Regulation and the FinTech Entrepreneur
Written by Joel Blom, Experienced Financial Services Executive and Entrepreneur
So you are a FinTech entrepreneur with the vision to blaze new trails and create exciting new products. Your only problem is that giant boulder of regulations directly in your path that is holding you back from your ultimate elegant solution. Or is it?
You don’t need to do an Einstein thought experiment to visualize an environment without effective financial regulation. Very simply, would you feel more comfortable trading in Somalia or Zurich? Experienced financial people know that it requires effective regulation to promote open, transparent, well-functioning markets.
Nobody with real world experience wants fully deregulated financial markets. As an attorney once pointed out to me, each rule is the result of someone losing money. For example, money transfer rules allow for exchanges of funds to take place millions of times per day with minimal disruption and the rapid correction of problems. Even if you lived in a country with a perfect court system where the results were always exactly what you would personally expect, you would still want money transfer regulation. Given that money transfers are time sensitive, you would be very cautious of using a system where you have to routinely go to court to resolve issues, even if you were ultimately treated fairly.
Industry participants want “appropriate” regulation, which is where issues arise. What is appropriate? There is a natural tension between the industry and governments, who have to consider all stakeholders as well as bend to political pressures. Those pressures often result in industry viewing the resulting regulations as invasive. Adding to this difficult mix, technology capabilities will typically move faster than the regulatory environment can keep up.
This is not the place for me to propose a theory of financial regulation; the point is that regulation / deregulation is not the appropriate dichotomy. There will be regulation as a fact of life working in financial services. If you are an entrepreneur who wants to work in a green field free of such considerations and invent the next Snapchat, find a different industry.
Regulations are the operating system of the financial world and you need to accommodate yourself to them. As an entrepreneur you cannot bring to market a new technology solution that does not work within the regulatory framework of your business. You will waste a lot of good effort if you wait to consult your lawyer until after you build your brilliant idea.
While you need a smart lawyer, it is fully as important for you to be personally acquainted with the rules that apply to your business as it is for you to be technically proficient. For me, the US Securities Act of 1934, along with the rules that have been written to implement it make a good antidote for wakefulness, but are invaluable to know for working in the US securities markets. If you think that a rule does not make sense, that only means that you need to learn more. The regulatory environment influences every decision you make during your day and you can’t stop to call your attorney several times a week, nor can a startup afford that kind of legal handholding.
As you work in the rarified air of new technology and new financial solutions, you will often find that existing regulations have never contemplated your latest vision. You may well find yourself and your investors / sponsors advocating regulatory change to accommodate your product or service. In that situation it is even more important for you to understand current regulations and why they were enacted. Your knowledge will allow you to frame your argument for change within the goals of safeguarding the various stakeholders that the regulations already address. Don’t make the mistake of ignoring the influences that created the current environment.
Above all, do not be discouraged! Financial services are too important to a nation’s economy to be ignored by politicians and regulators, so embrace the challenge of working in such an important field. Let the constraints push you to your best thinking, and keep innovating to create a better future.