Regulatory Aspects to Consider When Building a FinTech Product
While automating some of the functions of financial professionals and allowing their business to grow, technology opened the doors for brand-new ways to put customers’ money into a treat. The market and competition demand new features from FinTech startups, which contributes to the emergence of violations and prevents spending resources for time-consuming security work. That’s why it’s essential for CTOs and CPOs in FinTech to consider how their compliance risk management processes ensure technology doesn’t become a tool for fraud, money laundering, or to fund criminal organizations.
Before you start your FinTech journey, it’s worth finding out what lies in wait for your product in the U.S. regulatory field. Its landscape is convoluted, enmeshing federal and state activities and interactions among governmental and non-governmental institutions. Some of them are modern, but others are deeply rooted in history such as the Investment Advisers’ Act of 1940 (the “Advisers’ Act”), which regulates advisory firms activities.
Regulatory bodies also investigate modules introducing innovative technology such as artificial intelligence (AI) or Blockchain to prevent unintentional violations of law or customer money and data security. All these reasons envisage that a technology leader should have at least a basic understanding of what FinTech regulatory landscape is.
Why is it impossible to operate in FinTech without regulatory compliance? Which legal bodies exist to regulate FinTech unicorns’ activities, and what do they control?
To make a long story short, let’s explore legal bodies and their basic formalities in terms of robo-advisors, which must be registered investment advisors (RIAs) by the U.S. Securities and Exchange Commission (SEC) before they start operating. Together with the Financial Industry Regulatory Authority (FINRA), SEC is the basic regulatory body with which FinTech entities must be compliant.
FINRA is a non-governmental organization that manages risks in the broker–dealer industry under the oversight of SEC. What regulations does it imply?
Both SEC and FINRA stand on the investor side of things with the mission to regulate the broker–dealer market. FINRA launched its own BrokerCheck system to allow investors to overview the firm’s or investment professional’s disciplinary history, information on employees, regulatory actions, etc. These data aim to help investors prevent fraud from the advisory company’s side.
Also, FINRA has issued a “Report on Digital Investment Advice,” a guide for client-facing digital advisory systems complementing the Adviser’s Act to help digital advisory companies gain compliance. The regulatory principles it outlines include clear and transparent explanations of how their tools work, what limitations they have, and so on.
SEC is an independent federal government agency responsible for overseeing the securities markets and protecting investors. It promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.
Each independent advisor’s activity should start with its official RIA status legitimation. Also, the SEC requires each RIA to submit a form containing information about the investment adviser’s business, ownership, clients, employees, business practices, affiliations, types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, etc. and update it annually. The Investment Adviser Public Disclosure (IAPD) website, a BrokerCheck analog, was also created to make RIAs activities more transparent.
For more details on how to register your RIA and start providing advisory services, check out this how-to guide about regulatory aspects and adopting cloud.