Why Regulated Industries Produce Better Technology

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There is a widely held belief that regulation and innovation are in tension. That the compliance overhead, the approval processes and the constraints imposed by financial regulators, healthcare bodies and data protection authorities slow technology teams down and limit what they can build. It is a belief that is popular in startup circles and largely wrong in practice.

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The technology teams that consistently build the most robust, scalable and commercially durable products tend to be those that have learned to work within constraints rather than around them. Regulated industries do not produce worse technology. In many respects, and for reasons that are worth understanding if your business is navigating growth in a regulated sector, they produce better technology.

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Constraints as a Design Forcing Function

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The argument for regulation as an inhibitor assumes that the best technology gets built when teams have maximum freedom. The evidence from the businesses that have scaled most successfully in regulated sectors suggests something different. Constraints force specificity. They require teams to be deliberate about what they are building and why, to document their decisions, to design for auditability and to think about failure modes before they ship rather than after.

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Lee Provoost, CTO of Flagstone, which manages over seventeen billion pounds in client assets across more than seventy banking partners, has spent his career in regulated environments. His perspective on what those constraints produce is direct.

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"I often find that constraints breed creativity. Some of the things we have to do to protect client data and client money are probably things that most companies should do anyway. I am quite horrified sometimes by the cavalier attitude towards sensitive data from consumer tech businesses." - Lee Provoost, CTO, Flagstone

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That observation points to something that PE-backed businesses in regulated sectors would do well to hold onto during periods when the compliance overhead feels like a drag on delivery. The practices being enforced by regulators, secure data handling, clear audit trails, robust access controls, explainable decision making, are the same practices that produce systems that hold up under the scrutiny of a transaction or a due diligence process. They are not a cost of operating in a regulated sector. They are a competitive advantage, if they are treated as such.

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The Creativity That Comes from Having No Off-the-Shelf Answer

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A second way in which regulated industries tend to produce stronger technology is through the absence of ready-made solutions. Consumer technology companies can assemble products from a large and growing ecosystem of third-party components. Businesses operating in regulated markets often find that the components available either do not exist for their specific use case or do not meet the requirements they are operating under.

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That gap forces internal capability. Teams that cannot buy a solution have to build one, and building a solution to a genuinely hard problem in a constrained environment produces a kind of technical depth that is very difficult to acquire any other way.

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"Because there isn't a cash savings platform product you can buy off the shelf, pretty much everything we have and do is proprietary and in-house built. Having the creativity to come up with novel solutions under regulatory constraints is what I find quite exciting." - Lee Provoost, CTO, Flagstone

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For businesses in financial services and similarly constrained sectors, this is worth reframing. The proprietary capability built out of necessity is often the most defensible part of the business. It is harder to replicate than a product assembled from third-party components, and it tends to be more closely aligned with the specific needs of the customers it was built to serve.

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What Newer Fintechs Have That Established Institutions Don't

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The other dimension of this conversation is the difference between newer businesses operating in regulated markets and their more established counterparts. Established financial institutions carry significant regulatory responsibility, and the culture that has grown up around that responsibility over decades can be genuinely limiting. The processes, the approval layers and the risk aversion that come with managing a systemic institution are not irrational, but they do create a pace of change that newer entrants can exploit.

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"When you work in a more modern fintech versus a very well-established two-hundred-year-old financial institution, you don't have the same level of baggage and the same level of established process and control. That means you can sometimes come up with really creative, interesting solutions to constraints that are imposed on you." - Lee Provoost, CTO, Flagstone

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For PE-backed fintechs and growing businesses in regulated sectors, this is the window that matters. The ability to move with the discipline that regulation demands but without the cultural weight that slows established players is a genuine and time-limited competitive advantage. The businesses that use that window to build technically robust, well-governed products will be significantly harder to displace once they have scale.

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The Practical Implication

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If your business is operating in a regulated sector and the compliance overhead feels like a constraint on what your technology team can do, the more useful question is whether that constraint is being used productively. The businesses that answer that question well tend to be those where technical leadership has internalised the regulatory requirements deeply enough to design with them rather than around them. That requires a specific kind of experience, and it is one of the more significant factors in how PE-backed businesses in regulated sectors perform through periods of growth and scrutiny.

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At Gathered and Found, we work with PE-backed businesses in financial services, fintech and other regulated sectors to build technology that is designed for the environment it operates in. If that conversation is relevant to where your business is heading, get in touch.

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This blog draws on our Leaders and Founders conversation with Lee Provoost, CTO of Flagstone. Listen to the full episode and more at https://open.spotify.com/show/6OncHpC9Yt1a7WiP7AzGJu

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