Financial Services Compliance Transformation

Evolving compliance in financial firms is critical, driven by tech advancements and efficient operations. With decentralized systems, third-party checks, and digital identities, compliance becomes seamless.

Financial Services Compliance Transformation

Financial entities are experiencing a remarkable growth in the area of compliance transformation, even in an era of widespread workforce reduction. As cost concerns proliferate within the sector, the need for more efficient compliance operations is on the rise. Technological advancements are playing a key role in enhancing this efficiency, as they propel the automation of compliance activities. Improved business processes, skills development, and a well-coordinated, skilled workforce are crucial to support this automation.

Strategically outsourcing services helps mitigate expenses associated with IT infrastructure in compliance roles, thereby smoothing the operational process. Furthermore, cooperation with external specialists accelerates the acquisition of regulatory expertise, enabling organizations to respond promptly and strategically to regulatory alterations. Some financial bodies have already started this transformation process, adopting a new compliance viewpoint that allows them to exploit the advantages of the existing business and technology environment. Despite the increasing expenditure on compliance, several compliance officers have hinted that investments in this sector are often delayed and do not concentrate on introducing comprehensive compliance solutions.

The role of the compliance function varies depending on who provides the interpretation. Factors such as scattered compliance controls, disjointed systems, evolving legal requirements across geographical areas, and a shortage of local compliance expertise in smaller markets further complicate this. For the compliance function to be effective, it must define its role clearly and communicate its vision in a manner that all employees can relate to. Achieving this requires the provision of clear, actionable metrics through interactive dashboards targeted at senior management or specific employee groups, boosting compliance awareness, and acknowledging employees' contributions transparently.

Financial Services Compliance Solutions of the Future
Financial Services Compliance Solutions of the Future

Financial Services Compliance Solutions of the Future

The rise of private cloud technologies and the popularity of decentralized systems and services will create a more collaborative environment in which trusted third parties conduct some of the compliance checks and controls. For example, when it comes to client onboarding, a specialized third party or a trusted partner network could perform several verifications more swiftly and inexpensively. The use of digital identities in this process would not only prevent duplication of verification efforts but also reduce costs and increase customer satisfaction.

The growing dependence on decentralized ledger technologies (DLTs) will also simplify various compliance duties. Through DLTs, official documents such as passports, company ownership structures, and financial statements can be authenticated automatically. The use of DLTs will drastically lower fraud attempts related to financial instruments like bank guarantees and letters of credit, and eventually lead to simplified AML procedures by providing an auditable, regulatory compliant source of funds and transaction history.

With streamlined procedures and better technological utilization, the conventional approach of addressing compliance challenges by simply adding more staff will be phased out. With enhanced processes and improved technology, there will be less need for manual controls as business processes become less susceptible to human error. Simultaneously, procedures and tools will become more potent, less expensive, and more tech-oriented, leading to standardization of the compliance function and a shift towards a data-driven organization.

As financial institutions evaluate their current circumstances, they will find valuable guidance in resolving their legacy problems and implementing complex new regulations. The future compliance function will need specifically designed tools and processes that can be adjusted swiftly and efficiently. These institutions will ensure that their core technology operates optimally and will restructure their processes to be user-centric, event-driven, and optimized for continuous data capture. This will address current issues around manual data collection, making compliance an integrated, streamlined part of the organization's DNA.

By analyzing vast datasets, hidden patterns and correlations can be unearthed, enabling financial institutions to comprehensively understand the risks within their organizations at all levels. Technology will boost the awareness and decision-making abilities of compliance professionals by automatically and systematically performing analyses and validations necessary for informed and reliable decisions. This will also free up time for Compliance officers to shift their focus from routine operational tasks to scrutinizing patterns and identifying fraudulent and non-compliant behaviors, namely, shifting from processing false positives to hunting for false negatives.

Moreover, by using highly sophisticated tools within their compliance function, financial service institutions will empower their compliance officers to better anticipate the broader implications and risks posed by technological changes in other parts of the business. Across the entire organization, processes and systems will be built around the same core design principles and architecture, allowing for the integration of data lakes and a shared use of the same information by compliance and other business areas through comprehensive client views.

In this harmonized environment, the synchronized use of data and tools will prevent duplication of records, efforts, and controls. Roles such as Chief Data Officer and reliance on cross-functional design boards will play a crucial part in achieving this vision. Facilitating the efficient consolidation of key metrics within the organization will enable more insightful conclusions. The process of responding to regulatory requests will become faster, more accurate, and less costly.

It's predicted that the compliance function will decrease in its overall size and its current workforce will evolve following four trends, in line with the shift towards an increased reliance on technology: an increase in seasoned and senior compliance professionals, an increase in compliance professionals embedded within front-office units, the transfer of operational roles within compliance to operations, and the disappearance of low value-added roles performing manual tasks due to automation.

This transformation will revolutionize the approach of financial institutions towards compliance, making it an integrated, streamlined part of their operations. The development of the Banking, Financial Services, and Insurance (BFSI) sector in 2023 will be significantly influenced by the synergy of customer requirements, technological advancements, and regulatory measures. Six key areas are anticipated to shape and influence this rapidly evolving field, combining the aforementioned compliance transformation with these new trends.

Balancing Digital Evolution with Emerging Threats and Environmental Sustainability: The pandemic accelerated the use of digital resources due to restrictions on in-person banking and insurance services. Now, the surge in digital adoption is being examined for its security, resilience, and sustainability, given its significant societal implications. As digital risks surface, risk control is becoming integral to all operations in banking and insurance companies, necessitating a redesigned risk strategy that involves substantial investment in data, infrastructure, reporting capabilities, and regulatory compliance.

At the same time, BFSI entities are aligning their digital transformation with sustainability objectives. Sustainability is progressively becoming a measurement of the extent of digital transformation. The industry is promoting the integration of Environmental, Social, and Governance (ESG) objectives in their products, operational processes, and corporate strategy, adding purpose through ESG considerations.

New Drivers for Operational Productivity: As the industry anticipates a possible economic downturn, most BFSI firms are focusing on cost transformation. Nine interdependent drivers are identified, including product streamlining, IT upgrading, and a mixed workforce, evaluated through outcomes beyond mere cost savings. Emerging technologies are playing a significant role in this transformation, particularly in hyper-automation, remote work collaboration, and advanced analytics for customer service.

Redefining the Future of Regulated Sectors: The transformation of the financial ecosystem due to decentralization facilitated by digital assets and tokens is imminent. In 2023, it's expected that all significant BFSI players will invest in bridging the gap between decentralized and traditional finance. With nine out of 10 central banks experimenting with central bank digital currencies (CBDCs), an increase in the uptake of new currencies and tokens in the regulated market is likely. Technologies like blockchain will support this transformation, enhancing benefits such as faster settlement times, uninterrupted 24/7 cross-border transactions, and automated foreign exchange conversion.

Transitioning from Open Banking to Open Finance: Global regulators have been supporting open banking initiatives to foster market competition. Open banking's transparency encourages banks to provide digital services, equitable pricing, and enhanced security. Open finance, extending data sharing to new cross-industry business models beyond banking products and services, is the natural progression of open banking. In 2023, various open finance ecosystem partnerships are expected to emerge, such as BFSI with automotive for future mobility, banks with energy firms for sustainability, and sports with banks for funding the creator economy.

Instant, Seamless, and Interoperable Cross-Border Payments: With more token network silos, opportunities for interoperability increase through country-specific CBDCs, stablecoin, and digital assets. Collaboration with SWIFT to expand the ISO messaging layer and offer gateways and trusted nodes (smart contracts) will help tap into the token interoperability market.

Broadening of the Regulatory Compliance and Reporting Solutions Market: As financial crimes and money laundering techniques evolve alongside technological advancement, financial institutions need specialized solutions to align with their regulatory landscape and prevent service misuse. The increasing threats have led to a surge in reporting standards and guidelines, often lacking compatibility and uniformity. The complex data demands of the financial sector necessitate finding suitable financial crime technology and software solutions to identify threats and adapt to changing regulations. Consequently, there will be a surge in regtech firms providing technology solutions to help financial firms achieve regulatory compliance.

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