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Piece written by Charles Brecque, CEO at Legislate


The fintech sector has to-date secured a huge proportion of VC funding because the financial services industry is ubiquitous and built on legacy technology which is ripe for disruption. However, due to the nature of the financial services industry, fintech businesses are under more scrutiny from financial regulators and must meet compliance requirements in order to operate. As a result, fintech founders must have mechanisms in place to track and manage their legal risks. This article explains the types of legal risks founders should be aware and explains the risks which are specific to the fintech market.


Legal Risks for Every Founder


Every founder starting a business should ensure that their intellectual property is protected. This means protecting confidential information with non-disclosure agreements and having intellectual property provisions in consultancy and employment agreements to ensure the IP developed by the consultants and employees stays within the business. Due to the higher levels scrutiny in the fintech sector, founders should ensure that their internal agreements are in order and trackable so that they can be easily reviewed by regulators on demand.


Unique Risks to the Fintech Sector


Before setting up their new business, fintech founders must be aware of the local regulatory requirements and consumer protection laws of the jurisdiction they plan to operate in. Additionally, Just like financial institutions, fintech startups must comply with anti-money laundering (AML) and terrorist financing rules. As the digitalisation of the financial market improves the user experience, it increases the risks of financial crimes. Accordingly, fintech companies must carry out AML and KYC (Know Your Client) checks on their customers as part of their due diligence checks in accordance with the Proceed of Crime Act 2002 (UK). In the UK, fintech startups must also comply with the cybersecurity guidelines set out by the Financial Conduct Authority (FCA) and report any cyber incidents to the FCA. Finally, depending on the activities of the fintech, they might fall within the scope of certain regulations. For example, If the fintech plans to offer banking services then they may need to have a banking licence and prove that they have enough funds on their balance sheet to operate in accordance with the regulations of the FCA and the Prudential Regulation Authority (PRA) (UK).


How Can Fintech Firms Stay Compliant?


Fintech companies can only manage their legal and financial risk if they have the technology to quantify their risk. In practice, this means tracking the factors which can affect their risk and ensuring that they remain within compliant boundaries. Founders can manage their legal risk with contract management platforms. Not only do they provide visibility into what their contracts contain, they allow fintech companies to quickly create agreements and policies to comply with new regulation. By automating legal risk management with contract management software, fintech founders can focus their energy on managing financial risks and growing their business.