Designing a Fintech Compliance Strategy: Strategic Considerations for African Fintechs

We analysed data, facts and legislation surrounding 33[1] regulatory actions taken against financial technology (Fintech) companies by Fintech regulators across Europe, US, and Asia covering a 5- year period beginning from 2015.

In this update, we have distilled some of the most consistent patterns that are shaping global Fintech regulation and enforcement as follows:

1.] The most regulatory actions taken in the global Fintech industry, were taken in the United States (U.S.) by U.S. regulators.

2.] On a country by country basis, Fintech regulation is generally fragmented and there is typically no one/single regulator of Fintech businesses. As a result, there are also multiple regulatory frameworks that apply to Fintech businesses.

3.]Although securities and banking regulators are the primary regulators of Fintech companies, we cited instances where a “secondary” Fintech regulator imposed fines on Fintech companies. Some of these regulators include competition/anti-trust regulators, loan/borrower protection regulators and commodities/future trading regulators.

4.] Fintech regulators are mostly federal regulators. In the United States, some the regulators that have taken actions against Fintech companies include the US Attorney’s Office, the Federal Trade Commission, the Financial Industry Regulatory Authority (FINRA) and the Consumer Financial Protection Bureau. However, there could be state-level exposures for Fintech companies from state regulators. In 2018, the Massachusetts Division of Banks reportedly fined lending club $2,000,000 for giving out 46,000 loans without proper state license.

5.] There could be exposures for Fintech companies from an economic and trade sanctions regulation standpoint. In 2015, the Office of Foreign Assets Control[2] reportedly imposed a fine of up to USD7.7 million on Paypal for processing 486 illegal transactions, totalling $44,000, which violated sanctions on Sudan, Cuba and Iran.

6.] Imposition of monetary fines were the more common type of regulatory action taken by Fintech regulators, followed by shut-downs, civil liability actions, seizure of assets and disgorgement. In some instances, founders and other executives were charged with criminal offences, leading to imprisonment in some cases. For instance, the founder of Liberty Reserve, a digital currency service provider, was reportedly sentenced to 20 years’ imprisonment for money laundering offences.

7.] Selling or offering unregistered securities to the public were by far, the most common type of Fintech infraction we cited, followed by failure by some Fintech start-ups to obtain the relevant license for their businesses. Other regulatory infractions cited include, fraudulent and misleading advertising, facilitation of money laundering, inadequate anti-money laundering programs, inadequate data protection processes and failure to report data breaches.

8.] Fintech regulators have taken more regulatory actions against digital currency businesses and their founders than in any other Fintech vertical.

9.] Celebrities who endorse Fintech products can be exposed to disciplinary actions from securities regulators. The United States’ S.E.C charged celebrity actor Steven Seagal for failing to disclose payments he received for promoting an investment in an initial coin offering (ICO) conducted by Bitcoiin2Gen.

10.] In the peer-to-peer lending sector, the regulatory approaches vary widely between jurisdictions. The rules regarding registration and marketing are particularly a strong area of concern for regulators.

11.] Sandbox regulation is a more common strategy for regulating early-stage investment companies. So far, there appears to be some success with this regulatory approach, with countries like Spain, Netherlands and other European countries recording relatively fewer cases of serious regulatory breaches.

12.] Across all Fintech verticals, the accuracy of advertising material is a major concern for regulators as they work to protect consumers from predatory terms. The cases of Lendup and Sofi particularly reflect that trend, having taken significant damage in terms of financial penalties and reputational damage due to regulatory action in response to misleading advertising claims

For Fintech-related licensing, contracts, data privacy, compliance and litigation support, please reach out to your Balogun Harold contact or to our Fintech team at support@balogunharold.com

[1] Kindly see the table below

[2] The Office of Foreign Asset Control is the enforcement arm of the US Department of Treasury

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