Fintech companies in the UK are under heightened scrutiny from the regulator, especially internal processes, back-office and controls.
It's a common problem for challenger banks – there’s a conflict between making transactions and services provision easy, at the same time implementing proper control systems. In pursuit of rapid growth, it can be challenging for neobanks to keep track of internal and formal processes.
Tightening regulations are becoming a common trend across the fintech industry. Favorable rules for fintech in the UK have allowed numerous start-ups to flourish. However, there are growing concerns from regulators that some of these new entrants may have weaker controls than traditional banks.
Such problems were witnessed among many neobanks apart from Revolut - e.g. N26 (weak AML controls, fraudulent accounts), Monzo (AML breaches), Digit (false advertising), Starling Bank (compliance deficiencies). Traditional banks are not an exception and are regularly fined by regulators (e.g., Natwest from AML breaches).
Investments in private companies are particularly susceptible to risks associated with lack of information, transparency of financial results, and assumptions (accounting policies) implemented by a company, and are more prone to unexpected and sometimes negative news coverage appearing in the media.
As of 06 September 2022, Revolut audit by BDO was criticised by the Financial Reporting Council (FRC) in its latest audit quality inspections. Concerns were connected to revenue recognition approach, payment process testing that have led to misstatements. However, the recognition, the reasons and the materiality of the misstatement are not disclosed. In our view, further monitoring is required to be able to estimate the impact of this update.
We believe obtaining regulatory approvals and licenses can be considered an essential part of Revolut strategy. Revolut is presumed to be highly motivated to comply with regulators’ requirements against the backdrop of applying for UK banking license in 2021. We will continue monitoring the news to make more conclusions.