Financial Services | Survive & Thrive in a Complex Regulatory Landscape

5 Min Read

Financial institutions are under mounting pressure to improve their credibility when it comes to regulatory compliance and governance issues.

Thanks to the COVID-19 pandemic, and numerous factors preceding it, the finance sector continues to face evolving regulatory challenges during 2021 and beyond. As the rest of the world settles into the new normal, financial institutions need to rethink their compliance strategies to overcome new and emerging regulatory challenges to enjoy a redefined version of success. 

While the worst of the pandemic might be behind us, its after-effects linger on. Financial services were forced to rely on untested strategies to continue their services including work from home arrangements, health & safety initiatives and the extensive adoption of digital technology. The woes of financial institutions were further compounded and faced significant changes, with regulators tightening already stringent regulatory requirements to ensure resiliency, the integrity of information, and the safety of customers. 

According to a American Banker, financial institutions experienced an 18% jump in the cost of complying with anti-financial crime rules in 2020 and compliance costs have risen $33 billion from 2019, totaling $213.9 billion  last year. The LexisNexis Risk Solutions annual True Cost of Financial Crime Compliance Study released in June concours with these findings. Firms in the US alone spent $8.8 billion more on compliance costs in 2020 than in 2019.  

The UK has been experiencing a decade of global regulatory reforms sparked by misconduct issues and the financial crisis. Meanwhile in the US, regulatory, legal, and compliance teams are being asked to do more with less all the while trying to understand and implement new technologies to support them to meet these requirements. 

Regulators have identified a breakdown in governance and controls as one of the root causes when trouble arises in the finance industry. So where are the fault lines when it comes to compliance beyond 2021 in the sector?

Rapidly Changing Regulations

Regulators around the world have responded first to the global financial crisis and then the recent pandemic by introducing more stringent regulations to protect consumers. Financial services are trying to keep pace with rapid regulatory change, while simultaneously trying to deliver value for customers and reduce operating costs. A recent PwC study of CEOs revealed that the rising cost of compliance is a concern for almost half of the CEOs surveyed. 40% of business leaders expressed concern, that with rules and regulations subject to such regular and rapid change, and compliance measured at wide intervals, their organisations inevitably face the risk of falling out of compliance at some point. 

The Ever-Increasing Cost of Compliance

When new regulations are introduced, financial institutions face the unenviable task of having to overhaul their compliance processes to accommodate the changing regulatory requirements. As a result, these organisations incur an ever-increasing cost of compliance.  

The average cost of compliance, according to a study by Globalscape and Ponemon Institute, stands at $5.47 million compared to an average of $14.82 million for non-compliance. With an average difference of $9.35 million annually it is clear to see that compliance is worth the investment. 

In the new normal, competitive advantage will go to those that can allocate capital in a way that recognises correlations and potential synergies; and ensures every dollar or pound spent enhances regulatory compliance capabilities and customer experience simultaneously.  

Heftier Penalties

Today, corporate watchdogs are handing out heftier penalties than ever before for regulatory breaches.  Non-compliance costs stem from costs associated with the resulting business disruption, losses, reduced productivity, penalties, fines, and settlement costs among others.  According to Fortune, last year alone, the total fines for non-compliance amounted to $10.6 billion, with the breakdown being 20% from employee errors, 60% owing to cyber-attack-related fines, and 20% as a result of criminal misconduct.  Financial services must take key steps to dedicate equal attention to internal compliance checks and external checks to prevent breaches. 

Increased Emphasis on Consumer Data Protection

According to recent research, between February and April last year, cyber-attacks targeting the financial sector increased by 238%.  The growth in cyber-attacks and the potential impact is a major challenge for financial institutions. This upsurge in both frequency and intensity – have resulted in regulators imposing stricter data regulations including SOX, GDPR, PCI, HMDA and DSS to protect consumer data.

Cultivating a Culture of Compliance

Traditionally the culture of financial institutions has been driven by the requirement to produce big profits. A current issue affecting compliance globally is reshaping this culture into one that understands why compliance matters and how it is closely linked to a strong financial position. 

In the UK, the Banking Standards Boards found that firms struggle to get it right despite making genuine attempts to improve their culture.  On the other hand, US firms have been subject to an increased focus on culture and conduct following the wake of the Wells Fargo sales practices scandal. The Haynes Royal Commission, in Australia, found managing culture is a continuous and ongoing effort that must be integrated into day-to-day business operations. Financial services firms must arm their employees with the tools, processes, and technology that facilitate the clear communications of expectations, making it simple for employees to comply and for conduct to be measured. 

The Finance Industry is Going Through an Unprecedented Time – And Will Continue to Do So

This this recent Forbes article, Risk Management and Compliance Expert, Michelle Prohaska, recognised that for financial institutions that wished to innovate and grow, the time is now to opt for a proactive approach to compliance. She highlights the fact, that steering through even the messiest of regulatory environments is possible with a strategic approach, the right support and collaboration with accountable partners.

According to Adam Collins, Chief Product Officer at Camms, “It’s time to disrupt your compliance status quo. An active financial accountability framework is driven by robust regulatory compliance. Implementing an integrated approach to governance, risk, and compliance will embed strong controls and underpin informed decision-making. Now is the time to reflect on your current regulatory change framework and assess its capabilities in light of anticipated changes in the future.”

Adam added “As financial institutions ready themselves to look beyond 2021, technologies and processes that simplify compliance workflows and procedures are a must to enable these organisations to ensure consistency and remain compliant in a rapidly changing regulatory and economic landscape.” 

Here at Camms, we help business leaders understand exposures and areas of non-compliance to drive business actions and address legislative changes using our, Camms.Risk solution. Our software links to key regulatory providers like Lexis Nexis, to automate regulatory horizon scanning. When a regulatory change happens the relevant stakeholders are notified and workflows to kick into action to ensure the relevant policies, procedures and processes that are affected are amended in line with requirements. Reach out to us to discuss how we can help you stay a step ahead in a world of constantly changing regulations and complex compliance frameworks. 

Daniel Kandola

Vice President, EMEA

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