Financial Services Compliance Challenges

The financial services sector faces evolving challenges and regulatory changes. Customer impact and financial misconduct are key focuses. Adapting to these changes is crucial in a complex financial landscape.

Financial Services Compliance Challenges

The financial services sector found itself in a complex matrix of challenges following the initial recovery from the pandemic. These difficulties range from geopolitical instabilities fuelled by the war in Ukraine and ongoing US-China tensions, rampant inflation, decelerating economic expansion to the looming possibility of a severe recession in numerous countries. This turbulent macroeconomic environment has engendered a myriad of regulatory changes as policymakers scramble to respond and mitigate these issues.

These regulatory changes often reflect the underlying challenges faced by the sector and, in some cases, add layers of complexity for the industry's leadership. The surge in geostrategic risk, for instance, has manifested in the form of new rules and legislations that carry the heavy influence of strategic autonomy and wider political considerations. While these alterations aim to alleviate the risks of the new climate, they inadvertently increase the regulatory costs and operational risks for financial firms due to jurisdictional discrepancies in regulatory approach.

The landscape for global banks and financial service firms has also transformed significantly. Traditionally neutral towards international significance issues or domestic partisanship, these firms now find themselves having to assess the feasibility of their operations from both legal and stakeholder perspectives across various jurisdictions.

Simultaneously, regulators worldwide are progressively shifting their attention from their traditional focus on financial inclusion to the broader concept of customer impact. This shift is driven by tough economic conditions and encompasses not just equitable access to financial products and services but a comprehensive examination of the overall impact of these offerings.

One noteworthy example of this evolving focus is the Financial Conduct Authority's new Consumer Duty rules in the UK. Implemented in July 2022 and set to take effect in 2023, these rules necessitate firms to transition from a compliance-focused mindset to a more holistic evaluation of the impact of their products and services on consumers. This has compelled many businesses to strategically reevaluate their models and concentrate more on the consumer outcomes throughout the product and service lifecycle.

Financial Services Compliance Challenges
Financial Services Compliance Challenges

Regulatory Compliance: Digital Assets Framework

The accelerating prominence of digital assets and cryptocurrencies has emerged as a formidable challenge for regulatory bodies globally. These assets present a double-edged sword; on one hand, they hold the potential to enhance financial inclusivity, resilience, and cost savings, but on the other, they pose significant risks to market stability and consumer protection.

The turbulent events of 2022 have underscored these risks. The dramatic collapse of a major virtual asset exchange due to alleged mismanagement, misuse of customer assets, and conflict of interest, combined with the sharp downturn in the value of numerous cryptocurrencies, has highlighted the urgency for decisive measures to safeguard investors.

Regulatory bodies are focusing on formulating balanced regulatory frameworks that foster the benefits of these digital assets without leaving consumers vulnerable. However, striking this balance is proving to be a complex task. Over-regulation can potentially stifle innovation, while insufficient regulation can trigger market instability.

Despite these challenges, progress has been made in some regions. For instance, the EU has inched towards establishing regulatory clarity for digital assets with a tentative agreement on the Markets in Crypto-Assets (MiCA) proposal. This would institute standard rules for crypto-assets and their issuers, and service providers across the EU. The Monetary Authority of Singapore (MAS) has also issued guidelines to limit the promotion of cryptocurrency to its residents and proposed additional regulation on cryptocurrency exchanges and stablecoins.

Simultaneously, the emergence of Central Bank Digital Currencies (CBDCs) has further complicated the landscape. While most governments are not on the brink of issuing a CBDC, there is a rising global interest. However, CBDCs introduce a range of challenges, including key issues like monetary policy and privacy concerns. The potential impact of CBDCs on the financial system and the economy as a whole necessitates careful consideration and regulatory frameworks.

For both traditional finance firms and crypto-native companies, prudent engagement with digital assets, including CBDCs, is paramount. These entities must align their risk and compliance frameworks with the evolving digital asset landscape. Moreover, they need to adapt their operating models to address the risks and concerns that regulators are focusing on, while also preparing for potential new regulations in this dynamic space.

Financial Services:   Strengthening Cybersecurity Measures

Financial misconduct has always been a critical aspect of regulatory oversight, but recent events have rekindled the emphasis on combating illicit activities in the financial sector. The conflict in Ukraine, subsequent embargoes, and developments in the cryptocurrency market have highlighted the importance of robust measures to combat financial crimes. In response, regulatory bodies are working towards establishing unified standards to minimize inconsistencies across regions and enhance law enforcement efforts.

In the European Union, the introduction of a comprehensive Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) package in 2021 represents a significant step towards addressing financial crimes within the EU. This package includes the establishment of a uniform AML/CFT rulebook throughout the entire EU and the creation of a novel AML Agency for the EU (AMLA). The AMLA will directly supervise large firms and collaborate with national regulators to oversee cross-border activities. Furthermore, the package proposes expanding the existing funds transfer regulation to include cryptocurrency asset transfers, reflecting the broader move to regulate virtual assets and Virtual Asset Service Providers (VASPs) from a financial crime perspective.

Financial sanctions also play a pivotal role in global regulatory efforts. The conflict in Ukraine has demonstrated the extent to which sanctions can be used as a foreign policy tool, leading to complexities in managing these sanctions regimes. Compliance with sanctions requires meticulous scrutiny not only of sanctioned entities but also of beneficial ownership and controlling-party considerations, adding to the compliance challenges for financial firms. The implementation and enforcement of sanctions vary across jurisdictions, posing additional hurdles for firms operating globally.

To combat financial misconduct effectively, financial firms are transitioning from a siloed approach to a more holistic perspective. Rather than solely focusing on Anti-Money Laundering (AML) measures, customer identification, risk evaluation, fraud prevention, or governance, firms are adopting a broader view that encompasses all aspects of financial misconduct prevention and detection.

Cybersecurity threats have become increasingly significant in the digital age, particularly in the financial sector. The reliance on technology and the value of data make financial firms attractive targets for cybercriminals. The ongoing geopolitical instability and the rapid adoption of digital financial services due to the pandemic have further amplified the cybersecurity risks. Regulatory bodies are responding by expanding cybersecurity regulations and advocating for proactive cybersecurity measures.

The Financial Stability Board (FSB) issued a toolkit in October 2022 to help financial firms and authorities manage and respond to cyber incidents effectively. The toolkit provides guidance on cybersecurity governance, risk management, and incident response planning. Additionally, the European Union Agency for Cybersecurity (ENISA) has issued recommendations on cyber hygiene, emphasizing the implementation of basic cybersecurity measures such as regular software updates, employee training, and incident response preparedness.

While increased cybersecurity regulation is crucial for safeguarding financial systems, it can also lead to heightened compliance costs for financial firms. Consequently, firms must integrate cybersecurity measures into their strategic planning and consider them as integral components of their business operations. By doing so, firms can not only protect their operations and customer data but also gain a competitive advantage by fostering trust and reliability among their stakeholders.

Let’s make
compliance fun again

Grand - Let’s make compliance fun again.
We are reinventing GRC. Sign up for free in just seconds.

Grand is not your average GRC platform. Our primary focus is to make the lives of GRC practitioners easier and more fun. We do this by reducing workload through workflow automation, collaboration, advanced AI and all the rest, but what truly sets us apart is our continuous feed of out-of-the-box content that has been curated by industry leading experts.

Sign up for Free 

Join us

Reduce your
compliance risks