The financial industry constantly evolves with new technologies, regulations, and customer expectations shaping the landscape. In 2023, financial service firms will face critical challenges that require a compliance perspective, from data privacy and cybersecurity to ethics and conduct.
While these challenges aren’t new, they are becoming increasingly complex, forcing firms to keep up to remain relevant and competitive in the industry.
Here, we’ll explore five critical challenges in detail and provide insights and strategies for financial service firms to address them from a compliance perspective.
Challenge 1: Regulatory Compliance
As the regulatory landscape constantly evolves, financial service firms must keep up with emerging laws that impact their operations to stay relevant. Failure to comply can result in significant financial penalties, legal action, and reputational damage, impacting the firm’s ability to attract and retain clients.
However, it’s never that easy! The number of regulations can be overwhelming, complex, and difficult to interpret. Additionally, the pace of regulatory change is sometimes rapid, and since compliance can be resource-intensive, smaller firms without the means struggle to stay afloat.
Financial service firms can develop a robust compliance program with regular training and risk assessments to help them stay compliant. This allows firms to identify potential issues before they become major problems.
Firms can also automate compliance processes using artificial intelligence and machine learning to analyse large amounts of data and identify potential issues. Automation frees up resources allowing companies to focus on other business areas.
Challenge 2: Data Privacy and Cybersecurity
In 2023, firms must prioritise protecting customer data to avoid reputational damage and regulatory penalties.
Financial service firms collect and process large amounts of complex data, including sensitive customer information. This data can be difficult to secure, especially as cyber threats get more sophisticated.
Similarly, as technology advances, firms must adapt to new and unknown security threats and vulnerabilities. This can be challenging as cybercriminals work around the clock, developing new methods of attack, forcing firms to stay ahead of these threats to protect consumer data.
Finding a balance between innovating new products and services and compliance with data privacy and cybersecurity regulations is also a struggle. Since innovation often requires access to customer data, potential data breaches may arise, and the impact may be severe.
Firms must implement best practices like encryption to protect customer data from hackers and limit access to sensitive information only to employees who need it to perform their duties. Additionally, firms should regularly audit their systems and processes to identify potential vulnerabilities.
Challenge 3: Anti-Money Laundering (AML)
AML regulations require financial service firms to verify the identity of their customers, monitor their transactions, and report suspicious activity to regulatory authorities. These regulations are in place to ensure that firms are not unwittingly facilitating criminal activity. Failure to comply with AML regulations can result in significant reputational damage, financial penalties, and legal action. For example, in 2021, the UK’s Financial Conduct Authority fined Standard Chartered Bank £102 million for failures in its AML controls.
However, sometimes AML regulations can be complex and difficult to understand, especially as they differ across multiple jurisdictions. Similarly, financial service firms process many transactions, and criminals constantly develop new methods to launder money. This makes it difficult to identify potential money laundering risks.
Firms must conduct risk assessments to identify potential money laundering and terrorist financing threats. They must also develop policies and procedures to mitigate those risks, including conducting customer due diligence and monitoring transactions for suspicious activity. Artificial intelligence and machine learning can help analyse large amounts of data and identify potentially suspicious activity.
Challenge 4: Digital Transformation
Using artificial intelligence (AI) and machine learning (ML) in decision-making processes can improve efficiency and accuracy in risk assessment procedures. Still, there are concerns about the potential bias in the data used to train these systems.
Regulators are also concerned about the potential cybersecurity risks associated with digital transformation. As firms increasingly rely on technology, they must ensure their systems and processes are secure and resilient to cyber-attacks.
To balance innovation and compliance, firms must also work closely with regulators to understand their expectations and requirements related to digital transformation. This will help ensure that their digital transformation initiatives comply with regulatory requirements.
Challenge 5: Ethics and Conduct
Regulations related to ethics and conduct in the financial services industry include the UK Senior Managers and Certification Regime (SMCR) and the US Dodd-Frank Wall Street Reform and Consumer Protection Act. These regulations require firms to establish codes of conduct and ensure that their employees adhere to these standards.
Failure to operate with integrity and transparency can result in significant reputational damage, legal action, and financial penalties. For example, in 2016, Wells Fargo was fined $185 million for creating fake accounts to meet sales targets, which ruined its reputation.
Firms must develop a culture of compliance that prioritises ethical behaviour, like a code of conduct that clearly outlines its values and expectations for employees. They must also provide employees with regular training on ethical standards, identifying potential ethical issues, and how to report violations of the firm’s code of conduct.
Navigating the Regulatory Landscape
Compliance is no longer a tick-box exercise but a critical part of business operations that requires investment in technology, staff, and training. Firms prioritising compliance will be better positioned to navigate the constantly evolving regulatory landscape and take advantage of the many arising opportunities.