefully by more comprehensive legislation which will encourage expansion and innovation. This new and emerging industry can provide positive developments in the world of financial services, aiding all from those in high positions within the financial industry right down to the everyday consumer through creations such as Monzo. FinTech expansion is exciting and, though it will likely continue to provide issues for the world of law for the foreseeable future, the results will no doubt warrant the hard work.



 

Sources

  1. Bulitin, ‘Fintech: What is Fintech? Guide to Financial Technology’, < https://builtin.com/fintech > accessed 26 November 2020

  2. Allaboutlaw, ‘FinTech Law’, < https://www.allaboutlaw.co.uk/stage/areas-of-law/fintech- > accessed 26 November 2020

  3. Bulitin (n1)

  4. Ibid

  5. William Magnuson, ‘Regulating Fintech’, 2018, Vanderbilt Law Review Volume 71, Issue 4, < https://heinonline.org/HOL/Page?collection=journals&handle=hein.journals/vanlr71&id=1212&men_tab=srchresults > accessed 26 November 2020

  6. Dentons, ‘FinTech: the top five legal issues to consider’, < https://www.dentons.com/en/insights/articles/2019/february/26/fintech-the-top-five-legal-issues-to-consider > accessed 26 November 2020

  7. Dentons (n6)

  8. Philip Treleaven, ‘Financial Regulation of Fintech’, 2015, Journal of Financial perspectives, Volume 3, Issue 3 < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084015 > accessed 26 November 2020

  9. Treleaven (n8)

  10. Ibid

  11. Ibid

  12. Ibid

  13. Manisha Patel, ‘Legal Sector to Benefit from Fintech Revolution’, 2018, The Fintech Times <https://thefintechtimes.com/legal-sector-to-benefit-from-fintech-revolution/ > accessed 26 November 2020

  14. Patel (n13)

  15. Ibid

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