Achieving regulatory compliance has become a daily focus for financial institutions of all sizes. Although meeting these standards is no small task, there is no other option; the cost of non-compliance is much too high. Whether it’s debilitating fines or being named and shamed, no company wants to be called out. As such, firms need to understand the biggest regulatory challenges facing the financial sector and take steps to address them.
The broad scope of regulation
First and foremost, firms must recognise the sheer volume and breadth of regulation in existence. There are currently more than 750 global regulatory bodies and governing businesses, which means financial organisations are under the microscope; no company can escape compliance standards.
Each regulation comes with numerous clauses. For example, the Dodd-Frank Act, which was passed in response to the financial crash, has 2,300 pages of regulations that financial institutions must comply with. The abundance of legally enforced guidelines has a financial and operational knock-on effect for businesses, and the costs of compliance are only rising.
There are currently more than 750 global regulatory bodies and governing businesses in operation, which means that financial organisations are under the microscope
The scale of regulatory requirements isn’t the only issue that firms need to consider; complex risk calculations also demand their attention. Risk management is likely to pose a major challenge for many firms, in part because of the real-time calculations that are needed to comply with regulations such as Basel III.
Calculating risk has long been a manual process. As such, the infrastructure to cope with new demands for risk management is simply not in place. Firms are only just starting to realise that some level of automation is required to avoid falling behind.
Additionally, firms are working to build their three lines of defence, particularly with surveillance and controls processes becoming an integral part of compliance procedures. Firms should be looking to track, timestamp and easily recall specific data points as part of these procedures, especially as regulators, and the industry at large, have come to expect a certain level of transparency.
Knowing the customer
The financial sector must respond to increasing concerns about money laundering and terrorist financing. Even if a bank launders money unknowingly, it will still face huge repercussions from regulators. As a result, know your customer processes, which see businesses carrying out appropriate background checks for all clients, have become a priority for the industry. However, this puts huge pressure on the staff processing this information manually.
Errors can occur, and information risks being mismanaged unless employees receive the appropriate training and support. As such, it’s vital that staff are given the right tools to record client information accurately.
Recording information is vital to regulatory compliance. However, the method of recording required depends on the country the business is operating in. For international banks, this means varying the recording standards used across different countries – from the US Generally Accepted Accounting Principles to the International Financial Reporting Standards.
As a result of these different standards, banks often find themselves doubling up on work and investing a huge amount of time in meeting these requirements. Financial institutions dealing with numerous reporting standards must streamline each method in order to consolidate all the data.
The legal implications of data storage are perhaps one of the most understated challenges of regulatory compliance. Depending on the circumstance, firms may need to hold specific client information for several years, which can put a strain on the employees who need to provide this data to regulators, should it be requested.
Poor data management can have major repercussions for firms; those with inadequate data management procedures have been forced to improve their document processing capabilities very quickly or risk facing legal action.
Regulation in the financial services sector will continue to pose a challenge to firms both large and small. Compliance is not just about recognising the key regulatory pressures facing financial institutions, but also proactively ensuring the company is improving its processes and streamlining its operations. As the challenges around compliance continue to put pressure on firms, finding new solutions and methods will be vital.