Financial Crime World

Fintech Regulation: A Growing Concern for Industry Players

As the fintech industry continues to grow and evolve, regulatory bodies are increasingly focusing on ensuring that these companies adhere to strict standards and guidelines. In Italy, fintech operators are required to comply with specific regulations to maintain a secure and trustworthy environment.

Internal Control Framework

In Italy, fintech operators must appoint external auditors to verify their accounts and establish internal control functions. The internal control framework is divided into three lines of defense:

  • Business Units: Responsible for day-to-day operations
  • Compliance, AML, and Risk Management Functions: Ensure compliance with regulatory requirements and identify potential risks
  • Internal Audit Function: Verifies the effectiveness of these controls

In many cases, fintech companies outsource these functions to third-party providers.

Unique Challenges for Fintech Operators

Fintech operators offering both regulated and unregulated products or services face a unique challenge in Italy. While it is possible to offer non-regulated products in conjunction with regulated financial activities, it is essential to ensure that these offerings do not pose significant risks to the company’s business.

  • Creating Separate Legal Entities: Fintech companies may choose to create separate legal entities for their unregulated businesses to avoid applying regulatory rules that are not applicable
  • Managing Potential Conflicts: Companies must be mindful of potential conflicts and ensure compliance with relevant laws and regulations when offering both regulated and non-regulated services

AML and Sanctions Rules Take Center Stage

Compliance with anti-money laundering (AML) requirements is a critical aspect of fintech operations in Italy. Fintech companies must:

  • Design Remote Customer Onboarding Processes: Meet Italian regulatory obligations while creating smooth onboarding processes for customers
  • Monitor Transactions: Develop internal algorithms or systems to identify suspicious transactions and report them to the Italian Financial Intelligence Unit

Sanctions for non-screening are a significant concern, particularly in light of recent global events such as the conflict in Ukraine.

Robo-Advisers: A Growing Force in Fintech

Robot advisory activities are becoming increasingly popular in Italy, with fintech companies offering investment advice or portfolio management services in relation to various asset classes. However, the regulatory requirements applicable to these activities depend on the nature of the underlying asset class:

  • MiFID2 Rules: Apply to robot advisory services related to financial instruments
  • VASPs Registration: May be required for fintech operators offering robot advisory services connected to crypto-assets

Legacy players in the industry are also implementing solutions introduced by robo-advisers, recognizing the value of these innovative approaches in enhancing customer experiences and improving investment outcomes.

Conclusion

As the fintech landscape continues to evolve, it is essential for companies to stay abreast of regulatory developments and ensure compliance with applicable rules and guidelines. By understanding the unique challenges and regulatory requirements in Italy, fintech operators can maintain a secure and trustworthy environment for their customers.