Finding equilibrium between innovation and regulatory compliance is imperative for startups and especially for fintechs. Sonia Garcia, Head of Risk and Compliance, and Christophe Daudrix, Head of Internal Audit, at FundsDLT shine a light on the role of internal audit and compliance in pioneering companies with great ideas.

Startups, by definition, are young companies founded to develop a unique product or service, bring it to market and make its use widespread. They often operate under conditions of uncertainty and aim to solve problems where the final solution may not be immediately apparent at the beginning of the journey.

In the field of investment fund issuance and distribution, FundsDLT has emerged as an innovative force. We strive to transform traditional methods through the integration of cutting-edge technology like distributed ledger technology (DLT), delivered via Software as a Service and the Cloud. While forging this pioneering path, FundsDLT recognizes that viable and long-term solutions are anchored in alignment with established and ongoing rules and regulations.

Compliance and internal audit: fundamental ingredients

Whether in startups or established firms, the role of internal audit and compliance is paramount. These functions serve as the foundation upon which trust is built with stakeholders, be they clients, regulators or investors.

Internal audit objectively evaluates an organization's risk management and the efficacy of its control processes, ensuring alignment with company objectives. Compliance, on the other hand, plays a pivotal role between the company, management, stakeholders and regulators by ensuring adherence to external regulatory standards and internal policies. Together, they form the bulwark against operational failures, financial misstatements, and regulatory infringements.

Compliance and internal audit can be a critical, parallel voice in product design and creation. FundsDLT has embedded compliance into the DNA of the company.

In short, they are an important cog in ensuring that a company is delivering and can deliver what it promises. Moreover, for fintech startups that appreciate the role of compliance and internal audit they can be a critical parallel voice in product design and creation. They provide an important reality check and can guide what is feasible from a compliance stance. Sonia Garcia, Head of Risk and Compliance, points out, "Startups, more than established companies, face a crucial need to optimize their time and resources, considering the complex design and approval processes. In response to this imperative, FundsDLT has embedded compliance into the DNA of the company.”

In the shifting sands of startup development, FundsDLT has stood out, not only because of its adaptability but due to its unwavering commitment to robust regulatory compliance.

Despite our innovative nature, we are bound to the same rules and regulations as established financial institutions. These include AML/CFT requirements, GDPR, the new outsourcing circular (CSSF 22/806) and the new whistleblowing law among others. However, the challenge is unique; as Christophe Daudrix, Internal Auditor, reminds us, "Unlike well-established companies that have gradually implemented compliance and internal audit systems, we had to be operational almost from Day 1."

Navigating such a journey is not without its challenges, particularly due to the emerging risks associated with pioneering technology. As leaders in nascent solutions within the fund industry, we shoulder the weight of heightened regulatory expectations. This position demands not only technological leadership but also a commitment to impeccable compliance and risk management to counterbalance the inherent uncertainties.

Startup agility with regulatory rigour

This mandate of regulatory adherence becomes even more demanding when combined with the agility that characterizes startups. For FundsDLT, the challenges range from establishing a mature organizational structure in tandem with rapid expansion to ensuring fortified cybersecurity in an increasingly digitised world.

The evolving regulatory environment, especially for rules around information and communication technology adds another layer of complexity to our operations. In this regard, we are fortunate to be established in Luxembourg where the regulator, the CSSF, has been a leader in proactively clarifying uncertainty. Its non-binding advice in its whitepaper of 2022, which FundsDLT contributed to, on assessing risks when implementing DLT is notable among its various actions.

In one respect, size is an issue and startups like FundsDLT need to have an agile mindset. While startups and established companies allocate a similar proportion of their budgets to internal control functions, the absolute monetary allocation differs significantly. Despite this divergence, the expectations for compliance and internal audit remain consistent. Therefore, we strategically design our processes to be efficient and effective, making the most of the resources available.

On the other hand, size works to our advantage. Our relatively smaller size offers a level of flexibility that larger corporations often lack. It facilitates direct stakeholder engagement, expediting decision-making. “We work in an entrepreneurial environment,” says Sonia Garcia, ‘"but our products must remain sellable and viable. Compliance and internal audit are embedded from the very beginning, ensuring a product doesn't need post-release adjustments due to compliance issues." In contrast to established organizations where issues might need multiple escalations, FundsDLT can tackle challenges swiftly, ensuring their timely resolution.

This agility doesn't compromise our commitment to excellence. Our rigorous compliance structure has been validated by successful third-party audits and assessments.

What sets fintech startups like FundsDLT apart is our ability to address challenges head-on. Without the constraints of the legacy systems that were bogging down established entities, we have had the freedom and agility to design next-generation systems from the ground up. The responsibility lies in ensuring compliance across a spectrum of regulations, given our diverse clientele, while the opportunity lies in redefining fund distribution operations.

Trailblazing trust for next-gen services

The fund distribution chain is an intricate web of actors and systems. FundsDLT offers services throughout the chain and as a result there are many particularities that we must cover.

By ensuring a compliance mindset throughout a product life cycle, the vision can be released more efficiently.

Moreover, at a time when code and algorithms can change the landscape, we remain at the forefront, marrying technical expertise with a strong principled foundation. Therefore, control functions are experienced, independent and can adapt to ongoing internal and regulatory changes. “Working in a new company with a vision,” says Christophe Daudrix, “means, to a certain extent, providing tools to those who realise that vision. The most efficient way of achieving this is to ensure that a compliance mindset is there all throughout a product life cycle.”

Given the complexity of the fund distribution chain, spanning banks, asset managers, distributors and more, FundsDLT’s regulatory scope is expansive ─ we need to be compliant with all applicable parts of our customers’ regulations. This means we must cover banking regulations, investment fund management regulations and general transversal requirements of the financial sector.

It is important to note that our clients are not only within the EU (which has a common regulation) but also outside of it. To give an example, UK, Switzerland, and Singapore have specific and local requirements.

We therefore took the decision to have an ‘agile’ mindset when it comes to compliance and internal audit. By this we mean an environment of ‘continuous improvement’. Even if the control environment is set in place, the demonstration/assurance is in an improvement process. We choose to develop and implement a cross-regulation/industry standard matrix of controls prominently featured in a SOC2 report which is publicly available.

Beyond the horizon: a vision for excellence

Our vision for the future remains clear. With dedicated and experienced professionals, FundsDLT is meeting the regulatory challenges while setting new benchmarks. This approach ensures that we have the expertise needed to manage a plethora of projects without compromising on quality. Our achievements since June 2021 stand as a testament to our dedication, and as we look to the horizon, our innovative DNA promises a future of continued evolution in compliance and beyond.

In conclusion, while the role of internal audit and compliance in startups is paramount, FundsDLT’s journey exemplifies that it's not just about striking a balance between innovation and compliance. It's about intertwining them, proving that with the right mindset and dedication, startups can pave the way for a secure and progressive future.