The Consumer Financial Protection Bureau (CFPB) in the U.S. is the trend setter in financial regulations. Other markets follow their lead. However, The Financial Conduct Authority (FCA), and to a certain extent the Prudential Regulatory Authority (PRA), both in the UK, have been way ahead in regulating alternate financial institutions engaged in distributing consumer credit and/or taking public deposits. The higher threshold has led to a consolidation in the industry with only serious, well-capitalized firms left in the market. This has also led to increased investor confidence with FinTech valuations firming up in the UK.
U.S. companies that want to enter the UK market must keep an eye on the regulatory environment. In fact, ensuring your company is on the right side of the FCA and PRA is an important part of a CEO’s job. With the CFPB cracking the whip on the U.S. companies, startups are looking for new avenues to expand and grow. One of the most lucrative markets is the UK, the birthplace of peer-to-peer lending.
One advantage to doing business in the UK is they’ve already gone through a massive regulatory upheaval. Now the dust has settled and there are clearer rules than in the U.S. The FCA has been considerably more responsive to challenger banks than the U.S., but a lot of that has to do with the public mistrust of banks after the recession in the U.S., and the LIBOR fixing scandal. Big banks vacated the consumer and small business lending space while challenger banks like Metro, Fidor and Atom took it upon themselves to capture the UK market.
U.S. firms are also looking to take a bite of the pie via mergers and acquisitions in the UK. But it is extremely important for American firms to be cognizant of UK laws governing the sector. A specialist UK law firm is a wise investment.
What a UK Law Firm Can Do For Your U.S. Company
Walker Morris is a renowned full-service commercial law firm in Leeds ranked among the top 20 law firms in the UK by Bloomberg. Their specialty is helping U.S. companies establish a foothold in the UK market. They’ve previously represented U.S.-based alternate finance providers Enova and Avant, both os which raised hundreds of millions in VC money for expansion into the UK. Jeanette Burgess, a partner at Walker Morris LLP, heads the regulatory services team. She advises U.S. lenders acquiring in the UK on all aspects of UK regulations that include financial services, health and safety, and data protection. Debbie Jackson, one of the partners in the corporate group at the firm, specializes in handling compliance issues such as M&As and corporate governance.
While the UK government has been supportive of the FinTech sector, there has been a public clamor for tougher regulations for alternative finance providers. This has led to the FCA examining whether retail lenders understand the risks of such platforms.
Another area of concern is investor demand. As demand increases and more funds flow to platforms, startups are forced to dilute their lending criteria, which leads to default rate increases. Burgess and Jackson are worried this could lead to a dot-com-like crash if left unattended, which is why the firm favors tighter compliance. They believe it will lead to fewer alternate finance platforms taking advantage of less experienced lenders.
There is increasing global concern about the effect of Brexit on the British alternative lending market. Walker Morris, however, does not see any major adverse consequences coming from Brexit.
Another factor in play is that England will start exit proceedings by March 2017 and the divorce from the European Union should take around two years. So there might be some lag time in feeling the full ramifications of the vote. Walking Morris has actually seen an uptick in business with many continental firms looking to establish a presence in the UK.
In response to public and political pressure, the FCA has become cautious. Usually, the process of P2P firm authorization is less onerous than for full-service credit firms. The FCA has a statutory maximum of six months for deciding on an application. They can extend that up to 12 months and more if they require more information. Walker Morris has seen a lot of startups wait in limbo for getting their license. This increases the attraction for U.S. firm to buy an already-licensed UK company as compared to waiting for over a year to gain entry to the UK market.
UK regulatory bodies have been engaging and supportive after seeing the value of credit innovation brought by the young startups. As the sector matured and billions of pounds began pouring into the market, it became essential for the FCA to ensure the little guy investing his retirement money isn’t hurt. This led to tighter scrutiny and tougher regulations, necessitating the need for having a full-service law firm on your side. Investors will see increased value in getting a top-tier law firm on board as this could be the difference between winning and losing a fast moving market.
Written with Heena Dhir.