Compliance Challenges

Top 10 Compliance Challenges in 2020

As the financial world gets more and more regulated everyday, organizations are facing greater burden and stress to keep up with the pace of alterations and to comply with the evolving regulations. In 2020, the challenges of regulatory compliances will require a more technology and user-centered strategies since the concepts like the geopolitical protectionism, the divergence in regulatory obligations, data processing, operational resilience, credit quality, shifts in capital, agility in compliance procedures, financial crimes, customer trust, and ethical business may be some of the hot topics to tackle in order to understand the financial atmosphere and cover the compliance needs.

The 10 top challenges the financial organizations should put special attention to in 2020 if they want to comply with the regulatory changes are listed below.

1. Geopolitical trends towards nationalism

 As the popularity of “globalization” started to fade away, the focus on protectionism, nationalism and sovereign rights re-emerged as an “anti-“ movement and this created an uncertainty in the policy and regulation side as well.

The change in the geopolitical area directly or indirectly affect the economic activities, trade businesses, monetary policies and eventually related regulations like GDPR, KYC, beneficial ownership, etc. Therefore financial organizations must remain aware of what is to come and expect the disruptions in the process even if they think that they are addressing diverse policies and regulations and continuing to implement necessary changes. Another risk here is that in the countries of uncertainty, financial crime may thrive due to the facilities provided by the innovative technologies.

2. Divergence in regulation and the need to “merge”

The divergent nature of regulations thanks to local and global needs is to be understood and embraced by financial organizations and the term “merge the diverge” must be learned and adapted into their strategies.

The main areas of divergence are:

— Cybersecurity, data privacy regulation, student loan servicing, and cannabis industry-related banking services

— Special regulatory and supervisory expectations to risk and complexity, deviating from global standards

— Innovative technological applications where new regulations may emerge

— Alignment with non-financial services federal regulators

3. Data processing: protection and governance

Financial services providers acknowledge data as something to be protected with governance and control within their organization and through third-party organizations. Although the quality of data and the way it is used are the most important aspects in the protection of personal or operational information, data is perpetually captured, monitored, processed and shared. Since the breaches in data sharing continues, the expectations for more stringent data privacy and security regulations are increasing in both local and global levels

4. Operational resilience: Be ready for the unexpected and adapt to changing patterns

 For the process of business transformation for the sake of regulatory compliance, the ability of the organizations to adapt to changing environments is one of the key concepts.

Regulators expect firms to have a highly broad view of operational resilience by both controlling the operational risks and managing the disruptions. Therefore, they need to operate an integrated approach including continuity planning, operational risk, and concentration risk analysis.

Also, the organizations need to take into consideration that outside sources like cyber crimes, environmental aspects or sociopolitical changes might create threats or disruptions to their businesses so, they must be ready for these as well.

5. Risks related to credit cycles

Financial institutions should learn from previous credit cycles and apply the learnings into their operations to prevent the potential risks which are related to:

— Risk layering and leveraged lending

— Expanded delivery channels and payment options

— New products and services and technology applications

— Disclosures via securities or trading activities, lending to non-depository institutions, or partnership arrangements.

6. Easing of regulatory capital and liquidity requirements

 There is a trend in easing the buffers in the capital and liquidity requirements; however, this does not necessarily mean weakening risk management because it seems that the regulatory focus on managing these activities together with risk management will resume.

In this scenario, financial institutions should expect:

— Upcoming final rulemakings for banks and nonbank entities

— Emphasis on governance over capital planning

— Creating a regulatory focus on capital and liquidity frameworks

7. Agility of compliance operations

 Efficiency and change are the two most important drives of legal and compliance processes. Together with the quickly evolving technological improvements, the speed of change within financial organizations requires firms to adapt to potentially emerging risks and transformations within the spheres of regulatory developments, new market necessities, and shifting consumer choices/preferences.

As the focus of the regulations turns to the echnology sector, the business strategies of the organizations change accordingly giving more attention to consumer protection risks including privacy, accessibility, and prejudice by taking AI and cloud systems into consideration. Eventually, the firms will bear the responsibility to understand the technological applications and their outcomes. On top of this, the challenges on the compliance side will remain in the center of areas like financial crimes, ethics, customer data protection, and geopolitical shifts.

8. Fine line in between innovation and financial crime

 As the beneficial side of technology is undeniable for the companies to deliver better service and value to their customers, it is also giving way to financial crimes and fraud.

There is a huge regulatory pressure on the companies to work to identify the risks for the crimes. The adoption of innovations to prevent these crimes like AI, fintech, or other co-sourcing arrangements is accepted and supported the regulatory authorities. However, since the volume of data, diversity, and number of sources and control of data is hard to navigate, the companies are still struggling with these.

9. Building consumer trust

The customer-centered business model involves a personalized service experience, mobility in between channels, data privacy, evidence of good corporate citizenship, and fair value. This is the model needed by financial service companies to build a loyalty-based relationship with their customers and it gained more importance in this evolving environment.

Personal data protection is also at the center of regulations as topics like use and/or sale of data for marketing purposes and similarly, data ownership and control are still hot topics when it comes to privacy concerns in the digital era.

10. Ethics in business

 Financial companies are also expected to identify and prevent unethical conducts as stated by the regulations. Monitoring, surveillance, reporting, and governance will be added to the frameworks of misconduct identification procedures.

The main points of concern will be personal data privacy, sales processes, fair treatment, incentive plans, market conduct, and third-part oversight, etc.

Serkan Arslan, CAMS, Head of Sales MENA