UK Fintech Regulations: Set and New Regulatory Framework

Fintech in the UK has grown into a phenomenon. 

It results from careful planning, meticulous but fair fintech regulation, and a support system that helps businesses deal with challenges while staying innovative. 

Behind every new payment app or crypto platform, there’s a complex web of rules, regulations, and guidance. 

This article looks at how fintech in the UK is shaped by its regulations — and why those rules are more than just red tape.

How Fintech Firms in the UK Affect the Economy

The UK is a fintech powerhouse. Behind the numbers lies a strong, supportive environment that keeps this sector growing.

• the UK is the second-largest destination for fintech investment after the US;
• There are over 90,000 finance and insurance companies in the UK;
• There are more than 3200 fintechs with headquarters in the UK;
• The fintech adoption rate in the UK is 71%  — way more than the global average;
• Fintech is responsible for over 11 billion pounds and 76,000 jobs in the UK economy.

This didn’t happen overnight; this didn’t happen accidentally. The UK’s fintech strength comes from factors that ignite innovation, investment, and growth.

Looking to scale your fintech in the UK? Our QA experts can help you deal with complex regulations while maintaining innovation.

Book a consultation

Tell us about your project.

We’ll send back CVs and get in touch to learn more about your project.

Name*

Email*

Project Description*

I agree to the QArea Cookie Policy and Privacy Policy*

[email protected]
+1 310 388 93 34

Δ

Thank you!

We’ll be sending you some CVs within two business days.

What makes the UK so attractive for fintech companies? 

From a supportive regulatory framework and rather transparent compliance requirements to access to top talent, several key elements make the UK an ideal place to build and grow a fintech business. Here’s what drives this success:

1. A supportive regulatory environment that prioritizes innovation, trust, and mutual growth between the regulators and fintech companies.
   
2. Access to capital: venture capital, angel investors, international hubs supporting startups.
   
3. World-class talent. People from worldwide flow into the UK market looking for the best opportunities. UK companies indeed can cherry-pick the most capable and motivated specialists.
   
4. Robust infrastructure. Incentives, grants, hackathons, expos, network network-building opportunities.
   
5. A growing number of regional clusters. Fintech in the UK doesn’t mean just London.
   

So, if everything goes so well, if money, alongside the best and the brightest in the industry, are flowing in, why regulate fintech? Why invest so heavily in fintech compliance regulations?

Does this efficient and visionary fintech ecosystem require unmatched regulatory scrutiny and compliance procedures that make both startups and enterprises flinch? 

Let’s talk about problems.

Why Regulate Fintech and Ensure Compliance

On the other side of innovation lies a growing problem: financial crime.

In 2022, the cost of Financial Crime Compliance hit $274 billion globally. Money laundering alone is a massive issue, with the UN estimating its global cost between $800 billion and $2 trillion annually. In the UK, the National Crime Agency reports that over £100 billion in laundered money affects the economy yearly.

New fintech companies need to adapt quickly, or they become easy prey.

Common types of financial crime include fraud, money laundering, tax evasion, and identity theft. Ponzi schemes and other fraudulent financial practices also cause significant damage. The risks associated with billions of pounds scream for better fintech laws and regulations across the globe.

Two events that highlighted the urgent need for stricter financial regulations were:

• The 2008 banking crisis. This was largely due to gaps in regulation and compliance failures, revealing how unchecked financial systems could collapse. Common sense dictates that the only way to prevent such “bubbles” from hurting us again is for fintech products and services to be under heavy compliance obligations.
  
• The MT.Gox bankruptcy. Once, the world’s largest cryptocurrency exchange collapsed due to poor regulation and security issues. The company ignored repeated warnings, suffered from multiple hacks, and ultimately triggered significant financial losses for thousands of users. A better regulatory landscape for the fintech sector would not have saved but significantly improved, this situation.
  

These cases demonstrate why strong regulations are crucial for fintech to prevent financial crime and protect both economies and individuals. 

“It is sometimes more important to test what should NOT happen in a system than what should happen, for example, system access. People should only be able to see and do what they need to do based on their specific allocations. If these are incorrect, they could, for example, have access to other people’s data (which would also be a breach of GDPR) and could take their money, which, in turn, would be a reputational issue for the bank and also in breach of Banking Regulations.”

Bruce Mason, Delivery and UK Director, QArea

Let’s see who stands on guard.

Key Fintech Regulatory Bodies in the UK

The fintech industry in the UK operates under the oversight of several key regulatory bodies, each crucial to maintaining financial stability, promoting competition, and ensuring consumer protection. 

Financial Conduct Authority (FCA)

The FCA is the primary regulatory authority for fintech firms in the UK. It is the fundamental body of the UK regulatory landscape. Its responsibilities include:

• safeguarding consumers;
  
• maintaining the integrity of financial markets,
  
• encouraging competition.
  

It closely monitors fintech companies involved in payments, lending, and investment, ensuring they adhere to strict regulatory standards such as anti-money laundering (AML) and Know Your Customer (KYC) requirements:

• Authorization. The FCA is responsible for authorizing and registering fintech firms, ensuring they meet the necessary standards before entering the market.
  
• Conduct regulation. It oversees the behavior of local fintech firms and global fintech partners operating in the UK, focusing on consumer protection and maintaining market integrity.
  
• Innovation support. The FCA fosters innovation through initiatives like the Regulatory Sandbox while ensuring regulatory compliance.
  
• Enforcement. The FCA can investigate and take action against firms that breach regulations.
  

Bank of England

The Bank of England’s role in fintech regulation is broader but no less important regarding both more conservative and innovative fintech products. It ensures the financial system remains resilient and stable, playing a key role in overseeing payment systems, clearinghouses, and major financial institutions:

• Financial stability. It oversees the stability of the UK financial system, which can impact fintech regulations.
  
• Payment systems. The Bank regulates systemically important payment systems and service providers.
  
• Digital currencies. It’s exploring the potential for a Central Bank Digital Currency (CBDC), which could significantly impact the fintech landscape.
  

For fintechs, especially those involved in payment services or blockchain technologies, the Bank of England’s rules and regulations aim to ensure that innovations don’t undermine financial stability.

Prudential Regulation Authority (PRA)

Operating as part of the Bank of England, the PRA is a financial industry regulatory authority that focuses on the financial stability of banks, insurers, and major financial institutions, including certain fintech firms:

• Capital requirements. It sets and monitors capital and liquidity requirements for banks, building societies, credit unions, insurers, and major investment firms.
  
• Risk assessment. The PRA assesses the safety and soundness of firms, focusing on their ability to absorb shocks and avoid disruption to critical financial services.
  

The PRA’s oversight is essential for fintechs that provide banking services, ensuring they meet capital requirements and risk management protocols. PRA regulations aim to prevent a 2008-like crisis from hitting us again.

Payment Systems Regulator (PSR)

The Payment Systems Regulator (PSR) is an independent body that promotes competition and innovation in UK payment systems, overseeing fintech compliance.

We are waiting for some serious steps from them very soon — unfortunately, small players may not enjoy those fintech regulations.

It ensures that payment systems are accessible and operate smoothly, while fostering innovation in payment technologies.

Rolling out specific regulations on fintech compliance often comes with some protest from the market, stating that risk and compliance should be balanced. 

Information Commissioner’s Office (ICO)

The ICO enforces the UK’s data protection laws, including the General Data Protection Regulation (GDPR). Compliance with data protection laws is crucial for fintech companies handling sensitive personal and financial data. 

• Data protection. It enforces and oversees the UK GDPR, the Data Protection Act 2018, and other data protection legislation.
  
• Privacy rights. The ICO guides on privacy issues and has the power to fine organizations for data breaches.
  

The ICO ensures fintech firms process, store, and manage customer data in line with legal requirements, particularly regarding user consent and data security.

From navigating fintech to law-enforced protection

Two authorities play less role in fintech regulatory work in terms of laws and compliance norms, but are always there to enforce them, track the fraud, and protect the country and its citizens. 

The National Economic Crime Center — NECC — will actively target criminals defrauding British citizens, undermining UK industries, and exploiting the country’s financial services. Its goal is to ensure industries and government agencies are equipped to prevent economic crime while improving protections for citizens across the UK.

Through coordinated efforts, it aims to make the UK a more secure and resilient place to do business, minimizing the impact of financial crime on society.

The UK Financial Intelligence Unit (UKFIU) — the UK analogue of the Financial Crimes Enforcement Network in the US — cooperates with all the agencies and regulators mentioned above. It is responsible for analyzing and disseminating intelligence submitted through the Suspicious Activity Reports (SARs) regime to share with law enforcement agencies at home and internationally.

No matter how supportive fintech regulation in the UK is, NECC and UKFIU are there to say, “you play around — you find out.”

Need help ensuring your fintech meets FCA requirements? Our compliance – focused QA team can audit your systems and processes

Get started

Tell us about your project.

We’ll send back CVs and get in touch to learn more about your project.

Name*

Email*

Project Description*

I agree to the QArea Cookie Policy and Privacy Policy*

[email protected]
+1 310 388 93 34

Δ

Thank you!

We’ll be sending you some CVs within two business days.

Core UK Regulations: Main Frameworks for Fintech Compliance

Payment Services Regulations 2017 (PSR)

The Payment Services Regulations ensure that payment providers operate with transparency and safeguard customer interests. 

For fintech companies, this means offering secure, clear, and reliable payment processes that comply with strict rules on data handling, transaction security, and customer protection.

• Implements the EU’s Second Payment Services Directive (PSD2) in the UK
  
• Covers services like money transfers, payment initiation, and account information services
  
• Mandates strong customer authentication for electronic payments
  
• Requires clear information disclosure to customers about payment services
  

Impact. Opens up banking data to third-party providers, fostering Open Banking initiatives. Sets security standards for online and mobile payments

Electronic Money Regulations 2011

These regulations focus on protecting customers’ electronic money and ensuring that fintech companies managing digital wallets or prepaid cards are financially sound. They also set the standards for how these companies manage users’ funds.

• Defines electronic money and sets rules for its issuance and redemption
  
• Establishes safeguarding requirements for customer funds
  
• Sets out capital requirements for e-money institutions
  

Impact. Governs digital wallet providers and prepaid card issuers. Ensures protection of customer funds in digital formats

Financial Services and Markets Act 2000 (FSMA)

The FSMA governs much of the financial activity in the UK, requiring fintechs to be authorized by regulators like the FCA or PRA. It covers everything from how fintech firms manage their services to how they protect consumers.

• Establishes the FCA and PRA as regulatory authorities
  
• Defines regulated activities requiring authorization
  
• Sets out the general prohibition on unauthorized businesses
  

Impact: Determines which fintech activities require FCA authorization. Provides the basis for enforcement actions against non-compliant firms

Money Laundering Regulations 2017

These Regulations are designed to prevent criminal activities like money laundering and terrorism financing. Fintechs are required to implement strong AML controls, such as identity checks and ongoing transaction monitoring.

• Implements risk-based approach to customer due diligence
  
• Requires appointment of a money laundering reporting officer
  
• Mandates suspicious activity reporting
  
• Sets out requirements for record-keeping and staff training
  

Impact. Requires robust KYC and AML procedures. Affects customer onboarding processes and ongoing monitoring

Data Protection Act 2018

The Data Protection Act 2018 works alongside the GDPR, giving more details on how data protection laws apply in the UK. It outlines specific rules for sectors like healthcare and law enforcement, but fintechs are also covered under this law, particularly when processing customer data for services like payments or loans.

Network and Information Systems Regulations 2018

The Network and Information Systems (NIS) Regulations focus on the security of essential services, including fintech companies that manage large volumes of data. These regulations aim to prevent cybersecurity incidents that could disrupt services and ensure that companies have systems in place to detect and respond to threats.

General Data Protection Regulation (GDPR) and UK GDPR

The GDPR is the EU’s data protection law, but after Brexit, the UK introduced its version, the UK GDPR. Both laws set strict guidelines on how companies handle personal data, such as ensuring transparency, obtaining consent, and protecting data against misuse.

Open Banking and PSD2 Compliance

Open Banking and the Payment Services Directive 2 (PSD2) have transformed the fintech landscape by allowing secure financial data sharing between banks and third-party providers. For fintechs, complying with these regulations means meeting specific technical and security standards. Here’s a breakdown of the key elements of Open Banking and PSD2 compliance.

Open Banking Implementation Entity (OBIE) Standards

The Open Banking Implementation Entity (OBIE) sets the technical standards for how banks and fintechs should share financial data securely. This involves using APIs (application programming interfaces) to allow third-party providers access to customer data, with the customer’s consent, of course. These standards ensure that all parties are working with the same technical rules, making the process more secure and reliable.

What this means for fintech
Fintech entities must develop APIs that meet OBIE standards to allow secure and seamless data sharing. This means working on secure API design, testing for vulnerabilities, and ensuring that user data is handled correctly and efficiently.

Challenges
One of the biggest challenges is keeping up with the evolving standards and making sure APIs remain secure. Regular updates and testing are necessary to stay compliant with OBIE and avoid potential security breaches.

Strong Customer Authentication (SCA) Requirements

Strong Customer Authentication (SCA) is a key requirement under PSD2, designed to make online payments more secure. It requires that two or more authentication methods are used to verify a user’s identity during a transaction. This can include something the user knows (like a password), something they possess (like a phone), or something they are (like a fingerprint).

What this means for fintech
Fintechs must implement SCA into their payment systems, ensuring that customers are verified through multiple layers of security. This adds an extra step in the user journey but is essential for compliance and preventing fraud.

Challenges
Implementing SCA without disrupting the customer experience is tricky. Fintechs need to balance security and convenience, ensuring that authentication processes are smooth while remaining secure. This requires careful testing of user flows and authentication systems to prevent friction in the payment process.

Testing considerations for APIs and third-party access

APIs are at the heart of Open Banking, and their security is crucial. Fintechs must regularly test their APIs to ensure they work securely with third-party providers, verifying that authorized users only access data and that no vulnerabilities are left exposed.

What this means for fintech
API testing should ensure that third-party access is controlled and that potential security gaps are identified and fixed. This includes penetration testing, validating authentication flows, and ensuring that customer data is always encrypted and protected.

Challenges
Managing consistent security across all systems can be challenging with multiple third-party integrations. Fintechs must continuously test their APIs to ensure they meet compliance standards and prevent unauthorized access.

Building Open Banking APIs? Let our QA specialists ensure your integrations are secure and compliant

Request a demo

Tell us about your project.

We’ll send back CVs and get in touch to learn more about your project.

Name*

Email*

Project Description*

I agree to the QArea Cookie Policy and Privacy Policy*

[email protected]
+1 310 388 93 34

Δ

Thank you!

We’ll be sending you some CVs within two business days.

Anti-Money Laundering (AML) and Know Your Customer (KYC)

Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations prevent illegal activities such as money laundering and terrorist financing. For fintech companies, compliance with these regulations involves strict processes for customer verification, transaction monitoring, and reporting suspicious activities. 

Customer Due Diligence (CDD) Requirements

Customer Due Diligence (CDD) is the process of verifying the identity of customers before they are allowed to use financial services. This typically involves collecting and verifying personal information such as names, addresses, and identification documents. CDD also includes ongoing monitoring to ensure the customer’s activity remains consistent with their risk profile.

What this means for fintech
Fintech companies must have robust CDD processes in place to confirm the identity of each customer and assess their risk. This is especially important for high-risk customers, where enhanced due diligence may be required, including verifying the source of funds or conducting deeper background checks.

Challenges
The main challenge is balancing thorough identity checks with a smooth user experience. Fintechs must collect and verify the required documents without frustrating users or creating long onboarding times. Automated systems can help, but they need to be tested thoroughly to ensure accuracy and compliance.

Transaction monitoring and reporting obligations

Transaction monitoring is crucial in identifying suspicious activity, such as unusual payment patterns or transactions that don’t align with a customer’s normal behavior. Fintech companies are required to report any suspicious activity to relevant authorities, typically through Suspicious Activity Reports (SARs).

What this means for fintech
Fintechs must implement transaction monitoring systems that automatically flag suspicious transactions based on specific criteria, such as large transfers or frequent international payments. Once flagged, these transactions must be reviewed and reported if necessary.

Challenges
A common issue is dealing with false positives—transactions that are flagged as suspicious but are legitimate. These can overwhelm compliance teams and slow down the process. Effective testing and fine-tuning of transaction monitoring algorithms are essential to reduce false positives while ensuring that actual risks are caught.

How QA and Testing Help Fintech Companies Follow Key Regulations

In fintech, where compliance, security, and performance are paramount, QA and testing are indispensable. Fintech compliance in the UK takes much more than clicking a few “I agree” boxes. Here’s how QA processes help address specific fintech requirements practically and efficiently. 

Compliance testing

QA helps fintech companies meet stringent regulatory requirements by ensuring systems adhere to key frameworks like GDPR, PSR, and AML/KYC. Compliance testing ensures that financial applications meet these legal standards, which is especially useful when regulations are frequently updated.

Automated tests ensure that personal data is encrypted and only accessible to authorized users, helping fintechs comply with GDPR without human oversight.

Security testing

With rising concerns about cybercrime, security testing identifies vulnerabilities and tests for potential attacks. This includes penetration testing and vulnerability assessments to ensure that sensitive financial data remains secure.