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Young, visionary start-ups often begin their ventures with high aspirations and dreams for disrupting the financial industry. With an eye to innovation and a focus on their cutting-edge tech, they may not fully appreciate the regulatory complexity they are about to face. BBVA’s Fintech University in San Francisco addressed this critical issue in a recent panel.
The panel featured experts Wally Young, Director in the Division of Financial Institution Supervision and Credit at the Federal Reserve Bank of San Francisco; William B Haraf, Special Advisor with Promontory Financial Group; and Antoinette O’Gorman, Ripple’s Chief Compliance Officer and BSA Officer.
Emerging entrepreneurs usually aren’t aware of the multi-layered, multi-faceted regulations that exist across the industry. That means they may come up against unanticipated obstacles. Or worse, these young companies may be subject to fines and penalties imposed by the regulators. Without high levels of compliance awareness and expertise, they aren’t likely to get very far, and that’s a shame if they are prevented from bring their innovative ideas to market.
The forum revealed that regulatory challenges pose a complex barrier to fintech companies seeking to change the status quo. Layers of regulation and oversight come from both federal and state governments. In some cases, a fintech company with operations across the United States might be subject to oversight by over 40 different regulatory agencies. For added complexity, insurance, bank, and investment industry regulations can vary widely. While the Federal Reserve and the Consumer Financial Protection Agency have discussed creating a regulatory “sandbox” to allow for fintech experimentation, the parameters have yet to be established.
Navigating compliance has also become more complex due to UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). In the past, financial regulations were more prescriptive, detailing explicit do’s and don’ts that companies needed to follow in order to comply. With UDAAP, these iron-clad rules transformed into general principles, making them more subject to interpretation. It is now up to each company to interpret the guidance and take action, which means they must tread carefully to avoid violations.
The stakes are high. In the current environment, it is not uncommon to hear of regulatory penalties in the millions of dollars (or higher!). Even more importantly, serious and long-lasting damage can occur to a company’s reputation. Negative press coverage, drawn-out investigations, and in some cases even criminal charges can cause irreparable damage.
Savvy fintech innovators have learned to partner with banks. Established banks already have the years of experience, infrastructure, oversight, and processes to effectively manage compliance. Such a “white label” relationship, in which a start-up uses a bank’s APIs to leverage existing bank resources and capabilities, are becoming more common.
The panelists emphasized that it’s important to recognize the significance of compliance from the start, and make it a top priority. “Get some good outside advice, and start thinking about them early on, because you can easily find yourself in trouble otherwise.” said regulator Wally Young.
Compliance culture was highlighted not only by the panel, but even pointed out in the opening keynote by venture investor Ryan Gilbert. “Hire a lawyer immediately” he advised. He explained that this isn’t just necessarily to “keep you out of trouble”, but to keep you at the forefront of the changes occurring in the regulatory environment.
By devoting attention, time, and resources to these challenges, entrepreneurs will be better equipped to build their business in a secure and sustainable way.
*This article is one in a series from BBVA about the latest in fintech and banking.
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