How to build a Fintech startup — Chapter 1

Introduction

This blog mini-series will focus on the vital steps to building a UK/EU fintech startup. The aim is to share with you our experiences and the lessons we’ve learned along the way from building WealthKernel: the “shopify” of financial services. At the time of writing, my experience is heavily weighted towards wealth management and auxiliary services, so I add a disclaimer relative to applying my advice to other regulated areas, such as payments, which are significantly different. Also note this mini-series will focus primarily on dealing with regulators, an area considered by most as a major blocker.

Chapter 1 — Preparing to file your FCA application

Relax, it’s not as bad as you think. A decade of heavy fines have painted the FCA as the big bad regulator, but truth be told they are open to entrepreneurs entering their realm. Ironically, you will most probably encounter far more closed minds in the industry than at the FCA. I won’t lie to you, though, they are a large bureaucratic institution and every step forward will require the sign-off of a different gatekeeper. Some might be more open to innovation than others, but in the end they all share a strong commitment to enforce the FCA’s core principles. If you had to focus on a particular one to embed in your firm culture, I recommend familiarising yourself with number 6: Treating Customers Fairly (TCF). I plan on covering these principles and how to incorporate them in company culture in more details in subsequent posts.

The Ingredients

9 Months

Yes, that’s how long it takes, at least… And don’t think you’re special and will magically get that number dropped to 6 (we sure thought we could). Thanks to the innovation hub, we were assigned a case officer within a matter of weeks instead of months, but due to the innovative nature of our requests our application took 12 months. We’ll come back to this later and how to avoid the increase in a subsequent chapter.

1 Prototype in the works

As a firm looking to launch with a digital product, you will be asked to demonstrate something as early as your first review meeting (2 months into the application). Be prepared. Make sure the prototype carries the right disclaimers. Consultants will tend to recommend taking a cautious approach that involves putting blanket disclaimers everywhere. Remember, this need only be a prototype. Your case officers want to see what the final product will look like. Don’t worry about data driving your charts or beefing up your security, click dummies are fine. Also don’t worry if this is far from your ideal product (bloated with disclaimers); come launch day the final product can be very different.

1 Custodian lined up

This was our hardest challenge, as there are few custodians in London willing to take on a small unproven business. All were reluctant to even consider us unless we had an FCA license. Don’t despair, when filling out the initial application you can always use your best guess or the company your prospects are looking the strongest with. We ended up changing ours in the final stretch of the application.

1 Compliance officer (CF10/CF11)

With a bit of studying anyone can be a compliance officer. Some consultants will recommend that you temporarily assign them as this person. I disagree with this approach. As a company who operates in the EU and UK regulated financial markets, compliance is no longer an afterthought. It sits at the core of everything you do. This is knowledge you want in house and to entrust to a founder or an early employee. Taking the long road pays off in many ways: strong sales reassurance, great innovativeness, better ability to lobby and discuss important topics with regulators. Embrace it, own it and you will be greatly rewarded.

Exams I recommend taking:

  • Global Financial Compliance (CISI): 1 to 2 weeks of solid studying
  • Regulation Compliance (CISI): 1 or more months of studying. Similar to a CFA level 1. Expect at least 100 hours of studying

You might not need to sit the Regulation Compliance exam if your application is straightforward. For those of you looking at retail advice, consider taking it. One word of advice: don’t be an idealist, this exam is all about cramming as much as possible. I spent the better part of my 100hrs reading and gaining a deep understanding of the content, but in the end I realised the most important aspect was regurgitating long lists of core principles or rules. I also recommend taking the official mock exam a month earlier, it will provide you with an accurate representation of what to expect.

2 Product specialists (CF30)

For this role you will need someone with relevant experience and qualifications. These are more formerly established and can be found on the FCA’s website. In our case, Karan, co-founder/CEO, was formerly a portfolio manager at Barclays Wealth and had the necessary qualifications for being an investment CF30 RDR. He has a full CFA, IMC level 1 and 2. Remember all CF staff members need to be fit for purpose, this means in addition to being qualified they need a clean record. You will also need to include an alternate person to replace the first in case something happens. An easy way around this is to set up a locum agreement with the compliance consultant that helps you with your application (worth mentioning in the price negotiation).

£50k in capital reserves

These are your BIPRU ICAAP reserves: the higher of 6 months of operation capital or £50k. You need these to ensure your business has an an orderly exit if things don’t go well. You will need to prove this cash is on hand at the end of the authorisation process, when the firm is ready to go live.

Funding

These are the funds used for creating the business. You need to specify this amount in your application and be aware you will also need to show proof you actually raised this amount. This can be done through bank statements or the HMRC share register. Your final approval will be contingent on your raising this amount, so don’t inflate it unnecessarily.

In chapter 2 we will discuss submitting the application.