FinTech, Blockchain, Smart Contracts and Regulation – An interview with Sean Murphy and Imogen Garner (Part 1)

Sean Murphy and Imogen Garner are partners at global law firm Norton Rose Fulbright. They are renowned for their work in the technology and financial institutions sectors.

Sean is the global co-chair of Norton Rose Fulbright’s technology international business group and leads its global distributed ledger and Blockchain practice group. He is the Legal Chair of the Smart Contracts Alliance, recently launched by the Chamber of Digital Commerce (see post). He is a frequent speaker at Blockchain/DLT events like the recent R3 Smart Contract Templates Summit.

Imogen is a financial regulatory lawyer based in London and is heavily involved in Norton Rose Fulbright’s Blockchain and distributed ledger practice. She advises a broad range of clients on the UK and EU financial services regimes. Having been seconded to the FSA, she has an excellent understanding how regulators tick and is in an advantageous position to judge how lawmakers might respond to new industry trends like FinTech, RegTech and Distributed Ledger Technology.

Jochen Heussner talked to them for PlanetCompliance about FinTech, Blockchain, Smart Contracts and how regulation affects innovation and what to do about it.
PlanetCompliance: First things first, everyone is talking about Brexit and what it means for London as the FinTech capital. What is your take?

Sean Murphy: It is far too early to tell what the consequences of Brexit will be because Brexit is an on-going medium term process that will take some years to play itself out. One concern that some people have is that Brexit might lead to the relocation of decision makers in financial institutions to other jurisdictions and this might make London a less attractive place for FinTech companies. At the moment you’ve got a very large concentration of financial institutions in London, which makes it very attractive place to be for FinTech companies because many of their potential customers are based here.

However, I spoke recently to a CEO of a FinTech firm in the UK, and his view was that even if key decision makers were relocated, London would still be a very attractive place given its transportation links, the fact it is English speaking, it is in a convenient time zone and the FCA and the UK Government are very keen to promote the FinTech industry in the UK. But I go back to my initial comment as it is far too early to tell what the eventual impact will be on the FinTech industry.

Imogen Garner: I completely agree and I have been hearing very similar things. There are lots of reasons completely unrelated to Financial Services Regulation or the UK being in the EU that make London an attractive place to be. We were recently discussing the subject of FinTechs moving for example to Berlin on a call with partners from a number of other jurisdictions. The sense was that FinTech firms ought to be considering factors like the local regulator’s style and attitude towards innovation and new technology before moving away from London – they shouldn’t simply assume they would be better off on the Continent.

Sean Murphy: Europe is so rich in talent that it is possible for London to be successful and for many other cities like Berlin, Amsterdam Dublin, and Paris to also be vibrant FinTech centres.

PlanetCompliance: If the UK leaves the EU and in consequence potentially loses access to its single market, wouldn’t it be an issue though for FinTechs developing a product under UK rules and then having to transition it to the European Union?

Imogen Garner: It’s a fair concern, but it’s one nobody has the answer to yet because, for instance, FinTech firms that are licensed to provide financial services in the UK can currently use passporting rights under EU directives to provide services or set up branches in other European jurisdictions. What we don’t know yet is whether or not that sort of mechanism could continue in some form following Brexit.

PlanetCompliance: FinTechs, and especially start-ups, are always concerned with product development and financials, while legal aspects are often neglected. What is your advice what start-ups must keep in mind?

Sean Murphy: As you say, start-ups tend to focus on product and client development and fundraising because without those things they will go out of business. Because entrepreneurs are very focused on these things, they can lose sight of other connected issues which are important, like protection of intellectual property, making sure they have proper service agreements in place with employees and consultants, and making sure that the constitutional arrangements of the start-up company are in order. Those things feel like formalities, but the problem is that if you don’t get them right at the outset they can come back to bite you. For example, any venture capital firm that is considering investing in a start-up will do due diligence on the company and will look at all of these things. If there are deficiencies, it may hinder your ability to raise finance.

PlanetCompliance: Another topic not very popular with founders is regulation, what is your advice for entrepreneurs and start-ups in that respect?
Sean Murphy: The question of regulation is broader than just financial services regulation. Take, for example, something like data privacy. A lot of FinTech companies have business models that are built around collecting and analysing large quantities of data and sometimes, at an early stage when they are focusing on building a product, they might not think about how their product may or may not comply with data protection regulations. If the product doesn’t comply, it is a pretty fundamental problem.

Imogen Garner: From the perspective of financial service regulation, it is something you don’t want to get wrong from the outset and for some this can be quite a barrier. You need to be aware of your obligations from the start, because you don’t want to find yourself somewhere down the line and then work out that there is some form of regulatory obstacle that keeps you from conducting business the way you had envisaged it. The UK’s regulatory sandbox and the availability of the FCA to provide guidance to firms that are establishing their business models have potential, though, to be quite valuable in that sense.

PlanetCompliance: The fact that regulators take different approaches also makes it difficult for start-ups to understand their regulatory obligations. Whilst the FCA seems to have taken a very flexible approach, others like BaFin, the German financial regulator, isn’t a fan of regulatory sandboxes. Will these differences not create an uneven playing field?

Imogen Garner: Potentially, yes. Looking at the FCA as an example, it has a specific mandate to promote competition and that is key to its attitude toward fostering innovation. In many ways, it comes down to the question of regulatory philosophy and there can be significant differences. One of the functions of EU-wide legislation is often to smooth away those differences and harmonise the position, but that comes with a potential cost as well. It is positive though, that we are tending to see regulators taking the “first do no harm” approach (for example, with virtual currencies and Distributed Ledger Technology (DLT) in the EU) and recognising the potential for inappropriate regulation to stifle innovation.

PlanetCompliance: It seems that regulators take a wait-and-see stance, i.e. they aim to get a better understanding first, in particular with regard to DLT and Blockchain, as to what it means, what the implications are. Then, there will eventually be some form of new regulation, while in the meantime existing laws are applied where possible. Does this not create gaps in the existing regulatory framework and how are FinTechs supposed to deal with this?

Imogen Garner: It could do, as regulators might try to fit it into the existing regulatory framework on a technology neutral basis. And that may well be perfectly appropriate. But cryptocurrencies are a good example of where we are seeing regulators are taking different responses, thinking of cryptocurrencies in different ways and characterising them differently. What this means is that you have a regulatory response that is fragmented between different regulators and jurisdictions and that is particularly challenging for FinTechs. If you look at things like the Blockchain, there are some really difficult legal questions out there about, for example, how the jurisdictional aspects work, which legal system applies and which regulators have competence.

PlanetCompliance: The FCA aims to promote FinTech in general, but it has also been among the first to pick up on the topic of RegTech. In the findings of its recent Call for Input, which it had launched last year, the FCA concluded that it wants to play an active role, but from the report itself it isn’t apparent what the FCA plans in practical terms. Do you know what the FCA means by that and how the regulator intends to get involved?

Imogen Garner: I think it makes sense to consider where they are coming from as a regulator and what it is that they really want. One of those things is to see RegTech supporting compliance in the best possible way and potentially reducing the burden of regulation. For example, a lot of the legislation that came out of the financial crisis imposes significant additional data reporting obligations on firms and RegTech will be key in the delivery of that. On the other hand, you have regulators that receive large amounts of data and they have to understand, process and use. Anything that makes that easier will be very attractive.

Read on in the second part of our interview with Sean and Imogen when we will look at the consequences of RegTech and LegalTech for the legal profession and the questions that surround Smart Contracts…

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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