Regulatory Riddles

FinTech Articles Week of 10/30/15

Three key themes became clear at what conference promoters called the world’s largest FinTech conference to date, held Oct. 25 – 28 in Las Vegas, where fantasy and finance meet daily.

• Though the U.S. usually welcomes innovation, it’s easier for FinTech to blossom in the U.K.

Getting regulatory licenses on a state-by-state basis, plus federal licenses, is very difficult and one of the most expensive, time consuming, and confusing exercises anyone can go through, according to panelists.

It’s much easier to start a FinTech company in London, where there’s a single common regulatory scheme that’s transportable across other jurisdictions in Europe. “As an American, I am concerned about the ability of U.S. companies to compete when regulatory structure is so difficult,” said alternative lender Lending Club’s Richard Nieman.

Having state and federal regulatory agencies to satisfy is highly inefficient. “I would love to see Congress preempt state regulators, as it’s a global business,” said Richard B. Levin, of the law firm Bryan Cave.

Not that international regulation is easy. The real challenge is that most new FinTech products invoke many regulatory issues at the same time, which is especially complex because many apps are international in scope. “We have to figure out as companies what rules apply, who has jurisdiction—and believe it or not, regulators are trying to do the same,” Microsoft guy says.

Not that international regulation is easy. The real challenge is that most new FinTech products invoke many regulatory issues at the same time, which is especially complex because many apps are international in scope. “We have to figure out as companies what rules apply, who has jurisdiction—and believe it or not, regulators are trying to do the same,” Microsoft guy says.

• Regulators are looking to clarify their scope and find more efficient ways to help firms understand the rules.

Ambiguity and uncertainty are the toughest things regarding regulation for a company, panelists agreed. Banks especially are avoiding risk after the financial crisis and will be hesitant about providing any service that has ambiguous regulatory implications.

Regulators themselves are not so hesitant. If a service falls under their jurisdiction in any way, they will look at it and take enforcement action if they feel it’s warranted. “Have a discussion with a regulator first,” advised Ori Lev, of the law firm K&L Gates.

“Getting to a degree of certainty and clarity on new business models helps immensely,” said Jon Zieger, Stripe’s general counsel.

• As they seek better methods, FinTech startups and regulators are more aligned than ;it might seem.

The agendas of regulators and FinTech disruptors are more aligned than not, especially in lending. Both seek to address areas where lenders benefit from market inertia and consumer confusion, and both seek to expand financial inclusion. Regulators also look extremely closely as innovation in financial services, as it’s their nature to let in the good and keep out the bad.

In lending, the primary scheme for consumer protection consists of the disclosures that come with any loan and credit card. Many, if not most, consumers ignore them, finding the bulk of the material too dense. “I am going on the record to say that the disclosure model has mostly failed,” said Jo Ann S. Barefoot, a senior fellow at Harvard University. “People don’t understand what they are getting nor do they read disclosures.”

Many FinTech startups help provide good information, providing services that compare interest rates and terms on loans and credit cards that consumers had difficulty doing in the past. “We all want a well-functioning market leading to good choices,” Barefoot says. “Consumers need good information.”

That’s a challenge for the regulators as well. “Regulators are overworked, underpaid and understaffed. They are trying to keep up with new technology that is changing faster than they, and especially the Congress, can keep up with,” noted Microsoft’s assistant general counsel Youssef Sneifer, in a defense of regulation he found surprising.