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The financial services industry is heavily regulated, with a complex landscape of rules and regulations that organizations must follow to remain compliant. In the past few years, poor lending and compliance practices have led to waning trust in financial services brands and the rise of innovative challenger brands. Meeting all the regulations can be challenging, as they are constantly changing and institutions must continuously update their policies and procedures to adhere to the latest requirements. In addition, financial institutions are feeling the pressure from regulators, customers and the community at large to keep up with the regulations, because customers have more options to choose from, and the ability to switch to competitor brands is easier than ever before.

Businesses in the financial industry will need to become more resilient and inventive with their business models to manage instability and attain long-term growth and profitability. Here are the top five compliance challenges the financial services industry will face in the year ahead.

1. Keeping Up With Changing Regulations and Growing Uncertainty

One of the biggest compliance challenges facing the financial services industry is keeping up with changing regulations, especially after the economy rebounded following the pandemic. Financial institutions must ensure that their practices align with the latest regulatory requirements, which can be difficult as these requirements constantly evolve. In addition, keeping up with changing regulations can be especially challenging for smaller financial institutions, which may need more resources to devote to compliance.

Even so, regulators worldwide have responded to the volatile global financial crisis and other events by introducing new and more stringent regulations (e.g., climate responses and sharing personal data) to protect consumers.

According to a PwC study of CEOs, 40% of business leaders are concerned that this constant change “increases the risk of their organization not complying with relevant laws and regulations.”

Among financial services institutions, a significant percentage of the budget is “directed toward regulatory requirements and keeping the lights on.” Banks face pressure in deciding how much to spend on running the institution compared to changing it. Banks are “trying to keep pace with rapid regulatory change while simultaneously trying to deliver value for customers and reduce operating costs” — a nearly impossible tradeoff when they depend on both to survive.

The rising cost of compliance is a concern for almost half of the CEOs surveyed. And it’s a concern that likely won’t go away any time soon. These institutions will have to get more creative and resourceful with their capital, “where every dollar spent enhances regulatory compliance, capabilities and experiences simultaneously,” per the survey.

Automated content production can help empower teams to make quick updates at scale to their written compliance and regulations so teams can easily keep up with the changing industry regulations.

2. Improving Risk Control

Financial institutions are required to manage various risks, including credit, liquidity and market risks. Managing all of this can be difficult, as financial institutions must strike a balance between managing these vulnerabilities and maximizing profits. For example, a financial institution may need to dedicate a certain amount of capital to mitigate them. Still, financial institutions could use capital invested in revenue-generating activities better.

McKinsey shares that financial institutions can lower their risk management costs by:

  • Creating “analytics-aided techniques, such as digital credit assessment”
  • Establishing systems that provide advanced early-warning
  • Developing thorough stress testing for their systems
  • Measuring credit-collection analytics

According to the survey, “The expense of compliance oversight has escalated recently, and banks can use analytics to get economic returns from their considerable investments.” The report explains that by taking these actions, banks can better understand and estimate their returns on compliance investments. Alongside budgetary constraints, this is an important step for institutions to consider.

Another way that risk and compliance can be improved in financial institutions is by updating the company’s digital systems, referred to as digital transformations. When an institution frequently improves its technology architecture, its risk and security functions (not to mention the staff support) must also be able to keep up with the updated systems. This can be a large undertaking, yet ultimately, large-scale transformation is worthwhile because it brings large-scale risk and control implementations. Financial services institutions that modernize their digital transformations alongside their risk and security functions are better protected from potential threats — and will see greater returns on these investments.

Digital asset management software can help improve governance by empowering financial institutions to automate their content production. Teams can ensure total compliance by empowering stakeholders to only have access to approved key messages, approved imagery and legal disclaimers. Centralizing brand control makes sense. It ensures the business’s visual identity is used correctly and, in turn, strengthens the equity built among customers.

3. Ensuring Privacy and Data Security

Ensuring data security is another major compliance challenge facing the financial services industry, especially for fintech companies that maintain extremely sensitive data (i.e. credit card numbers and bank account information) and are required to protect this data from unauthorized access. Ensuring overall privacy and data security can be challenging, as cyber threats are constantly evolving and becoming more sophisticated.

Financial institutions must implement strong security measures to protect customer data, but these measures can be expensive and may impact the institution’s ability to compete in the market. Privacy and data security are not just critical competitive advantages, but rather are prerequisites for existing in the financial services business.

4. Environmental, Social and Governance Issues

In today’s competitive marketplace, financial institutions must not only meet regulatory requirements but also provide transparency and accountability for the products and services that customers, stakeholders and employees expect. The challenge is that the expectations these groups have around transparency and accountability are constantly changing, and financial institutions must stay ahead to remain competitive. According to ESG reporting, companies can’t delay in taking action on this because the alternative to prioritizing corporate integrity and employee well-being by not taking action could pose severe risks to a company’s brand, market position, customer relations, recruiting ability, culture and more.

The Net-Zero Banking Alliance is an example of a global group that is leading with transparency and accountability. They are aligning their lending and investment portfolios with net-zero emissions by 2050 and have agreed to publish emissions data annually in line with current best practices, as their lending and investment portfolios represent about 40% of global banking assets. In addition, the agreement targets the financial industry’s carbon emissions and those of their partnered businesses.

As more investors align their portfolios with net-zero targets, organizations will need to find an efficient way to track and report on essential ESG metrics as part of their financial compliance strategies. However, it won’t be easy. The amount of data needed far exceeds what can reasonably be managed by a team of people.

What can help? Automated processes and technology that can efficiently collect and analyze relevant data throughout the entire value chain. This will meet and exceed the expectations of an institution’s investors.

5. Preventing Fraud and Instilling Trust

According to McKinsey’s Annual Review, cyberattacks remain a serious risk, and the best banks have a well-protected and future-proof technology infrastructure and superior data security. However, preventing fraud can be challenging, as financial criminals constantly find new ways to evade detection.

Consistency of branding is crucial in maintaining trust with customers. Businesses that have the ability to quickly pivot and implement new messaging in the midst of the crisis, such as sharing updated and more compassionate business practices. Their ability to quickly pivot is vital to building back up any lost trust.

Financial services brands must arm their employees with the tools, processes and technology that facilitate clear communication. These tools should align teams’ expectations and make it as easy as possible for employees to comply and adhere to the regulations.

As the financial services industry comes out of a challenging year and faces what’s sure to be an equally complex 2023, organizations must employ technologies and processes that simplify to behave consistently and remain compliant.

Final Notes

Managing compliance is full of complexity, and banking institutions need to stay on top of the regulations to maintain their reputation and integrity. As the financial services industry contributes to both the economy and society at large, they must stay safe from fraud, theft, security concerns and reputational damage.

Financial institutions that put technology in place to help keep up with changing regulations are winning in the marketplace. Want to learn how? Check out our e-book to learn about how content automation can empower your team today.

Ready to speak to a member of our team? Schedule a demo with one of our consultants to learn how we can help your team simplify compliance and brand governance.