Turning Regulatory Hurdles into Competitive Advantage: How Startups Can Leverage Compliance for Growth
Navigating the regulatory landscape presents significant challenges for startups. However, embracing compliance proactively can transform these challenges into strategic advantages, enhancing credibility and attracting investment. Written by Claire Conby, Finnovation UK, and Dr Louise Beaumont, Global Industry & Policy Engagement at Mastercard, this article was inspired by their conversation on the Innovation Stage during a panel about Regulation and Innovation at Pay360 on 25th March 2025.
Compliance as a Competitive Advantage
Viewing compliance not merely as a legal obligation but as a strategic asset can set startups apart in competitive markets. Adherence to regulatory standards signals to investors and customers a commitment to ethical practices and operational excellence; it adds credibility. This commitment fosters trust, which is crucial for customer retention and brand reputation. Moreover, investors are more inclined to support startups that demonstrate robust compliance frameworks, perceiving them as lower-risk and better prepared for sustainable growth.
Regulatory Challenges for Startups
Despite the benefits, startups often encounter several regulatory hurdles, which, whilst they are also challenges for larger organisations, tend to hit startups the hardest as they are managing significantly constrained resources and are typically under a lot of time pressure, either to meet investor criteria or to manage limited funds.
1. Interpretation of Vague Regulations
Regulatory frameworks often contain broad principles rather than specific rules, providing flexibility but also creating uncertainty. For instance, the Financial Conduct Authority (FCA) requires firms to be “ready, willing, and organised” to comply with regulations, a standard open to interpretation. This can be a challenge where startups do not necessarily have the time to to and fro with the regulator and need to get as close as possible to a ‘right first time’ application (recognising that there will always be some challenge). The difficulty with interpretation is further exacerbated if the firm does not have the regulatory background to rely on previous regulatory [application] experiences, which would help them to address the requirements accurately.
2. Lengthy Application Processes
The duration of the FCA authorisation process varies based on factors like application completeness and business complexity. Officially, the FCA aims to assess complete applications within six months for Financial Services and Markets Act (FSMA) firms and three months for payments or e-money firms. However, incomplete applications can extend this period up to 12 months. In practice, the process often takes longer; some firms report timelines extending to 20 months or more. Where investors prefer to wait until the business can go live, but yet funding is required to support the compliance and operational work to support the application, these unknown timelines can be difficult to navigate financially.
3. Statutory Clock Resets
During the review process, the FCA may pause the statutory clock when seeking additional information from applicants. This means the countdown to a decision is halted until the requested information is provided, potentially prolonging the overall timeline. Again, this extended timeframe can create challenges from a cost and investor management perspective.
4. Uncertainty of Case Officer Workloads
The assignment and availability of FCA case officers can significantly impact application progress. High workloads and resource constraints may lead to delays in communication and feedback. For example, after submitting an application, firms might wait several months before a case officer is assigned, and further time before substantive review begins. Clear messaging to prospect investors and your team, becomes difficult, particularly for those staff and services who perhaps are waiting for investment in order to be paid for their work to date.
5. Assessing Proximity to Approval
The iterative nature of the authorisation process, involving multiple rounds of questions and reviews, can make it challenging for startups to assess how close they are to approval. Even after addressing initial queries, additional information requests may arise, extending the timeline. Further, the level of scrutiny and challenge impacts compliance resources required, which again can pose challenges from a cash flow management and budgeting perspective. The prolonged uncertainty effectively has the business – and its investors - on tenterhooks.
Strategies to Leverage Compliance
To turn compliance into a competitive advantage, startups can adopt the following strategies:
Thorough Preparation: Ensure all application materials are comprehensive, accurate, and clearly demonstrate how the firm meets regulatory requirements.
Seek Expert Guidance: Engaging with compliance consultants or legal advisors experienced in FCA processes can provide valuable insights and help avoid common pitfalls.
Maintain Open Communication: Establishing a proactive dialogue with regulators can clarify expectations and demonstrate the firm’s commitment to compliance, considering also alternative paths to a licence such as via the FCA Innovation Pathway or Regulatory Sandbox.
Consider Alternative Routes: Exploring options like becoming an agent or distributor of an already authorised firm can expedite market entry while working towards full authorisation.
By proactively addressing regulatory challenges and integrating compliance into their core strategies, startups can enhance their credibility, attract investment, and position themselves for sustainable success in a competitive marketplace.