The post-crisis supervisory structures have been gradually settling into place, and financial institutions have been adjusting their business models accordingly. The rapid pace of technological change is perhaps the most creative force in financial services today.
Big data and artificial intelligence analytics are becoming more widely used by banks’ financial crime teams, which are grappling with the dual challenges of reducing fraud and detecting suspicious transactions. Banks and vendors say they can reduce false positives and track customer behavior — all of which enables analysts to spend more time investigating high-risk transactions.
Elsewhere, regtech’s benefits have been slower to materialize. There are hundreds of vendors promoting a raft of solutions that promise to make compliance and regulatory reporting easier. That could be by bringing in more automation or by helping the market to better understand rules and regulations. Banks, however, have yet to digitalize compliance in a comprehensive and meaningful way.
Banks are investing heavily in risk and compliance but often they are still using reliable, legacy technology and processes. In many cases, their IT systems are disconnected and outdated, with data stashed in different silos. In this environment, it is hard for many compliance teams to justify deploying advanced regtech solutions.
The lack of standardized risk and regulatory data — a hallmark of the 2008 crisis — still remains a fundamental problem for incumbent financial services firms. This is hindering the potential of regtech and advanced analytics to transform the sector. It is also presenting an opportunity for neo-banks and other fintech players to steal a march on their competition by building systems that are “digital native” and big-data-centric.
Culture remains a problem
Aside from technology, culture remains a problem. This is notably visible in Australia, where conduct and operational risk problems persist nearly 12 months after the landmark Royal Commission. In the latest development, regulators have accused the country’s Westpac of 23 million breaches of anti-money laundering laws, saying the banking giant ignored red flags and for years enabled payments from convicted child sex offenders and “high risk” countries. The bank faces a billion-dollar-plus penalty and is expected to settle the case as quickly as possible in early 2020. Goldman Sachs, meanwhile, is still negotiating a multi-billion-dollar settlement over its role in the 1MDB scandal in Malaysia.
Compliance professionals will need to keep a close eye on the U.S. government in a presidential election year. Regulators will seek to finish rule-making before the pre-election uncertainty begins. A bitterly divided Congress is unlikely to overhaul regulations, but election-year proposals and political campaigns will provide an insight to future agendas of the victors. The Supreme Court also potentially faces questions on healthcare and financial regulation over its next term.
Brexit logjam broken in the U.K., looking ahead to trade talks
The U.K.’s recent general election has at least delivered certainty after three years of logjam following the Brexit referendum vote of June 2016. The passage of the Withdrawal Act through both Houses of Parliament shortly before Christmas means the financial services industry can prepare for the next stage of trade negotiations between the European Union and the U.K.; it remains to be seen, however, whether these will conclude before 2021, the oft-stated goal of the U.K. Prime Minister Boris Johnson’s administration.
The fact Brexit is no longer in doubt appears to have concentrated some minds with calls for London to distance itself from E.U. directives on financial services. The U.K. should use any wriggle room available to it to tailor its financial industry rules while preserving the ability of U.K. banks and insurers to do business in the E.U., City leaders said in early January. Mark Carney, the outgoing Governor of the Bank of England, said there was little point in the U.K. aligning its financial rulebook entirely with the E.U. post-Brexit in the hope of securing a better trade deal.
At a geopolitical level, uncertainty remains as the introduction of trade barriers threatens to reverse the flow of prosperity that has come with the rapid globalization of finance and trade. In addition, the United States is enforcing economic sanctions ferociously, which is having on-going consequences for banks and multinational companies across a range of sectors, including technology and telecommunications. The Trump administration imposed a further round of sanctions on Iran on January 10.
Nowhere has that focus been sharper than Iran, following the killing by U.S. forces of a senior Iranian commander in Baghdad on January 3. As tensions escalate between Washington and Tehran, banks would be wise to consider taking additional steps to ensure that funds flowing to Iranian-linked militant proxies are spotted and reported to authorities. Simply screening against the U.S. Treasury Department’s terrorism blacklist will not sufficiently protect financial institutions amid the United States-Iran row.
Careful scrutiny to root-out and report suspicious transactions is required, officials told Thomson Reuters Regulatory Intelligence.
The Chinese proverb “may you live in interesting times” was never more apt.