The origin of novel phenotypic characters is a key component in organismal diversification; yet, the mechanisms underlying the emergence of such evolutionary novelties are largely unknown. Here we examine the origin of egg-spots, an evolutionary innovation of the most species-rich group of cichlids, the haplochromines, where these conspicuous male fin colour markings are involved in mating. Applying a combination of RNAseq, comparative genomics and functional experiments, we identify two novel pigmentation genes, fhl2a and fhl2b, and show that especially the more rapidly evolving b-paralog is associated with egg-spot formation. We further find that egg-spot bearing haplochromines, but not other cichlids, feature a transposable element in the cis-regulatory region of fhl2b. Using transgenic zebrafish, we finally demonstrate that this region shows specific enhancer activities in iridophores, a type of pigment cells found in egg-spots, suggesting that a cis-regulatory change is causally linked to the gain of expression in egg-spot bearing haplochromines.