Tighter UK rules for fintech groups after the collapse of Wirecard will make it harder for start-ups to get off the ground and threaten the sustainability of smaller companies, some of the industry’s most senior executives have warned.
A government-backed review last week said fintech was “strategically important for the UK’s economic growth”, calling for a number of measures to make it easier for start-ups to expand.
At the same time, however, the Financial Conduct Authority is planning to enforce new rules to protect consumers that experts say will drive up costs in an already low-margin sector, highlighting a key tension in fintech regulation.
“If I was starting a payments business today I would look at e-money and think it wouldn’t be attractive . . . because the capital requirements are so much tighter,” said Nik Storonsky, chief executive of digital bank Revolut.
Hundreds of fintech companies operate in the UK as “payment institutions” or “e-money institutions”. The FCA grants licences that allow them to provide services such as money transfers or digital current accounts, with looser regulatory requirements than for traditional banks.
Under new rules due to become permanent this year, they will be held to stricter risk-management standards including, like banks, having detailed wind-down plans.
The FCA has also provided more explicit guidelines on how fintech businesses should manage customer funds, which are held in “safeguarded” accounts at a third-party bank and are not subject to the Financial Services Compensation Scheme that covers up to £85,000 per account holder at other financial institutions.
“Given the importance of the payments and e-money sector to consumers’ everyday lives, it is important that firms are resilient and ensure customer funds are adequately protected to maintain trust and confidence in the sector,” the FCA told the Financial Times.
Storonsky said Revolut, which already has a full banking licence in the eurozone and is applying for one in the UK, benefits from large scale and a range of revenue sources such as subscription fees and charges for stock and cryptocurrency trading, but said newer businesses or specialists that rely on card transaction fees could struggle.
“A standalone e-money business does not make sense with the new rules,” he said.
Rich Wagner, chief executive of Cashplus, which recently became a bank after operating for many years as an e-money company, agreed that the changes would be a burden for smaller start-ups.
“There used to be a pretty big difference in the number of compliance people you needed in an e-money firm versus a bank. Now the number of compliance people you need in e-money institutions is going up, but you still can’t use the customer deposits . . . the business case to become a bank has become stronger.”
“Wirecard got regulators to wake up and talk about how much more robust they need to be,” he said.
The FCA first outlined new temporary guidance for e-money firms two weeks after Wirecard’s collapse, although it had already been working on new rules beforehand.
David Kenmir, a former regulator and now a partner in PwC’s financial services risk and regulatory practice, said the regulator was “effectively trading off increased costs for the industry and potentially increased fees [for consumers] with increased degrees of customer protection”.
“The e-money industry has evolved much faster than the regulation,” he added. “If you look at some of the big players now, in effect they are of a scale which if they were to fail would cause huge issues for both their customers and regulators. It’s somewhat inevitable that regulators would look at the market.”