The world of compliance must continually adapt to ever-changing needs across the economy, industry and wider society. COVID-19 has shown us how quickly things can change — and regulation is still trying to catch up with a radically transformed business landscape. So, what are these major areas of change, and how will these trends shape future regulation?
The destructive impact of climate change will undoubtedly impact the future of financial services. For example, policy is likely to encourage ‘green’ investments. As a result, assets that help to reduce carbon consumption will become more valuable. In addition, new insurance products that protect against volatile weather conditions will emerge.
The UK’s Prudential Regulation Authority (PRA) expects banks to have fully incorporated climate-related risk into their strategy by the end of 2021. In addition, The Financial Conduct authority (FCA) has supported green finance initiatives through their Climate Financial Risk Forum. It is likely organisations will be encouraged to comply with policies on further climate-related disclosures in the future. While current ‘green standards’ are mostly voluntary, this could well change in the coming years, especially if the industry is given climate-specific goals by the government. Organisations that participate in the conversation now, and show they are taking climate change seriously, will be better prepared for the future of climate compliance.
There are already new financial products emerging to meet changing customer needs. For example, younger generations are more likely to have volatile incomes and slower acquisition of wealth than previous generations. As a result, we have seen credit agencies using big data to estimate ratings more accurately, and the increase of parental contributions to mortgage deposits.
Again, these changes will require new regulation. Flexible financing provider, Klarna, which offers ‘buy-now-pay-later’ options, boomed during the pandemic. However, there was concern that some customers could continue to use the service when already in substantial debt. The FCA will now regulate this growing market, and new laws will ensure affordability checks are carried out on customers.
In a recent survey, Deloitte found that 95% of respondents were already implementing or planning to implement accelerated digital transformation of business services. Use of digital financial services is only expected to increase, as is the use of digital infrastructure such as cloud computing and analytical tools such as artificial intelligence. In addition, more big tech companies are moving into financial services. For example, Samsung’s collaboration with SoFi and Mastercard. Other big tech companies are pursuing more challenging disruption, such as Facebook’s proposals for digital currency.
2021 will continue the focus on technological compliance. For example, ensuring that AI is used ethically (i.e., avoiding issues such as gender discrimination) and increasing transparency in model usage. Cloud migration and Brexit are causing concern over cybersecurity and data protection, so regulators are likely to respond to any problems that emerge. It is unclear how regulators will respond to the entry of big tech into financial services, as it raises questions over data usage and potential issues of market fairness (i.e., using existing infrastructure to give self-preference of own services).
One of the most sudden changes in recent years is the mass shift to remote working. This move means it will be more difficult to verify that documentation is properly managed and that standards are maintained. According to CFA Institute's APAC Managing Director, Nick Pollard, ‘compliance is what you do when no one's watching. And in a sense, no one's watching you when you're working from home. So, you have to have a very strong culture around compliance.’ To avoid further regulations in this area, organisations must embrace a culture of compliance across all levels.
There have been fears that the increase in remote working has also created conditions for market abuse and misconduct (e.g., reduction in self-policing and reporting of incidents to compliance teams). Firms have been advised to update compliance policies and provide staff with additional training and/or surveillance tools if required.
There has also been an uptick in money laundering and fraud — particularly of government schemes such as the ‘Bounce Back Loan Scheme.’ To combat this, regulators are expected to advocate for greater sharing of industry data. GDPR is an obstacle to this, but by making the requirements and purposes of data sharing more explicit, firms should be able to obtain greater freedom.
Factors such as climate change, societal needs, technology and even our working habits will continue to shape future regulation. Being aware of changing consumer needs and potential issues that may arise will help organisations meet compliance regulations — and engaging with policy as it develops may even help organisations shape it.
Please get in touch to discuss your changing regulation, compliance, financial crime, data protection and legal departments changing needs and future growth requirements.
Head of Practice, Regulation, Compliance and Financial Crime
t: +44 (0)20 7422 9030