What is Fintech?
“Fintech” is a sub-sector of the eBusiness sector and stands for Financial Technologies; that is, technologies used in the financial services sector. The Isle of Man has shown great enthusiasm for the Fintech sector and the development of Fintech products.
The established finance and e-gaming sectors, along with the technical infrastructure, have made the Fintech market a natural fit in the Island. Government has quickly established regulatory and fiscal control, processes and procedures to allow Fintech businesses to establish on the Island while providing necessary protection for both businesses and customers.
The Regulatory Position in the Isle of Man
In the Isle of Man, financial services are governed principally by the Financial Services Act 2008 (FSA08), which sets out a general prohibition against a person carrying on, or holding themselves out as carrying on, by way of business, in or from the Isle of Man, a financial services activity without a licence or in breach of licence conditions unless an exclusion (as set out in the Regulated Activities Order 2011 (as amended in 2013 and 2016) (RAO2011)) or an exemption (as set out in the Financial Services (Exemptions) Regulations 2011 (as amended in 2013 and 2016)) applies. The Isle of Man Financial Services Authority (IOMFSA) is the regulator responsible for enforcing compliance with the FSA08.
The Isle of Man is well known for its innovation in the financial services and e-gaming industries and is continually looking to expand and diversify business in the Island. The development of the Fintech sector corresponds with the regulatory objectives of the IOMFSA, which include securing an appropriate degree of protection for customers of persons carrying on a regulated activity, the reduction of financial crime and to support the Island’s economy.
Regulation of financial services providers continues to evolve to accommodate new technologies and forms of business. In 2015, a regulatory framework was established for digital currencies by introducing anti-money laundering and Know Your Customer requirements to the sector, one of the first jurisdictions to do so. Having embraced digital currencies, distributed ledger technology and blockchain, companies working in this area have since begun to arrive in the Island.
Crowdfunding as Fintech
Continually developing, the regulatory regime applicable to financial service providers was expanded again in 2016 to welcome the introduction of crowdfunding as a regulated activity (under the Regulated Activities (Amendment) Order 2016).
One of the factors behind the proposal to create a new regulatory environment for crowdfunding was the Department of Economic Development’s drive to actively attract new businesses to the Island. Alongside this, the IOMFSA also acknowledged that there had been a rise in equity and loan crowdfunding which had been brought about by innovation coupled with a downturn in lending from traditional sources, for example banks, following the financial crisis. Creating a regulatory environment for both debt and equity based crowdfunding platforms on the Island provides an element of consumer protection, which was a key component of the Isle of Man Government’s “Vision 2020” plan.
The types of crowdfunding available to businesses in the Isle of Man include loan (or debt) crowdfunding and equity (or investment) crowdfunding. Loan based crowdfunding offers financial returns to the lender through interest on the amount lent. Equity based crowdfunding involves the investor lending money in return for investment in the borrower’s business, for example, by way of shares. Operating loan based crowdfunding platforms is licensable as a Class 6 activity under the RAO2011, in particular: (i) the operation of an electronic platform in relation to lending in which the operator of the electronic platform facilitates persons to become lenders or borrowers and (ii) the administration of crowdfunded lending, including the transfer of repayment funds from borrower to lender and debt collection in relation thereto. Class 6 of the RAO2011 also covers the operation of equity based crowdfunding services, which means the operation of an electronic platform in relation to arranging deals in investments in which the operator of the electronic platform facilitates persons to become issuers of investments or direct investors.
The Isle of Man is not the only jurisdiction to welcome Fintech businesses. The United Kingdom and Europe all encourage Fintech start-ups, albeit with different levels of regulation. However, with Brexit looming and the uncertainty of what impact this will have on the Fintech sector in the UK and Europe, offshore jurisdictions could benefit from Fintech businesses looking to relocate. With increasing numbers of co-operation agreements between regulatory bodies, including agreements between the Australian Securities & Investments Commission and the Hong Kong Securities and Futures Commission and the United Kingdom’s Financial Conduct Authority and the Hong Kong Securities and Futures Commission, regulatory co-operation could appear attractive to businesses looking for certainty and stability. If the Isle of Man wants to maintain its position as a jurisdiction of choice for Fintech businesses, should the Island be looking at forming such relationships with other off-shore regulatory bodies?
The IOMFSA recognises that a balance needs to be struck between maximising the opportunities available to Fintech whilst also providing regulatory control to minimise risks to consumers and businesses. Going forward, it is to be hoped that the Island’s unique position will allow the IOMFSA to react swiftly to market demands where this is consistent with the discharge of its regulatory functions.