Between 2015 and 2019, several European fintech businesses built meaningful revenue by operating under lighter-touch payment institution licences while offering products that functionally resembled the regulated activities of banks and investment firms. The model worked while it lasted: lower capital requirements, faster time to market, and an asymmetric competitive position against incumbents who faced the full weight of prudential regulation. The FCA, to its credit, was slow to restrict this — the regulatory sandbox, launched in 2016, was an explicit acknowledgment that some experimentation with the boundary of existing categories was healthy for market development. But the window for regulatory gap exploitation in UK fintech has been closing steadily since the FCA's consumer outcomes agenda began in earnest around 2019.
We have declined investments in companies whose core business proposition rested on a specific regulatory interpretation that was, in our assessment, time-limited. The clearest cases are those where the product only works because a specific type of activity has not yet been formally classified, or where the competitive advantage disappears the moment the FCA issues clarifying guidance. These are not businesses; they are regulatory option positions with a finite expiry. The founders building them are often intelligent and commercially sharp, but they are running a game that gets harder every year as the regulatory perimeter tightens, and they often lack the infrastructure depth to pivot when the gap closes.
The alternative — regulatory fluency as a strategic capability — produces a qualitatively different type of company. Consider two competing infrastructure platforms both serving embedded finance clients. Platform A has engineered around FCA authorisation by using a partner institution's e-money licence, keeping its own activity just outside the perimeter of what requires direct authorisation. Platform B has obtained its own payment institution licence, built a compliance function with genuine FCA dialogue, and designed its product architecture around the requirements of Schedule 1 of the Payment Services Regulations 2017. In year one, Platform A ships faster and has lower overhead. By year three, Platform B's direct regulatory relationship allows it to offer products that Platform A cannot — and its compliance infrastructure has become a sales credential when enterprise clients conduct vendor due diligence.
We are not suggesting that every fintech company needs to be a regulated firm from day one, or that working under a partner institution's authorisation is inherently problematic. It is a reasonable route to market for early-stage companies where full authorisation would be disproportionate to initial scale. What we are saying is that this is a tactic, not a strategy. The companies that remain competitive through regulatory evolution are those that treat their regulatory relationship as an asset — that maintain open channels with their supervisors, that engage with FCA consultations, and that design products where compliance capability is inseparable from product quality. When PSD3 arrives and recategorises some current edge cases, those companies will adapt more easily than those who built around the gaps.
The practical signal we look for at investment is whether the founding team can describe the regulatory constraints on their product with the same precision they use to describe the technical architecture. If a founder can explain exactly which article of the Payment Services Regulations their product falls under, what their MLRO obligations are, and how their approach to transaction monitoring satisfies the Joint Money Laundering Steering Group guidance, that is a good sign. If they say "we're not regulated because we use [partner name]'s licence," we probe hard to understand whether that is a deliberate strategic choice with a roadmap to authorisation, or whether the regulatory question has simply not been thought through. The answer tells us more about the company's durability than almost anything else at seed stage.