Risk Management has been seen only as AML/CTF challenge
For the past years both regulator and Fintech companies have been mainly focusing on AML/CTF. The scope of inspections, penalties and recommendations as well as a number of dedicated Fintech employees have been pointing mainly towards the AML/CTF area. Recent Bank of Lithuania (BoL) report on electronic money institutions (EMIs) and payment institutions (PIs) inspection results highlighted concerning challenges within the risk management area. More than 50% of the inspected Fintech companies struggle with setting proper risk management frameworks and implementing them.
European Central Bank (ECB), BoL, Ministry of Finance, Financial Crime Investigation Service set requirements to clearly define Risk Management, Compliance, AML/CTF practices for Fintech companies operating under various licenses or even being listed as crypto players or consumer credit providers. However, historically Fintech companies and regulators mainly focused on AML/CTF while risk management has been forgotten, overlooked or left for big commercial banks to chew. The only time this topic surfaced was initial licensing application process.
Regulation will expand its’ focus from AML/CTF to Risk Management
Recently BoL raised early warning signals to the Fintech community that their focus will no longer be concentrated only on AML/CTF. It will look at overall risk management framework, including but not limiting to internal controls, identification, assessment, control and reporting of relevant risk types such as operational risk, fraud, information security, credit risk, liquidity risk and etc.
In addition, as per Gintare Skaiste (Minister of Finance) Lithuania is introducing new national guidelines for developing the Fintech sector. “The guidelines will focus on four main topics: ensuring the future growth and maturity of the Fintech sector, promoting the use of digital financial services, fostering the creation of technological innovations, and strengthening risk management”.
So if we put together the message from the Ministry of Finance, recent reports from BoL and increased attention to risk management during the new Fintech companies licensing process, it is clear that Risk Management bar is being raised higher.
Preparing to strengthen Risk Management competences should be a trend in Fintech
2021 has been another great year for Lithuanian Fintech ecosystem. Local Fintechs had record funding rounds, with the size of investments growing 4x compared to 2020 (more than EUR 65 million raised in 2021). Yet, with great growth comes great responsibility.
A number of Fintech companies in Lithuania are still operating with extremely small number of employees. As such, properly addressing internal risk management frameworks as well as three lines of defense concept might come as a challenge. In some cases more help is obtained from Headquarters and external consultants, however today we see this more as an exception rather than a rule.
*The Fintech landscape in Lithuania report 2021-2022
Good news could seem that the survey results indicate - 2022 is expected to be another year for growth. Only 3% of respondents are not planning any growth, while 12% of respondents indicated that they expect to ramp up their operations by nearly doubling their headcount and hiring between 30 to 100 new employees.
The same survey respondents have identified ongoing and growing demand for AML/CTF & Compliance (including risk managers, information security officers, data protection officers).
*The Fintech landscape in Lithuania report 2021-2022
So the trend of other Risk Managament areas in Fintech is coming, alongside with growing quality requirements from the BoL. Make sure that you do not miss it, as:
· Increased requirements for concise risk management practices are in place for Fintech companies, and as far as it goes - a number of BoL inspections and reports challenge their readiness;
· Regulation is strengthening risk management requirements which will be followed up by the BoL and possibly Financial Crime Investigation Service (for crypto players);
· Fintech companies are planning to increase their focus on risk management (Conclusions from The Fintech landscape in Lithuania report 2021-2022).
More about this @The Fintech Landscape in Lithuania 2021-2022 Report
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