Fintechs hoping to get approved by the UK financial regulator are in for a long wait.
The Financial Conduct Authority (FCA) is in high demand after seeing a 70% spike in applications for payment licences in the past year, fuelled by Brexit rule changes and a flurry of new, cash-rich startups.
But the FCA is struggling to cope with the influx, London fintechs say.
Sifted spoke to nearly a dozen fintechs who complained the FCA had left them in the dark for months about the status of their applications.
Many of the individuals interviewed by Sifted believe that the wait time for regulatory approval has doubled, with the average process now expected to take up to a year.
They also voiced fears the holdup could impact the development of the UK's fintech community, which the UK government promised to support just months ago, following the Khalifa report.
Among those affected is Jack*, the head of compliance at a London fintech, who asked for his real name to be kept private.
His company submitted an e-money institute (EMI) application to the FCA nine months ago, but still hasn't gotten a response about the status or quality of the application. It took five months to even get a caseworker, who he says has been largely unresponsive and has given little guidance.
“The caseworker...has only come back and asked a few questions... Every email says they're doing background checks but there are no substantive questions," they told Sifted.
He added: "It shouldn't take you three months to tell us you’re missing documents... The communication is shit."
Getting licensed as an EMI is essential for financial startups who want to scale and have autonomy over product development. Most major fintechs like Revolut and Tide are all EMIs, which can be a lighter (and cheaper) alternative to getting a bank licence. Until startups get approved as EMIs, they must rely on third parties' licences, which is costly and limiting, Jack says.
Alison Donnelly, an independent consultant and former FCA employee, says several of her fintech clients are also suffering from the bureaucratic bottleneck.
"The [FCA] authorisation team has been over-stretched for a while," she says. "Two years ago, you could have been authorised in 4 months. The process was relatively efficient...But it's taking a lot longer [now]."
It's even worse for fintechs that handle cryptocurrencies, Donnelly added, noting that these companies are facing particularly long delays to get registered with the FCA.
"It causes a great deal of uncertainty and additional cost for new businesses if the application process is lengthy," she stressed.
These complaints haven’t fallen totally on deaf ears. In July, the FCA admitted falling short of its response targets in its annual services report, finding it had failed to meet 45% of its standards, including processing applications, updating the register and responding to complaints.
The report concluded that it planned to hire more personnel to support companies and streamline applications.
The FCA is legally mandated to give a verdict on completed applications within 12 months, although anything deemed ‘incomplete’ can take longer.
The FCA explains
Part of the issue for the FCA is the sheer number of e-money applications it's received this year.
“Demand for authorisation under the e-money regulations (EMRs) is growing by c.70%," the FCA said in an email to Sifted.
But that's not the only problem they're overwhelmed. An FCA spokesperson flagged that, for the most part, fintechs are submitting incomplete or weak applications.
“While delays have a number of reasons, typically the quality of applications we receive under EMRs is poor. As a result, we’re approving fewer of them. What’s more, due to the pandemic, we’ve seen firms struggling to provide the documentation we need," the FCA told Sifted in an email.
The regulator noted that in Q4 2020, just 35 of 90 completed assessments received approval for registration or authorisation.
That could well mean the standard for approval is getting higher, introducing new elements like a ‘wind down plan’ and extensive compliance procedures.
"They're being a lot more cautious,” Donnelly told Sifted.
This shakeup may have been prompted by the Wirecard debacle last year, which raised difficult questions about the FCA’s supervision and controls over EMIs. The saga resulted in the FCA freezing thousands of customers' accounts in a frantic effort to ensure EMI funds were safeguarded and had not been caught up in the Wirecard fraud.
Some EMIs are also being used as a vehicle for money laundering in the UK, an investigation by OpenDemocracy has found.
It’s now a difficult balance between agility and security for the FCA, which has previously been credited as one of the most forward-thinking regulators in the world. This follows initiatives like its regulatory sandbox, allowing hundreds of young fintechs to test their solutions before going live.
Personnel shortages and culture
Aside from the influx of applications, the FCA’s personnel issues may be another aggravating factor.
Insiders say the FCA is burdened by bureaucratic fatigue, which is adding to fintechs' troubles.
According to one senior industry expert who works closely with the FCA, the organisation has struggled to keep — and motivate — its personnel in recent years.
"The turnover in staff there is extraordinary. There's a lot of absenteeism. It's a very strange culture... Morale is low there," the official said.
"With the single exception of the communications team, nobody puts their phone number on their email," they quipped.
Moreover, the FCA shrunk last year after making over 100 members of its team eligible for voluntary redundancy.
Yet it's not just management issues and high staff turnover. The FCA has also been bogged down by Brexit changes and the pandemic, says Donnelly.
"It had to divert a lot of resources to issuing and analysing the industry surveys when the UK locked down. It's taken a lot of people from authorisation [teams]," she said.
The output of the industry surveys then prompted further scrutiny of existing firms too, she adds, compounding the buildup.
For its part, the FCA reiterated to Sifted that it was hiring to fill the vacancies and deal with the resource strain. It also said it would be communicating "with all firms currently awaiting a case officer."
But fintechs may now need to brace for a tougher — and stricter — regulator, ready to keep its EMI cohort in check.
