The world of fintech is exciting, dynamic and fresh. So fresh in fact, that several of the laws are still under construction. In the words of Lord Hodge, fintech encounters, “unprecedented ethical and regulatory questions”. It can be a minefield for market entrants to navigate the troublesome legal avenues. If you are thinking about starting a fintech, here are some useful tips to remember:
1. How can I protect my innovation ?
The type of protection you can get depends on the laws of the country you are in (the “jurisdiction”). It varies from place to place. The usual way to protect your innovation is through a patent. But there are some rules which you should be aware of. For example, in the UK patents do not apply to ideas. They apply to names, designs, inventions or what you write, make and produce. So if you had an idea for a fintech, you could not protect it with a patent to stop somebody else using it later. This can cause some issues from time to time for the small firms with big ideas.
One possibility to get around this could be through contract law. Many firms ask contractors or employees to sign a non-disclosure agreement (NDA) or anti-competitive clause in the contract. This is to help protect their ideas from getting copied. This could be an option for your business. You could ask a lawyer to help you add this into a contract. The government has put together this useful guide on NDAs.
Once you are out of the “idea phase” and onto creating your product, you are in safer waters. Software can be patented. Although there are some criteria which firms must fulfil. The main one is that the product must be new and it must contribute something fresh to the industry.
2. How can I get funding for my start-up?
No matter how mind-blowing your idea is, if you cannot secure the funds it may never materialise. The question of funding is a very real one, over in the U.S. around 29% of new businesses fail due to a lack of cash[1]. To help overcome this, here are some guidelines and options to get you started:
Initial Public Offering (IPO): Putting (or “floating”) your company on the stock market is a popular way to secure funding. If you have a company, a business plan and feel comfortable splitting profits, this could be a good route.
Convertible Loan Notes or Advanced Subscription Agreement: Often used for new companies which are making their way into the market, this is a type of business loan... with a twist. It turns (or converts) into company shares later on. It means that seedling businesses have the funds to take off. Once the company grows, the lenders benefit from being shareholders.
Incubators: A Silicon Valley classic! Incubators can be physical office spaces or virtual ones. This is company which will help you to start up, network and get funding in return for a stake in your business. The stake varies and is often negotiable, but usually lands at around 7-10% of the company. While the majority are in the U.S., in 2017 Nesta (writing for the UK government) found 205 UK-based incubators [2]. Great for putting you in touch with angel investors, this could be a game-changer for your start-up. For firms which are past the initial stage of setting up, the next level of incubator is an “accelerator”. This is a service where the focus is less on funds and more on networking and building your business. Connecting with experts through an accelerator could be an ideal solution for your fintech.
Grants: Your business may be eligible to get money through a grant. Innovate UK is a good place to start if you are looking for financial support from the government. Have a look through the list of projects, such as the Innovate UK Smart Grants competition. You never know, you could be eligible for free money!
Borrowing money: Some banks may be reluctant to lend money to start-ups. However, there are some which specialize in exactly this. Look into options such as Silicon Valley Bank or peer-to-peer lending platforms for more information.
Speaking of funding, there are also several tax incentives available for companies such as fintech start-ups. Not to be sniffed at, these tax breaks could provide your business with a valuable extra flow of income. Certain companies, such as those developing R&D tech could get to keep up to 33% more of their money.
3. What are the rules around dealing with data?
Pre-2018, data protection laws were not designed to deal with today's digital world. 2018 saw an overhaul of the tired data-protection laws, and revolutionised the data landscape for tech companies. Customers now have much more protection, transparency and a “right to be forgotten”. Fintech firms must be especially aware of these documents when dealing with data:
General Data Protection Regulation (GDPR): This EU regulation took the tech world by storm and shook up a lot of businesses. As the biggest reform of data protection law for decades, it strengthens existing rules and creates new ones. Essentially it introduces eight protective rights for users, which every company must comply with. The penalty for non-compliance is serious. Companies face fines of up to 20 million euros or 4% of their global revenue (whichever is the greater amount of money). To get you started on the right foot, Blake Morgan have created this GDPR guide.
e-Privacy Regulation (ePR): Just on the horizon is the EU’s new e-Privacy Regulation, with a first draft already submitted. The new legislation is expected to be final this year. Replacing the 2002 e-Privacy and Electronic Communications Directive (enacted in the UK in 2003), the new “Cookie Law” looks at how cookies and direct marketing information can be used by companies. It will further tighten the rights of users to keep their personal information private.
These are data laws which apply to broadly all fintech companies, however there will almost certainly be more which are specific to your area of business.
4. How can I promote my fintech business to customers?
Promoting and marketing financial products has its own set of rules. In the UK these are decided by the Financial Conduct Authority (FCA). In a nutshell, any communication to customers must be fair, clear and not misleading. If you plan to head up your marketing with someone who has not had experience in financial services, it’s a good idea to go through the FCA’s guidebook. The guide, known as COBS (Conduct of Business Source book) has a section on the rules for communicating with clients.
The rules around financial promotions were updated in January 2018. This was with an EU directive called “Markets in Financial Instruments Directive II”, and known as MiFID II. It was implemented across the EU. So if you are marketing outside the UK, be sure to read up so that that your communications comply.
Are the rules changing?
“Sadly, it is not just a matter of the reasonable bot on the San Francisco tramcar replacing the reasonable man on the Clapham omnibus – these are just legal abstractions”. Lord Hodge, Justice of the Supreme Court, March 2019
This is a beautiful quote from Lord Hodge as it illustrates why and how the law clashes with fintech. Case law was constructed over centuries to create a refined set of rules (such as the “reasonable man on the Clapham omnibus” test). Fintech’s rise, on the other hand, has been fast and unprecedented. We are accelerating through technology faster than legislature can keep up with.
Any lagging laws are likely to change in the coming years. The UK is one of the very best-suited locations for budding fintechs. According to a 2019 government report on UK fintech, London has the highest concentration of financial and professional service firms in the world, and counting. Support is blossoming. Organisations such as Innovate Finance, FinTech Wales and FinTech Scotland are emerging to champion the cause. With its more flexible common law system, supportive government and systems in place such as Project Innovate, the UK has a strong infrastructure for the fintech movement.
This article is a guideline to help overcome of some key concerns we hear from new businesses in the fintech world. There are many more compliance and legal hurdles which should be considered as you start up your new venture. These include important rules found in the Financial Services and Markets Act 2000.
This blog is intended for general information purposes only and does not constitute legal or professional advice. Advice should be sought before proceeding with any transaction. [1] https://www.cbinsights.com/research/startup-failure-reasons-top/ [2]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/608409/business-incubators-accelerators-uk-report.pdf