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5 Compliance Challenges for Financial Services in 2021
Lara Sinclair — 4th November 2020
Financial services brands around the world are under pressure to improve compliance and credibility when it comes to regulatory and governance issues.
This pressure is not only coming from regulators, but from customers and the community at large; poor lending and compliance practices have led to waning trust in financial services brands and the rise of innovative challenger brands.
With the advent of the COVID-19 pandemic, the focus has paused and shifted in some markets to an expectation that financial services institutions offer some community support in a time of global need.
Governments have been focused on forging a path through the health crisis, intermittent lockdowns and the resulting shockwaves that have rippled through the economic landscape, from consumers and business owners to landlords and lenders.
In Australia, the federal Government has delayed implementing new restrictions on mortgage brokers and financial product owners arising from the 2018 Haynes Royal Commission into the banking industry as it negotiates the pandemic with the assistance of the ‘Big Four’ banks. But it has already taken 24 actions arising from the Royal Commission and claims to have at least a further 35 already in the pipeline.
Meanwhile, the Australian Securities and Investments Commission will enforce new laws requiring mortgage brokers to act in the best interests of clients and broker remuneration changes from January 2021, kickstarting the next regulatory wave.
The UK has experienced a decade of global regulatory reforms sparked by the financial crisis and misconduct issues.
Global standard-setting bodies – such as the Basel Committee on Banking Supervision and the Financial Stability Board – are expected to have less ambitious plans in the coming year. The third round of Basel recommendations arising from the global financial crisis has been delayed due to the pandemic but is still expected to be implemented by 2023.
Meanwhile, in the US, regulatory, legal, and compliance teams are being asked to do more with less while grappling with new and emerging challenges that stem from new technologies.
Regulators often identify a breakdown in governance and controls as one of the root causes when trouble emerges in the banking sector.
So where are the fault lines when it comes to financial services compliance in 2021? There are some key challenges emerging for this critical discipline:
Increasing volume – and cost – of regulation globally
Regulators around the world have responded to the global financial crisis and other events by introducing new and more stringent regulations to protect consumers.
According to a recent PwC study of CEOs, 40% of business leaders are concerned that this constant change “increases the risk of their organisation not complying with relevant laws and regulations”.
Among financial services institutions, a significant amount of budget is “directed toward regulatory requirements and keeping the lights on”, and banks are squeezed deciding how much to spend on running the institution compared with changing it. Banks are “trying to keep pace with rapid regulatory change, while simultaneously trying to deliver value for customers and reduce operating costs”.
The rising cost of compliance is a concern for almost half of the CEOs surveyed.
“Organisations have typically separated their budget for regulatory spending from their budget for building capability and customer experiences,” the PwC study concluded.
“In the new normal, competitive advantage will go to those that can allocate capital in a way that recognises the correlations (and potential synergies) among the three — where every dollar spent enhances regulatory compliance, capabilities and experiences simultaneously.”
Bigger penalties for breaches
Corporate watchdogs are handing out bigger and bigger penalties for regulatory breaches.
In a 15-month period to 2019, regulators fined financial institutions US$10 billion globally – a steep annual increase on the $26 billion handed out in the previous decade, the majority of which arose from money laundering violations.
Up to 20% of that $10 billion in breaches was due to “simple errors on the part of bank employees”, 60% arose from crooks outwitting banks, and a further 20% was due to deliberate criminal conduct on the part of banks, according to Fortune.
Banks should therefore dedicate almost as much attention to internal compliance checks and balances to prevent breaches as to external measures.
Trust in banks is an ongoing issue
Most customers have at best a neutral relationship with their bank, according to a recent McKinsey survey, which found consumers have a net positive relationship with banks in the US and the UK, but not in most other western markets.
According to the study, trust in banks has declined compared to pre-COVID-19 levels in several countries.
In Asia Pacific, trust in banks remains low, although in Australia, there has been some improvement in bank trust scores coinciding with the COVID-19 pandemic as institutions have allowed the deferral of loan repayments due to the crisis.
Despite that, Australia’s ‘Big Four’ banks remain well behind community-owned brands such as Bendigo Bank.
In a Fintech market seeing rapid innovation, the hurdles for customers considering challenger brands are reduced when trust in established bank brands is low.
Consistency of branding, and the ability to quickly pivot and implement new messaging reflecting updated and more compassionate business practices during the crisis, has been key to those brands seeing an uplift in trust.
Senior executives are being called to account
Regulators are increasingly “holding senior individuals to account for the compliance,
professional standards and culture of their firms”.
In the UK, the Financial Conduct Authority extended the Senior Managers and Certification Regime to 47,000 companies in 2019, encouraging greater individual accountability.
It aims to set a new standard of personal conduct in financial services by:
- Ensuring senior managers are accountable for conduct in their areas of responsibility
- Ensuring a minimum standard of behaviour for everybody working in the sector through five Conduct Rules
- Enhancing professionalism by requiring firms to certify that their staff are fit and proper.
Similar regimes have emerged, or are emerging, in other countries including Australia, where the federal Government has proposed a new Financial Accountability Regime to increase accountability throughout the financial services sector.
It aims to ensure senior executives of these financial entities will be more accountable for the activities of the organisation for which they are responsible and to“impose strict consequences for those who fail to perform their roles with competence, honesty or integrity.
The US Federal Reserve Board has proposed guidance which seeks to delineate the roles, responsibilities and accountabilities of senior management and the board better.
As a result, all levels within financial services organizations are under scrutiny - from the board and senior management to the various business lines, independent risk management, and audit functions.
Cultural issues are under the microscope
Resetting the culture at many financial institutions historically shaped by the need to make big profits is an ongoing issue affecting compliance globally.
Ihe UK, for example, the Banking Standards Board has found that despite making genuine attempts to improve their culture, many UK firms struggle to get it right, while the G30 reported a decade of “slow progress and uneven results” when it came to improving banking culture.
There has been an increased focus on culture and conduct in the US from a number of authorities, including the Office of the Comptroller of the Currency (OCC), which launched an industry-wide review following the Wells Fargo sales practices scandal in which employees committed fraud to reach impossible sales targets.
In Australia, the Haynes Royal Commission found managing culture is not a one-off event, but a “continuous and ongoing effort that must be integrated into day-to-day business operations”.
“Banks must embed conduct and culture messages and expectations from the top down, through middle management down to the teller in their organization. There is increasing awareness that tone from above is as important as tone from the top.”
“While cultural norms and beliefs cannot be explicitly measured, the behaviours and outcomes that culture drives can and should be measured,” the Commissioner’s final report found.
Financial services brands must arm their employees with the tools, processes and technology that facilitates the clear communication of expectations, and makes it as easy as possible both for employees to comply and for conduct to be measured.
As the financial services industry concludes a challenging year and faces an equally complex 2021, technologies and processes that simplify procedures are a must to enable organizations to behave consistently and remain compliant in a rapidly changing regulatory and economic landscape.
At Outfit, compliance is built into our DNA. Our brand automation platform helps teams comply with cultural and corporate branding, messaging and process requirements quickly and easily, and makes it easy to track adoption and output.
Reach out to one of our consultants if we can help your team simplify compliance and brand governance.
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