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The legal and regulatory landscape for compliance-enabled financial solutions

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To secure the legality of their business, companies offering financial products and services must comply with a plethora of laws and regulations. Featuring prominently among these are the Anti-Money Laundering (AML), GDPR, Payments, Infosecurity…

Owing to the costly and time-consuming nature of compliance-related procedures, however, the number of businesses looking for alternatives is growing by the day. In response to the demand for such alternatives, more and more companies are beginning to offer compliance-enabled financial solutions (CEFs) that do the heavy bureaucratic lifting on behalf of their clients.

Before we get too far into the weeds, though, let’s first define our terms and proceed from there.

What is a compliance-enabled financial solution?

Put simply, a compliance-enabled financial solution is a product or service that enables a client business to provide financial services under its own name without having to obtain a banking licence or ensure regulatory compliance using its internal resources.

In other words, with a plug-and-play CEF solution, your business becomes, partly or wholly, a financial service provider, while outsourcing the associated legalities to a licensed team of industry experts. This frees up time and resources for non-financial startups, fintechs, and traditional companies to give their full attention to growth and scaling.

The current legal and regulatory landscape

Handling all the ins and outs of regulatory compliance without significant outside assistance is only a live option for big companies with plenty of staff and liquid cash to spare. For instance, the application process for a banking licence can take anywhere between 6 months and several years, depending on jurisdiction and other variables. It’s also highly expensive.

Virtually the same can be said for AML/KYC procedures, ongoing due diligence, customer risk assessments, database screening against relevant PEP and sanctions lists, and other necessary functions. Chances are, you have neither the time, nor the in-house expertise to properly deal with all of this on your own.

This means that you’ll probably have to parcel them out to different contractors, thereby incurring additional costs and exposing yourself to potential compatibility issues. Alternatively, you can start running your own compliance department that will require hiring and training extra staff – and that will never generate any revenue.

With CEF, on the other hand, you don’t have to worry about any of that in the first place.

Providers of compliance-enabled financial solutions are further obligated to implement all the necessary internal Suspicious Activity Reporting (SAR) processes, report to multiple authorities, test screening tools on a regular basis to ensure consistent quality, and maintain enough staff to cover all the bases.

Finally, it’s important to note that failure to comply with legal and regulatory requirements can result in significant penalties, legal repercussions, and reputational damage to CEF providers. This puts a good deal of additional pressure on them to stay up to date with the latest developments when it comes to national and global financial policy.

Future regulatory challenges for CEFs

The regulatory landscape is evolving rapidly, and given the challenges the world is facing today – even more changes are looming on the horizon already.

For one, the war in Ukraine, the rising US-China tensions, and the fraying fabric of global trade are forcing regulators to give more consideration to strategic autonomy, national/regional security, and customer impact. The UK’s new Consumer Duty rules, set to take effect in 2023, is one example among many of how legislation is attempting to tackle these challenges.

With the price of cryptocurrencies taking a nosedive in 2022, the EU has been working overtime to implement changes that would protect investors from future shocks. As a result, lawmakers in the European Parliament have approved the world’s first comprehensive package of rules – Markets in Crypto-Assets (MiCA) – aimed at regulating the crypto industry. 

Related to the above, there’s also growing consensus globally that stablecoins (fixed-price cryptocurrencies whose market value is attached to another stable asset) should be 100% backed by fiat currency to improve transparency and disclosure.

Another factor driving regulatory change is the ever-stronger push towards digitisation – especially since the start of the pandemic. In the absence of special rules governing AI, cloud services, and non-financial companies that provide financial services, legislators are doing their best to regulate corporate behaviour as it is expressed through technology, rather than regulating the technology itself.

In addition, there are numerous policy initiatives – at least some of which might be approved already this year – aiming to boost the resilience of companies during periods of economic upheaval, promote green bonds, ESG funds, and more.

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