The Future of Financial Licensing: What to Expect
According to statements by many leading representatives of our time, the overall global financial market is preparing for a reform in the access of financial organizations to the commercial space. Instead of disparate regulatory requirements for applicants, it is proposed to introduce a unified approach for everyone. To achieve this, regulators intend to group organizations by type of activity and allow them to operate taking into account industry specifics. Certain trends in the existence of financial firms, as well as their licensing, were also set by the coronavirus pandemic, which in a certain way slowed down the functioning of the entire financial sector. Below we will look at the dynamics of the financial market, future of the financial sphere, development of the global market and try to trace the main trends and changes.
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Current Landscape of Financial Licensing
Regulation of players’ access to the financial market is currently not subject to regulation in all jurisdictions. Some segments of the financial market in certain countries have their own supervisory authorities or the Central Bank acts as a regulator. Control over non-state pension funds and the securities market in many jurisdictions is carried out by the Financial Markets Commission or a similar structure. The general rules and regulations for licensing and functioning of financial institutions can be described as follows.
- The Central Bank independently makes decisions on registering legal entities as financial institutions and issues appropriate licenses.
- Securities market participants or management companies receive licenses from the Central Bank only for certain types of operations.
- Microfinance organizations do not have licenses; The Central Bank decides to include such companies in a special register after verification. Credit organizations or pawnshops can be included in the general register only on the basis of additional verification by the Central Bank.
- Payment agents or other similar organizations are not required to enter the market in some jurisdictions.
Even if the approach to admission is similar for different organizations, the conditions and required documents may differ in different jurisdictions. Current regulations also increase costs for market participants. Often, if an organization intends to expand its activities, it is necessary to apply to the regulator for an additional license or permit.
Digitization in Licensing Processes: New Licensing Trends
Many jurisdictions have changed their approach to licensing financial institutions. The provisions of the new license conditions contain additional and more stringent regulatory requirements for financial institutions compared to previously existing ones. It is necessary to state the fact that now it has become more difficult to obtain a license in the financial industry.
Dozens of companies receive a license, and the same number cease their activities. This is not at all surprising, since the same funds were used by different companies to form the authorized capital. Each regulator contains a list of activities that are subject to regulation. It includes in general the following.
- Deposit acceptance; it covers typical retail banking activities involving current and deposit accounts.
- Issue of electronic money.
- Providing payment services. This covers money transfers, card issuance, card acquiring transactions and payment account transactions.
- Consumer lending; it covers both consumer lending and crowdfunding, credit brokerage and debt collection on behalf of third parties.
- Entering into regulated mortgage contracts – this relates to the sale of certain residential mortgage contracts.
- Carrying out insurance business.
- Providing investment advice.
- Trading in securities and other investments as principal or agent. This applies to brokers as well as most private trading firms.
- Organization of investment transactions. This activity covers the role of intermediaries in investment transactions.
- Managing investments on behalf of another person is a regulated activity. Special permission is required if a person carries out these activities in relation to an alternative investment fund (AIF).
- Creation, operation and liquidation of a collective investment scheme.
- Provision of depository services. Special permission is required to act as a depository for an alternative investment fund.
Almost all jurisdictions are actively using digitalization in licensing of the financial industry. Many types of permits have already been converted into electronic format.
Another advantage of digitalization is the ability to monitor in real time all stages of licensing, from filing applications to terminating a license through a specialized information system. By the way, such transparency of processes creates an incentive to improve the quality of work of licensing authorities, since it helps to monitor their performance indicators and build a rating of the effectiveness of their work.
Digitalization of licensing and permitting activities at the preparatory stage requires extensive and coordinated work of all government bodies whose activities it affects. In many jurisdictions, it turns out that some departments are not ready for the new format of work. After all, it involves not only the adoption of an application in a digital format, but also the digitalization of internal processes, as well as clear interaction between various departments.
Globalization of Finance Licensing Standards and Technology in Finance
Licensing standards involvement as a global concept is carried out with the aim of minimizing risks for both consumers and financial institutions. It is known that operations with assets and associated risks are considered inseparable concepts. In the event of an unfavorable combination of circumstances, the company may lose funds that were previously deposited by customers. And this, in turn, threatens global problems for financial institutions and serious inconveniences for clients. A striking example would be a situation where a large bank goes bankrupt one day and many depositors lose their funds.
In addition, financial licensing is also adapting to accept the latest technology industries. When running a crypto business and crowdfunding platforms, you may also need a license from the Central Bank or another financial regulator. First of all, it depends on the business model and its compliance with the legal provisions of the selected jurisdiction (or its equivalent). In many jurisdictions, electronic currencies, such as Bitcoin, are regarded as financial instruments, or more precisely, as units of account. If an entrepreneur is professionally involved in cryptocurrency, he needs a regulatory license.
The best way to avoid problems with financial sector regulators is due diligence before starting financial activities. In this regard, timely contact with lawyers specialized in the field of banking and financial law can be a huge advantage. Our company will help you in licensing your financial company, and also provide comprehensive support and consulting.
The article’s author is Denys Chernyshov - founder and CEO of globally-famous organization Eternity Law International.
