The rapid progression of fintech from a fairly niche play to the mainstream means that companies across all sectors are increasingly having to incorporate a fintech offering into their business models.
And while it is possible to develop in-house solutions, the scale, complexity and speed of tech development means it is often cheaper, faster and less labour-intensive for corporates to team up with fintechs that already have useable and market-tested products ready to go.
‘We partner with a number of organisations to make us more agile,’ says head of legal group digital and data protection, Aviva Insurance, Daisy Godfrey. ‘People want instant results and technology can really help with achieving that.’
Online pension tracing services, know-your-customer and anti-money laundering checks are some examples of services being offered to customers through these partnerships. Bird & Bird partner Gavin Punia also highlights the recent trend of companies ‘looking at NFTs and how they can monetise a company’s revenue stream’.
Mitigating against the risks
But while there may be clear benefits from partnering with fintechs, the arrangement is not without risk for in-house counsel. In order to mitigate against these risks, the first thing to do according to Jonny Emmanuel, co-head of Bird & Bird’s international financial services sector group, is to focus on the fundamentals.
‘It’s all about kicking the tyres on the partnership’ says Emmanuel. ‘What is the ambition and how is it going to be achieved contractually? Then, armed with this information, you can start to paper the deal and identify the risks. For example, how are you going to market vis-à-vis customers and what role does the fintech and its product play in this. As part of the partnership, are you reselling the fintech’s product to customers or are you acting as an introducer [introducing the fintech’s product to customers]. Or are you adopting another model? The answer to these questions will have a significant impact on the type of contract you need to draft.’
A key risk in any partnership will be the use of data. ‘I would say, “OK, I’m giving you my data, how are you keeping my data secure?”’ Emmanuel continues. ‘What is your business continuity plan to avoid any disruption to the provision of service? Are you backing up my data?’
Punia expands on this point, highlighting some key issues to be aware of in instances where the fintech that a corporate is entering into agreement with uses third party cloud services. ‘The key question is what rights do you have against the cloud provider, because you don’t necessarily have a direct contract with the cloud provider… So it’s working out what subcontracting rights you have because the IT vendors, in providing their software services,
rely on the cloud provider to store the data.’
From the perspective of the in-house legal team it means making sure that they’re clear on exactly how the partnership will work and what the risks are. As Emmanuel observes: ‘If you’re the in-house lawyer you need to understand the user journey so you can understand how the product intends to work and what the risks might be.’
Any discussion about fintech in 2023 ends up arriving at AI sooner or later, with AI already able to deliver efficiencies and expected to have a significant impact on the products fintechs offer.
Examples of the ways companies are incorporating AI range from language model chatbots that answer online customer queries, to generative AI tools that can assist with the drafting of company documents. Emmanuel offers an example of how an investment company could use such a tool: ‘You might provide it [the AI tool] with drafts of investment committee memos, and it reviews that, learns your house style and provides you with a first draft [of a committee memo].’
As the technology behind AI continues to develop at breakneck speed, keeping up can be a daunting task for even the most tech-savvy of lawyers. How can you stay up-to-date? ‘The best way to learn is by working on a [particular] fintech product’, says Latham & Watkins associate Gabriel Lakeman. ‘Technology and regulations move too fast to learn about fintech in general.’
Learning by doing is a point echoed by Allen & Overy partner Nikki Johnstone. She cites A&O’s partnership with AI platform, Harvey as an example. ‘It has been incredibly valuable to have access to that technology’, Johnstone states. ‘In reality, it’s very hard to advise on fintech products unless you have an intimate understanding of how they work. For something as new and sophisticated as AI you need to understand its capabilities.’
According to Johnstone, it’s important for legal to gain that understanding and get things right from the start, because ‘if people elsewhere in the company have AI tools unleashed on them, or they just run into them without quite knowing how they work, it’s very difficult to advise reactively on the outcomes.’
Again though, AI is not without risks. Clifford Chance partner Diego Ballon Ossio expands on some of the risks associated with the use of AI. He gives the example of a customer-facing AI tool to illustrate the dangers companies face: ‘It’s sort of like hiring a very, very smart or, depending on how you use it, very dumb employee. That employee will represent you and whatever that employee says and does is going to impact on you. It’s going to bind you as a business, both legally and also, potentially, reputationally.’
And if an AI tool does get you into hot water with the authorities, Ballon Ossio warns that it might be challenging to explain what has gone wrong:
‘You need to be able to trace back the steps that that AI has taken, and I think the problem is that you wouldn’t be able to do it because the AI may come up with a solution or a recommendation involving a very different way of thinking to that of a human.’
A view from the inside
At Aviva, Godfrey has been thinking about issues involving new technologies for a long time. ‘It’s definitely not new… but what has changed recently is the availability of generative AI tools for everybody to use. People are becoming a lot more aware of them and the things they can do to help them in their lives.’
Given the heavily regulated nature of the financial services sector, governance and compliance remain at the forefront of her thinking. ‘Obviously, you need policies around usage of these tools. You need to make sure your existing frameworks are suitable for the changes in technology,’ adds Godfrey. This is especially pertinent given the ambiguity around how the tools are trained. As Godfrey points out: ‘[GenAI tools] have been trained on a vast amount of data that has possibly been scraped from unknown sources.’
Before any AI tool was implemented by Aviva it would have to pass a ‘rigorous approval process’ and Godfrey underlines strategies that companies can employ in order to increase security and confidence. ‘One way of managing risk and getting more comfortable with the use of this new technology is to buy in tools that are internally hosted so that your data doesn’t leave your own environment.’ For Godfrey, a key control is to ‘make sure there is a human in the loop. I think the best way to see generative AI tools at the moment is as a first draft rather than a one and done.’
Issues for a fintech lawyer
Coming at it from the other side, one remark from Godfrey illustrates the very different issues that in-house lawyers at fintech start-ups can face: ‘One challenge is that it can sometimes be quite onerous for small companies to work with a large company like Aviva, because we do ask for a lot of due diligence beforehand, and our contracts can be quite extensive.’
The demanding nature of working as an in-house lawyer at a start-up is magnified by the inherently cross-practice nature of fintech. As Johnstone says: ‘I’ll work with our teams in corporate, commercial, data protection, antitrust, investigations, pretty much everybody.’
Ballon Ossio highlights how quickly a fintech lawyer’s work can spiral into complexity with an example of a client bringing a gaming product to market.
‘The core product is a game, so they brought in someone who was a gaming lawyer… but what’s then evident is that the gaming aspect is just one part of the product. A lot of the other things are potentially not related to gaming as such. Some of it is facilitating payments for clients. Another bit is commercialising digital assets. Another is operating the algorithm that will either decide whether your team has won or not.
‘What caught these guys out,’ continues Ballon Ossio, ‘is that they were potentially carrying out regulated activities even though they didn’t set out to do so. They were designing a product for something else, but it turned out that it touched on a lot of things.’
‘It takes a lot of experience for an-in house lawyer to have adequately assessed the product in a way that works’, observes Ballon Ossio. ‘It’s the fear of not knowing what you don’t know.’
Aside from potential regulatory issues for in-house lawyers inside fintech start ups, culture can also be a challenge as they grapple with dealing with CEOs who are trying to move quickly and keep their investors happy. Lakeman summarises: ‘You can have the tension between a CEO, focused on fundraising and who wants to get to market, and the regulators, who aren’t going to be impressed if things go wrong. Your job as a lawyer is to navigate that tension.’
Johnstone, however, highlights that the culture of fintechs is part of the attraction for many lawyers working within them, stating that the ‘sense of mission’ and the fast-moving, multifaceted interactions with teams all over the world is exactly what makes working at a fintech ‘so attractive for a certain generation.’
While the challenges for an in-house lawyer at a large corporate partnering with fintechs to deliver an aspect of its business are very different to those facing a lawyer working within a small fintech itself, there is a common thread. The need to understand and use the technology and to be excited, not overwhelmed by constant advances in regulation and technology. Only those who are able to do this are likely to thrive.
Fintech tips for in-house counsel from private practice partners
1. Break out of the silo
Looking for regulatory insights then ‘break out of the silo’ says Latham associate Gabriel Lakeman. In support of this he mentions the detailed Information Commissioner’s Office guidance on AI. By using a variety of sources, and not just reading the FCA’s regulations and announcements, it is possible to gain greater insight into what the regulators might be thinking.
2. Don’t take yes for an answer
If using AI for research then treat the answer you are given with a healthy dose of scepticism says Nikki Johnstone: ‘AI as a technology is very eager to please so it will give what looks like the most comprehensive answer to a question…The danger is people taking the first answer, accepting it as a single source of truth and not repeating the question in a different way or checking the sources to validate what the platform or tool has produced.’
3. Network like a pro
‘Make use of your network is my best advice’, says Ballon Ossio. ‘There’s a whole bunch of material and law firms are really willing to offer it up for free or for next to nothing as long as you build a relationship.’
4. Panel beater
‘Even if you’re a small company, try to put together a sensible panel of advisers… you don’t have to come to Clifford Chance every time,’ Ballon Ossio advises.
‘It’s having the right balance of: “I’ll need some very bespoke, very specific complex advice from time-to-time and I’ll go to a firm like CC for that. But I may have lots of bog-standard document review work that I’m not willing to pay CC rates for.” Pick the right advisers for the right product. Having that mix is really beneficial.’
5. One size doesn’t fit all
Ballon Ossio states that: ‘A constant fear that in-house lawyers face is the question: ‘Our competition is doing X,Y Z, why can’t we? There is then a risk that you try and replicate whatever the position is. I think that’s a risky strategy… We’ve seen too many times when slightly different footprints, with slightly different product offerings try to get the benefit of legal advice that was provided somewhere else. You go forum shopping and may get the advice that you want, but it actually won’t really help you.’