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Operating as a Fintech in the United Kingdom

 
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Banking License Types in the United Kingdom

Since the emergence of fintech companies, rapid revenue growth has more than doubled in the past four years. In 2015 the mobile payment revenue is reported to have been worth US450 billion and today in 2019 it is said to exceed the US1 trillion mark. It is very easy to trace the trajectory when you place the market under a microscope and inspect the full diversity of the platform. Companies such as Crowdfunder can boast of £20 million raised by mobile bank Monzo, who operate outside the confines of ‘the bricks and mortar’ of traditional banking allowing private investors the direct opportunity to invest in start-ups with a single swipe of a device.

If we look at the impact robo-advising is having on stock trading by providing recommendations based on collected algorithms, we can see how the data from online transaction can inform the market. Either way, there is an app for you that can transform a device into a digital wallet. As the trend of UK mobile payments hit 24% of all transactions last year, cash payments accounted for just 22% of all purchases according to the British Retail Consortium.

But of course, every unicorn company, coder and entrepreneur, whether you are one of the 5,779 financial technology start-ups in the Americas or one of the 3,583 in Europe, you must comply with the regulatory framework your geographical location demands. In order for your company to run efficiently, credibly and most importantly legally within the international financial system, you will need to acquire a license to operate and understand what license your company requires, who regulates it and of course what is the procedure in obtaining one.

Here we will look into the two main license types in the United Kingdom and the steps you have to take to get your fintech company up and running legally. 

 
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Banking License Types in the United Kingdom

It is important to determine, as a fintech, the exact status of your business in accordance with UK financial law definitions. Doing so will allow you to ascertain whether banking license types in the United Kingdom are for you – or whether an e-money one is more suitable. According to Prudential Regulation Authority (PRA), the definition of a bank is as follows: “1. a firm with a Part 4A Permission to carry on the regulated activity of accepting deposits and is a credit institution, but is not a credit union, friendly society or a building society; or 2. an EEA bank (EAA banks are in general subject to their home regulatory regime and are therefore excluded from the definition).”

If you are wishing to set up a fintech business that will function as a bank in the UK (ie accepting deposits and offering loans and credit), you will need to apply for a UK banking license to operate as a wholly owned subsidiary there. This is the case even if you already hold a banking license in another country. However, “passporting” may be an option for extending your business to the UK without re-registering if you already have a relevant license in another EEA country (for more details see www.fca.org.uk).

The New Bank Start-Up Unit is the place to begin your banking journey. This initiative is the product of the PRA and the Financial Conduct Authority (FCA) who together assess and authorise any new application from an entity wishing to operate as a bank in the UK. It is necessary to demonstrate to these regulators your capacity to function effectively, diligently and most of all stably in a banking capacity in accordance with their strict criteria.

Before any meeting with the PRA and FCA is held, the Early Stages of the unit advise on whether becoming a bank in the UK is for you and the alternatives available to you. This is followed by the Pre-Application stage, where meetings with PRA and FCA representatives are used to explain later parts of the unit and help you decide on whether to take the process further, mindful of the £25,000 fee that applying for a UK banking license entails. 

Should you proceed to the actual Application stage, your relevant forms and fee are submitted to the PRA and FCA for them to assess whether approval for bank status will be granted. A decision will be made within a six-month statutory deadline should the application have been correctly and completely filled; the decision is likely to take longer if information is lacking in quality or quantity from your forms – up to a year.

An optional phase of the New Bank Start-Up Unit is relevant during the Application stage. This “Mobilisation” period allows for you to develop your bank – securing recruitment, IT resources, third-party suppliers, etc – before the business becomes fully operational, providing of course that licensing approval has been pre-granted.

After Authorisation is the final stage of the New Bank Start-Up Unit, and involves ongoing supervision and support from both the main regulating bodies. You will be advised during the application process as to what to expect as a newly operating bank in the UK and what is required of you.

Useful link for banking license types in the United Kingdom: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/new-bank/new-bank-start-up-unit-guide

 
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E-money License: Alternative to Banking License Types in the United Kingdom

If you have made sure your company is not by UK financial definition a bank – for instance your fintech business serves to move money around instead of hold it – then an e-money license for operations in the UK could be for you.

There are two options in regard to registering an Electronic Money Institution (EMI) license in the UK. There is the Classic EMI, which incurs a fee of £5,000 to be paid to the FCA, and a Small EMI, which is applicable if your turnover is no more than EUR3,000,000. If by the time you apply your company is not active, then the turnover will be according to forecasts. If Small EMI is applicable, you will have to pay the FCA £1,000. It will take three months for terms of registration to be approved if there are no FCA questions regarding the submitted application, but up to 12 months if the FCA requires additional documents.

It is important to note that top management should possess the relevant experience to oversee the operations. The FCA emphasises that this is a major factor in your application and those who do not have the relevant experience usually will not be granted the license.

It is imperative that your company has more directors resident in the UK than abroad, but their nationalities do not matter. All board meetings must also be held in the UK. The CEO must be a resident in the UK as well as the compliance manager. The law also states that the anti-money-laundering officer must be a UK resident too. Once you have completed your business plan, detailing the activities and services your company will undertake and supply, and your disaster recovery procedures are in place, you will need to apply for an e-money license.

 
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The Impact of Brexit on Fintech: Banking License Types in the United Kingdom

Even though the UK is due to leave the EU officially on the 31st October 2019, many businesses are still setting up there, especially in London, often with European operations. If you are considering having a fintech presence there, however, it is worth being prepared for the possibility of the country leaving without a deal, which is still the case at the time of writing.

As a fintech, you will no doubt be aware of the need for specialist skills from your staff. Should the outcome for the UK be a no-deal Brexit, sourcing the right team may become more challenging given that the freedom of movement in the labour market could be compromised. This could result in more workers from other countries in Europe having to leave the UK as residence permits and work visas become too expensive. This may mean a narrowing of scope in your recruitment drive.

Another potential issue to arise from a no-deal Brexit is the ending of the UK’s “passporting” ability currently available to fintechs. This feature allows those licensed to operate within the European Economic Area to do business in any country of the EEA. It is a considerable perk as it means registration in the UK is not necessary if you already have a license elsewhere in the EEA. Once the UK leaves the EU at the end of October, however, the passporting benefit could no longer exist. With no official deal in place, UK-based fintech players will be anxious to know what the future holds for how they will be able to continue serving their European clientele, who represent key business for them. Having to apply for authorisation to do business in each country is now an unwelcome possibility and would clearly ramp up costs for a UK-based fintech. 

 
Arthur Shah-Nazarov