You can download TRRI’s 7^th report on Fintech, RegTech, and the role of compliance in 2023 here

On the other hand, there are signs of a slowdown in the growth of the fintech sector. In the first half of 2022, for example, the total capital invested in fintech worldwide reached $59 billion, which was flat year-over-year, according to Innovate/Finance’s 2022 Summer Investment Report. What’s more, there were 3,045 deals completed in the fintech sector, fewer than the 3,401 deals in the first half of 2021.

The slowdown is echoed in the findings from this year’s TRRI survey. There was a fall in the number people feeling extremely positive about fintech and regtech. For fintech overall, this year’s survey reported that 15% of respondents were extremely positive compared with 31% last year. For regtech, 15% of respondents felt extremely positive compared with 26% in 2021. What’s more, less than one-in-ten (8%) of respondents from G-SIBs felt extremely positive about fintech.

It may be unsurprising that respondents felt less positive about innovation and digital disruption given the challenges that firms must address across the board. This year, respondents said that the availability of skills (20% fintech, 16% regtech) and regulatory approach (14% fintech, 18% regtech) were the most significant challenges anticipated in the next 12 months. For G-SIBs, concentration risk and third-party providers ranked highest among challenges for fintech (15%), whereas cultural approach (15%) was the biggest challenge facing G-SIB regtech users. Data governance and cyber resilience also feature highly in the list, with other areas including financial crime and operational resilience also prominent.

Regulators are also adopting technological solutions to help with their supervisory roles and the management of large volumes of data. That means, firms need more interaction with regulators on fintech and regtech. More than two-fifths (43%) of G-SIBs reported having spoken to their regulator about fintech and regtech. This contrasts with responses from other financial services firms, nearly 60% of which reported that their regulator had not spoken to them about the use of technological solutions.

Despite this current slowdown and waning of enthusiasm, the future of the fintech market remains optimistic, the report observes, recommending that financial services firms should continue to invest in technology, IT infrastructure, and associated skillsets. To maximize the potential of technological innovation, firms must continually reassess their technological needs and then invest in solutions tailored to the activities of their business.

The Fintech, Regtech, and the role of compliance survey has, in its lifetime, attracted more than 3,000 respondents. Participants from all sectors of financial services — from globally significant banks to technology start-ups — took part in this seventh survey. The survey results are intended to help financial services firms with planning, resourcing, and direction, allowing them to benchmark whether their approach, skills, strategy, and expectations are in line with those of the wider industry. The report specifically focuses on areas that directly affect the compliance function.

The report also assesses the extent to which firms are turning the technological challenges they are now facing into opportunities, embracing new ways of working and navigating the evolving regulatory approach.

Indeed, as global economies moved away from the worst of the pandemic, it seemed early on that 2022 could provide a sense of normalcy, if not a return to traditional business practices. However, the rocky shoals of the war and global economic turmoil soon put an end to that sunny thinking. Yet many professional service firms and their corporate counterparts in the US and around the world found ways to remain profitable, resilient, and forward-thinking enough to allow some positive direction as we all head into 2023.

The Thomson Reuters Institute, through its blog posts, podcasts, market reports, and in-depth analysis, has chronicled many of the changes that swept through the last year, offering insights into how many organizations are adapting and what solutions are being successfully utilized.

If there were trends to discern in this very busy year, it was that twin issues of talent and technology implementation were impacting corporate departments and professional service firms to a greater degree as the year went on. And some of the most-read pieces on the blog site reflected that. For example, one piece that was very widely received described the different power skills that allow employees to flourish in new hybrid work environments; also, the changing regulatory stance toward the practice of law, especially around whether non-lawyers can own law firms, was of keen interest to our readers.

Further, many law firms, government agencies, tax & accounting firms, and corporate departments were beginning to grasp that the technology needed to meet the growing demands of the digital economy was of paramount importance. Indeed, as we moved toward the end of 2022, it was clear that technology adoption and maximizing its use simultaneously was among the biggest challenges and most promising opportunities that organizations are facing going forward.

Key market reports & in-depth podcasts

Throughout the year, it was the goal of the Thomson Reuters Institute to bring together people from across the legal, corporate, tax & accounting, and government communities and ignite conversation and debate in order to shed some insight on the newest industry developments and the most critical opportunities and challenges market participants are experiencing.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

We did this in part by providing coverage of these topics on the Thomson Reuters Institute blog site — such as podcasts, videos, and key market reports — and by hosting world-class events, which kicked off in Amelia Island at our 29th Annual Marketing Partner Forum, which brought together global law firm leaders and the best strategic thinkers from around the world to discuss the steep challenges facing firms in the legal market; and continued in New York City with our 21st Annual Law Firm COO & CFO Forum, along with many more in-person and virtual events throughout 2022.

As our reach expanded over the year — the Thomson Reuters Institute blog site reached more than 1 million annual page views this year for the first time in its history — our coverage expanded as well. We created two new resource centers on the site, to accompany those dedicated to covering the legal, tax & accounting, corporate, and government areas. Our new resource centers — Environmental, Social & Governance (ESG) and Technology & Innovation — allow us to offer readers dedicated content and insight into those areas.

Throughout the year, the blog site offered a steady stream of analysis and market insight reports that shed light on what participants in the legal, tax & accounting, and corporate fields were experiencing in their respective marketplaces in today’s economy. For example, in the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, including a hot market for legal talent that has driven up costs. Even so, the report showed that many law firms have managed the difficult market with a good level of success last year.

On the other side of the table, our reports on corporate law departments and corporate tax departments shed further light on the immense pressure these departments were under from their corporations to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the pandemic, it appears the dramatic changes undertaken by corporations during that time — especially around talent management and adopting new technology — may only be the beginning.

Also, our series of twice-monthly Insights podcasts offered in-depth discussions throughout the year on topics ranging from the viability of the new cryptocurrency economy to the most common misconceptions in the legal industry around artificial intelligence, and from how financial institutions were managing Russian sanctions to how organizations can benefit from client feedback programs.

Now, as we move into 2023, the Thomson Reuters Institute will continue offering insight into the latest events and trends, bringing leaders together, and mapping out the opportunities and challenges facing corporations and professional service firms going forward.

To that end, the Thomson Reuters Institute, along with key market partners, have published a series of in-depth State of the Markets reports over the last year that examine several different aspects of these markets and offer insights into how many organizations are adapting and what solutions are being successfully utilized. The idea behind these State of the Markets reports was to provide readers with an understanding of how their peers in law firms and corporations are implementing transformational change within their own organizations, suggesting ways that other firms and department leaders could innovate in order to best prepare for the future.

Legal

In the legal market, our flagship Report on the State of the Legal Market, published each January in partnership with the Center on Ethics and the Legal Profession at Georgetown University Law Center reviews the performance of U.S. law firms, breaks down the factors that drive firms to take a longer-range, more strategic view of their market positions. In the 2022 Report on the State of the Legal Market, we saw that the legal market has remained resilient, even though numerous key challenges remain for many law firms, such as a hot market for legal talent that has driven up costs.

Yet, the report showed that many law firms have managed the difficult market with a good level of success last year. For example, demand for legal services soared in 2021, and even exceeded pre-pandemic demand levels in some practice areas. Law firms also sought to boost profitability by raising their billing rates aggressively, which helped to secure another year of strong profits for many law firms.

When we break the legal market down, either by size or region, we can offer readers even more valuable insights into how many law firms are managing their challenges.

Our 2022 Report on the State of the Midsize Legal Market, for example, detailed how the midsize law firm segment, while not immune to the volatility experienced broadly in the overall legal market over the past several years, seemed to have staked a position going into the latter half of 2022 that finds them better positioned relative to the rest of the market, including their larger competitors.

One way they’ve been able to fare better — especially in terms of talent retention — was by leveraging their firms as being a desirable place for attorneys to work, even if the pay scale is less than at larger firms. The strategy paid off, and attorney attrition in midsize firms was less than in other sectors, demonstrating that, at least for some lawyers, a good working environment is about more than just money.

You can explore our top trending Thomson Reuters Institute insights that shaped 2022, or you can relive some of our highlights from this year here. And for further coverage of the legal, tax & accounting, corporate, and government sectors, visit the Thomson Reuters Institute.

Similarly, in the small law firm and solo practitioner segment, leaders voiced a general sense of optimism and expectations of future growth, despite an uneasy economic picture, according to the 2022 Report on the State of US Small Law Firms, published this month.

Interestingly, when we looked at other legal markets around the globe, we saw many of the same trends and challenges as in the U.S. market, but with a different emphasis. For example, the State of the UK Legal Market 2022, published in April, detailed how strong client-driven pressure was forcing law firms there to address issues ranging from demonstrating their value to offering tech-savvy solutions. And in the Australian legal market, the 2022 Australia: State of the Legal Market Report illustrated that some of the same downward pressure on legal demand experienced there was now being felt in the U.S. market in the latter part of this year.

Corporates

The Thomson Reuters Institute State of the Markets reports also look at the other side of the table, examining what corporations are doing to better manage their internal law and tax departments.

We found both departments facing immense pressure from their parent company to transform the way they operate, with special emphasis on working more efficiently and cost-effectively. Indeed, coming out of the COVID-19 pandemic, it appears the dramatic shifts in workflow processes that corporations undertook during that time – especially in working environments – may only be the beginning.

For instance, in the 2022 State of Corporate Law Departments Report we looked at how the dramatic shifts that law departments endured during the pandemic could kick off a larger transformation. The corporate response to the COVID-19 pandemic of embracing to a large degree what they saw as unavoidable change has left companies with a desire to capitalize on those changes and make them a permanent part of their daily business.

In the report, corporate law department leaders surveyed looked to be getting the message, ranking conducting operations efficiently and delivering legal work more effectively among their top priorities going forward. The report showed that the most successful law departments will be those that leverage the momentum of the change forced on them over the past two years, both in how they integrate and operate within their organization.

Similarly, the 2022 State of the Corporate Tax Department Report showed how the twin trends of technology and the war for talent are impacting how corporate tax departments are operating. Specifically, the report examined the strong tension between corporate tax departments seeking greater effectiveness and efficiency through technology, and tax professionals in those departments who are constantly being asked to do more, while working faster and with fewer resources.

Corporate tax departments were far from alone in facing this challenge. Many law firms and corporate law departments began to grasp that the technology needed to meet the growing demands of the digital economy is pulling them in several directions at once, making technology adoption and its use simultaneously one of the biggest challenges and most promising opportunities organizations are facing.

Indeed, there is even a new generation of consumer that reacts economically to the reputation of an institution, and it is increasingly common for institutions to endanger that reputation by running afoul with certain customers that they chose to accept. It’s these failures in financial institutions’ vetting process and its know your customer (KYC) compliance programs that can greatly cause harm to their reputations and integrity.

Global regulators are focusing on KYC rules as a way to ensure financial institutions across the world are not offering their banking services to illicit actors or being willfully ignorant of the risks that they are taking.

In a new white paper, Financial Institutions & Know Your Customer Rules: From Security to Solutions, published by the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence, we look at how KYC rules are playing a bigger role in the compliance and security of financial institutions. The paper also examines the challenges that financial institutions are facing in getting in compliance with changing KYC rules both in the United States, the United Kingdom, and around the world. Finally, we’ll see how some institutions and financial third parties are looking for solutions, either by creating new tech products or by outsourcing, to make their KYC challenges more efficient and cost effective.

The paper also shows that global regulators are focusing on KYC rules as a way to ensure financial institutions across the world are not offering their banking services to illicit actors or being willfully ignorant of the risks that they are taking. Regulators see these rules as being able to level the playing field and decreases gaps in screening for potential bad actors.

In addition, customers and other businesses are looking to make sure they are only associated with those financial institutions that do not have connections with bad actors. As global financial crime only increases worldwide — with a big boost in such illegal activity seen during the years of the global pandemic — more and more scrutiny will be placed on how financial institutions determine the real identity, suitability, and financial sophistication of their banking customers.

As the paper argues that KYC is here to stay, and its compliance and government oversight likely will only become more stringent. Financial institutions who fail to understand the importance of proper KYC compliance programs and their impact on institutions’ reputation and security are in for a mess of consent orders, bad publicity, and costly fines, among other negative impacts.

To download a copy of the new white paper, “Financial Institutions & Know Your Customer Rules: From Security to Solutions”, please fill out the form below:

While some of these forces might be short-lived — such as higher energy prices (which have already begun to abate) — others, including the political polarization of ESG issues in the United States, are more difficult to gauge. The most powerful, disruptive force, however, is arguably Russia’s invasion of Ukraine, which created a pressing need to strengthen energy security and will likely require more fossil fuel extraction, at least in the medium term.

Existing international pledges to cut carbon emissions to net zero by 2050 were already challenging; but now, given the new reality, governments and companies are scrambling to balance their green-industry ambitions with these new imperatives of energy security and higher costs. The Russian war exposed all too clearly what was already known: many countries, particularly in Europe, are still strongly dependent on Russia’s oil and gas exports.

To examine these myriad issues further as well as their combined impact on ESG initiatives across the board, the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence have published a new paper, SPECIAL REPORT: ESG Under Strain, that digs deep into the current challenges governments and companies are facing on the ESG front.

For many citizens, shareholders, company executives, and government officials, the importance of the underlying principles of ESG has not diminished.

As the special report details, other stress points have emerged among those entities that in the past were leading champions of ESG issues. The world’s largest asset manager, BlackRock, reduced its support for U.S. shareholder proposals on ESG issues by nearly half in this year’s annual meeting season, as the firm voted for just 24% of them. The group had warned in May that shareholder ESG proposals were becoming too prescriptive, and that Russia’s invasion of Ukraine had changed the investment calculus.

ESG has also become a flashpoint for conservative politicians in the United States. Many Republican-led states have adopted measures that seek to exclude banks that support ESG policies. The controversy is not only climate change; social issues have also come under scrutiny, and many companies are being caught in the political crossfire. With the U.S. Supreme Court having overturned a decades-old law on women’s right to abortion, conservative states which support the Court’s decision are targeting companies that seek to help female employees obtain such health services.

Still, even against such headwinds there are notable positive developments in the fight for ESG recognition. There are already signs that Russia’s war is quickening efforts by Western governments, particularly in Europe, to reduce their dependency on fossil fuels. For example, Germany, Europe’s largest economy, agreed to a major package of reforms in July aimed at boosting the production of renewable power. That move allowed the German government to announce that it expects to end purchases of Russian coal and oil this year, and of natural gas by 2024.

In the United States, the Inflation Reduction Act was passed into law in August, and this new legislation includes $370 billion to support clean energy sources and speed the transition from fossil fuels. The new law is expected to accelerate private sector investment in renewable energy and help the United States meet its net-zero emissions pledge by 2050.

Meanwhile, ESG regulatory efforts in the EU, the UK, and the Asia-Pacific region are gathering speed as well, with numerous proposals on company climate disclosures already in effect or poised to come online either this year or next.

Of course, how these crosscurrents play out over the next year or two is difficult to predict. This report focused on two problems that affect all companies and should be on the agenda of boards and senior management: i) the growing efforts of regulators to stamp out “greenwashing”; and ii) the uneven pace of ESG regulation among jurisdictions.

Clearly, for many citizens, shareholders, company executives, and government officials, the importance of the underlying principles of ESG has not diminished. Indeed, the imperative for companies to earn their social license through the careful application of well thought out ESG initiatives, appears to be rising.

You can download the full report, “SPECIAL REPORT: ESG Under Strain”, from the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence here. (You can also find a British-language version of the report here.)

Thomson Reuters Regulatory Intelligence’s (TRRI’s) newly published 13th annual Cost of Compliance Report, focuses on the challenges expected to be faced by risk and compliance functions within financial services firms in 2022. The report is based on a survey that generated responses from almost 500 practitioners worldwide, representing global systemically important banks, banks, insurers, asset and wealth managers, regulators, broker-dealers, and payment services providers.

You can download a copy of Thomson Reuters Regulatory Intelligence’s (TRRI’s) newly published 13th annual Cost of Compliance Report here

The survey questions remained largely the same as the previous year, and the survey closed before the Russian invasion of Ukraine and the resulting widespread sanctions. The shifting priorities highlighted in the survey results will only have been exacerbated by the myriad sanctions imposed on Russia.

Last year’s Cost of Compliance Report pointed to a need for compliance officers to focus on planning for the future and developing a vision to manage their firms’ evolving compliance and regulatory risks.

The new 2022 report and survey shows the difficulties that compliance officers are experiencing as they try to plan for the future. Competing priorities are compounded by tightening budgets and potential shortages of skilled professionals. Compliance functionality is a fundamental part of the in-house core competency required to secure the long-term future of financial services firms, but many are struggling to meet their commitments while maintaining an appropriate risk and compliance culture.

The demand for compliance skills has increased substantially in the last few years, the report shows. The regulatory environment has diversified, with developments occurring in many areas, such as crypto-assets, fintech, artificial intelligence, third-party management, operational resilience, and cybersecurity. The range of regulatory topics for which compliance is now expected to provide senior managers with assurance has increased. There is also emerging evidence that the compliance function is having to work much harder to continue to be heard at the highest level of the firm.

The 2022 results show a frustration among respondents that, despite compliance’s widening duties, staff numbers are unlikely to grow, mostly because staff costs are increasing and budgets remaining tight. Add to this the increases in personal liability for compliance officers, and it’s perhaps easy to see why capable individuals may be deterred from joining the profession and experienced personnel may choose to leave.

Outsourcing, new technology, and regulatory technology may step in to plug some of the gaps, but all these resources will need to become more sophisticated to make the type of changes required by compliance functions.

According to the new report, the greatest compliance challenges that boards expect to face in 2022 include:

Further, the 2022 report briefly explores some of the main regulatory developments and other drivers that have contributed to the heightened demand for skilled compliance officers as well as the challenges compliance officers are facing.

The findings in the report are intended to help financial services firms with planning and resourcing while allowing them to benchmark their own approaches with those of the wider industry. The experiences of the global systemically important banks are analyzed where these can provide a sense of the stance taken by the world’s largest financial services firms.

What does the ideal future of the compliance function now look like?

“I am concerned compliance is moving backwards, not forwards. That’s due to other challenges — supply chain, pandemic, and non-pandemic issues — that we’re getting less budget, getting more isolated, and returning to check-the-box type of compliance management. We’re in danger of losing the progress we’ve made rather than moving forward into a future state, ideal or not.”

— Anonymous, United States of America

In some firms there may be a perspective that technology could reduce the need for compliance functions. In fact, the increased popularity of regtech is a step down this path; however, technological solutions are often immature and need to show their value before they’re widely accepted. It is imperative that compliance functions, whether manual or automated, showcase their value and necessity to senior managers. A well-resourced, skilled, and managed in-house compliance function remains the most effective way of delivering high-quality compliance at a firm. Indeed, compliance skills are a core competency, and an appropriately resourced compliance function is a key way in which a firm can ensure that it continues to thrive.

Strong compliance functionality is difficult to achieve especially in the current climate. Firms should consider a wholesale review of their internal compliance strategy. A board-sponsored directive that the compliance function evaluate the firm’s post-pandemic position, the impact of new geo-political tensions, the refreshing of skills, and a continued investment in digital transformation all may go some way to untangling competing priorities that compliance leaders now face.

TRRI thanks all respondents for their participation in the survey, offering a continued assurance that responses will remain confidential unless permission to include an anonymized quote has been received.

The special report will be featured on the Compliance Clarified podcast which is available on Google, Apple, and Spotify.

You can see report co-author Susannah Hammond speaking about the report on Reuters Insider here.

The report probes new areas of global regulatory emphasis such as central bank digital currencies (CBDCs), non-fungible tokens (NFTs), stablecoins, decentralized autonomous organizations (DAOs), crypto-advertising, and financial crime.

The report also contains an updated compendium and map, which offers a country-by-country overview of the rapidly developing regulatory and legal framework for cryptos. The compendium includes approximately 70 important countries, their regulatory approach or stance on cryptos, general tax status along with links to valuable information such as the pertinent regulatory bodies or enacted regulations.

You can see the full digital version of the Cryptos on the Rise 2022 report here

The tremendous growth of cryptos, now estimated to be near $3 trillion in total market capitalization, is also examined. Such growth in popularity and size means that crypto-assets are now presenting new risks, such as disruption of traditional financial services and growing concerns about potential threats to global financial stability. Other, less macro-risks include the need to protect vulnerable customers, market manipulation, fraud, anti-money-laundering concerns, and cybersecurity, all of which will also need to be addressed. The increasing regulatory challenges are exacerbated by the growing public awareness, acceptance and use of cryptos.

Indeed, this perceived threat to financial stability is being considered by supranational policymakers with the identification, monitoring, and management of risks continuing to concern and on occasion confound regulators and firms alike. The challenges include operational and financial integrity risks from crypto-asset exchanges and wallets, investor protection, and inadequate reserves and inaccurate disclosure for some stablecoins. Moreover, in emerging markets and developing economies, the advent of crypto can accelerate what the International Monetary Fund has called cryptoization — which occurs when these crypto-assets replace domestic currency and circumvent exchange restrictions and capital account management measures. In other words, creating a situation that could have a potentially profound impact on financial stability.

Although outright bans on cryptos around the globe are somewhat rare and are diminishing, some jurisdictions are emerging as staunch advocates. Many regions, however, fall somewhere in the middle as regulations are slow to keep pace with the immense popularity of cryptos — a risk, in and of itself.

In many countries, cryptos appear to be at a legal and regulatory tipping point, the report shows. Concerns about financial stability and vulnerable customers, together with the apparently persistent misperceptions about financial crime, are driving policymakers to consider significant action. Policymakers must, however, balance these considerations with the benefits which could be derived from the more widespread adoption of cryptos.

Some countries, meanwhile, are welcoming cryptos with seemingly few regulatory concerns. Cryptos’ borderless nature makes this even more challenging, as is evidenced by the near-overnight relocation of miners and crypto-firms out of China after that country clamped down on crypto activity. Most jurisdictions are reluctant to stifle innovation, but it would be politically unacceptable to deliberately risk either wholesale financial stability or widespread retail customer detriment.

The clear message from the report is that there is an urgent need for a coherent, comprehensive, and global approach to the regulation and oversight of cryptos. The need for policymaking pre-emption and cooperation is seen as increasingly urgent as crypto-assets — which for now only accounts for a small portion of overall financial system assets — continues to grow rapidly. Further, direct connections between crypto-assets and systemically important financial institutions and core financial markets are rapidly evolving, opening the door to the potential for regulatory gaps, market fragmentation, or arbitrage.

Without a coherent international approach to cryptos there is a danger that they will fail to achieve their potential, and the world will lose the considerable benefits they could bring.

The special report will be featured at several upcoming conferences as well as on the Compliance Clarified podcast which is available on Google, Apple, and Spotify.

Yet, in addition to the AMLA and the CTA, financial services firm leaders have a multitude of other issues keeping them up at night — from changing regulations to sanctions screening to the quality of their data as they continue to on-board new customers, often remotely, at a rapid pace.

In the 4th edition of the Thomson Reuters Anti-Money Laundering Industry Report we sought out to learn the specific industry pain points more than two years into a global pandemic. The results were clear: keeping up with a rapidly changing regulatory and threat landscape continues to be challenging for many financial service firms. However, those firms that implement a new, and technology-driven approach to digital identity verification methods, for example, are finding opportunities to catch bad actors even as they pivot to mobile banking and other methods of financial activity.

Methodology

The purpose of the report is to provide a sounding board for financial services organizations, helping them compare, contrast, and evaluate their own anti-money laundering and customer due diligence (CDD) efforts.

You can download a copy of the 4th Annual Thomson Reuters AML Industry Report here.

This year’s report reveals several consistencies from past years but also flags changes and trends. Those trends were gleaned from the responses of 261 decision-makers related to AML and CDD compliance activities who come from large financial institutions (more than $500 billion in assets under management) and small (under $1 billion in assets under management), and everything in between. Respondent also represented a wide range of organizations from commercial banks to retail, private banks/wealth management firms, money service businesses, and more.

Industry trends & challenges

In regard to top industry trends respondents cited such well-known challenges such as discerning upcoming changes to beneficial ownership screening and disclosure requirements, navigating the evolving cryptocurrency regulatory environment, and assessing virtual currency risks. Respondents also indicated an overall concern around the use of technology to manage AML risk, including automation, data solutions, and more.

Of course, the AMLA is causing the deepest consternation among the financial institutions we surveyed. The single most challenging issue in complying with the act stems from the new beneficial ownership disclosure requirements with 46% of survey respondents reporting significant challenges in complying with that provision. An equal percentage (45%) reported difficulties imposed by the expansion of AML laws to codify jurisdiction over virtual currency activities. And more than one-third (35%) of respondents noted challenges associated with the development of regulatory solutions that place an increased focus on emerging technologies.

Technology & regulator activity concerns

Financial services companies of all sizes are increasingly turning to technology solutions for gathering and managing AML and CDD information and processes, according to the report. Indeed, AML professionals are facing increased pressure to stay up to date on processes related to customer risk rating — a key component in calculating whether to on-bank a customer based on the financial institution’s risk appetite. A typical risk score will include information about customers’ businesses, occupations, salaries, and the type of banking products they traditionally use.

There was some positive news for the financial services industry in the report as well. Only 10% of respondents experienced a regulatory action related to AML and CDD compliance. Further, survey respondents reported that it has becoming less of a challenge to remain compliant with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In fact, in 2021, the percentage of companies that were at least somewhat challenged by Dodd-Frank plummeted to just 11% — roughly half as much compared to the previous survey.

In a recent webinar, Jim Richards, founder and principal of RegTech Consulting; and Todd Ehret, a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence, both warned that regulators may have been less active in their enforcement actions as of late, largely due to the COVID-19 pandemic. Yet there are some warning signs ahead that 2022 could bring a wave of investigations and enforcement actions against financial firms, such as the Securities and Exchange Commission’s recent action against JP Morgan Securities.

The pandemic is not the only driver of change and challenges, of course. Shifting geopolitics, the emergence of climate risk as a key issue for financial services firms, the speed of innovation in cryptos, and the need to deliver consistently good customer outcomes are all key board room considerations.

The risks that financial services firms run are institution-specific, but there are some high-level risks applicable to all firms, irrespective of geography or sector. Here are five key risks for firms in 2022:

1. Data governance

The need for a robust approach to data governance is increasingly critical.

As a first step, firms need to embrace the fact that data is a key strategic asset and from there, build a business-wide approach to data aggregation, management, storage, security, retrieval, and destruction. In other words, build a business-specific approach to data governance. Successful data governance will have multiple benefits, including increased line of sight to risks being run in a hybrid working environment, the ability to comply with the recently agreed-upon climate risk reporting requirements, and enhanced record-keeping.

2. Operational resilience

The pandemic is nothing if not a test of the operational resilience of financial services firms.

At a minimum, firms need to consider operational risk management — such that the management of operational risk should identify external and internal threats and potential failures in people, processes, and systems on a continuing basis. Firms also need to promptly assess the vulnerabilities of critical operations and manage the resulting risks in accordance with the operational resilience approach.

A full version of the 5 Key Risks for Firms in 2022 report can be found here.

In addition, they need to consider as well governance, mapping interconnections and interdependencies, third-party dependencies, incident management, and IT (including cyber-issues).

3. The ‘G’ in ESG

ESG stands for environmental, social and corporate governance and covers a wide sweep of evolving risks and required actions for firms going forward as part of the global approach to climate risk mitigation. The environmental and social elements of ESG are important, but without robust corporate governance, financial service firms (among others) will simply not be able to deliver on the challenges. A key deliverable is the sustainability-related disclosure standards which were agreed upon, at least in draft, at COP26. For firms meeting the proposed reporting requirements, the process will involve the collection, collation, and reproducible reporting of millions of data points. And that is before jurisdictions overlay their own specific requirements.

There is a global shortage of ESG skills and experience, and firms should not underestimate the complexity of the governance aspect of this challenge, which they will needed to meet in order to develop criteria and expectations.

4. Remuneration

In a measure of how crucial compensation, remuneration, and good bonus design is perceived, these issues were the very first thing the Financial Stability Board (FSB) addressed in the wake of the financial crisis, implementing supranational compensation standards that sought to drive better risk-aware behaviors. That was September 2009, of course, and now, the FSB is continuing to review the global implementation and practical impact. The FSB’s seventh progress report covers the practices of the largest financial institutions in the banking, insurance, and asset management sectors and highlights uneven progress towards implementing the principles and standards, with banks seen to be relatively more advanced than insurance and asset management firms.

For more on this subject, you can see author Susannah Hammond’s interview here.

Firms would be well advised to benchmark their approach to compensation with the latest FSB progress report. There is much granular detail on emerging good and better practices, together with an insight into how firms are navigating certain legal challenges, and the use of compensation to promote a sound culture and positive behaviors.

5. Enabling technologies

It is estimated that the pandemic accelerated digital transformation by as much as three years. Digital transformation is made possible by enabling technologies which include application programming interfaces, big data analytics and artificial intelligence, biometrics, cloud computing (specifically outsourcing to the cloud), and distributed ledger (blockchain) technology. Firms and their boards need to be able to ensure the safe and sound adoption of any new technologies so that the benefits can be reaped and the risks arising from the adoption of innovative activities are proactively and appropriately managed.

The critical element is again governance. Without appropriately robust corporate governance, financial services firms could find that not only do they fail to reap the potential benefits but that regulatory issues are created that impact both the firm and senior individuals.

Gone are the days when the IT function, capable or not, was trusted with driving technological change. It is now a pre-requisite for board members and senior managers to have sufficient technological knowledge (or ready access to that knowledge) to be able to challenge and oversee a firm’s technological strategic direction and the associated change management.

You can listen to the Compliance Clarified podcast series here. (Episode 2 of series 4 features a discussion with author Susannah Hammond about this report.)

It’s no surprise then that risk and compliance officers will continue to play a central role in preparing their firms for all eventualities. The following is a list of 10 things compliance officers need to consider in 2022.

1. Shifting individual accountability

The concept of personal liability for senior managers is not new. What is new is the changing perception of the potential sources of liability and how regulators are interpreting accountability.

Firms are wary of the potential for reputational and other damage, and this has implications for individuals — even those at the most senior levels. Examples of non-financial misconduct have included everything from stealing sandwiches to failing to pay for train tickets to manipulating college admissions. In one high-profile case, Jes Staley, the chief executive of Barclays, stepped down due — at least in part — to concerns about his connection to sexual offender Jeffrey Epstein.

2. Vulnerable customers

Compliance officers have long been aware of the need to ensure consistently good customer outcomes. Many financial services firms have leveraged digital transformation and deployed enabling technologies in response to the pandemic, but vulnerable customers risk being left behind by technological change, particularly when that change has happened at speed.

A full version of 10 things compliance officers need to consider in 2022 can be found here.

3. Personal account dealing

Hybrid or non-office working environments have prompted a regulatory focus on the potential for market abuse and manipulation. That focus needs to extend to personal account dealing.

The issues occurred pre-pandemic, but the impact and implications of a fine imposed by the Central Bank of Ireland (CBI) should be taken as a warning to all. In March 2021, the CBI reprimanded J&E Davy , fining it €4.13 million for regulatory breaches arising from personal account dealing.

The fallout has been profound. Davy’s chief executive stepped down, the firm lost its role as a primary dealer in Irish government debt, and now has been sold.

4. Cyber resilience

Information and cybersecurity risks have increased during the pandemic, with the financial sector reported to have been hit more often by cyber-attacks than most other sectors since the pandemic started.

Christine Lagarde, chair of the European Central Bank said in that the potential of cyber-attacks is the greatest economic threat we currently face. This was echoed by Wayne Byres, chair of the Australian Prudential Regulation Authority, in a speech in which he said: “Of the three areas I’ve covered, cyber presents arguably the most difficult prudential threat: unlike GCRA [governance, culture, remuneration, and accountability] or climate risk, it’s driven by malicious and adaptive adversaries who are intent on causing damage. Cyclones and bush fires can be devastating, but they’re not doing it on purpose.”

Risk and compliance functions need to ensure that information security and cyber-risks are included in the range of risks being considered, and that the board can discuss the potential actions the company has in place to ensure that all reasonable steps have been taken to embed cyber resilience throughout the firm.

5. Diversity

Diversity has climbed up the regulatory agenda as it has come under the umbrella of environmental, social, and corporate governance (ESG) concerns.

For more on this subject, you can see author Susannah Hammond’s interview here.

Compliance officers need to assess whether their firm has a comprehensive approach to diversity and whether it is able to embed the new risks within the existing enterprise risk frameworks. They also need to delineate the specific roles and responsibilities for the compliance, human resources, and risk management functions, assessing whether those functions have the right talent with the required skill sets.

6. Hybrid working

Hybrid working is here to stay. Compliance functions have adapted to hybrid, or at least flexible, working arrangements, but compliance officers may need deal with further changes as the pandemic continues.

In a nutshell, “It’s important any form of remote or hybrid working adopted should not risk or compromise the firm’s ability to follow all rules, regulatory standards and obligations, or lead to a failure to meet them,” according to the U.K. Financial Conduct Authority.

7. Climate risk reporting

Climate risk is unlike other financial risks. Its uniqueness, complexity, and the long-term nature of the risks make quantifying the threat one of the biggest hurdles regulators must overcome in developing new rules and regulations.

The International Sustainability Standards Board disclosure standards, while still technically in “draft” form, will become the international reporting benchmark on sustainability matters.

Firms will have to be able to regularly collect, collate, manage, and reproducibly report millions of data points. Post-COP26, firms simply cannot allow a widespread failure in delivery of their new reporting obligations. Fines and remedial actions likely will be severe, and there is also the worry of greater personal liability and reputational damage if a firm is seen not to have taken its climate risk obligations seriously.

8. Digital transformation & cryptocurrencies

Digital transformation will continue to be a fundamental enabler for financial services firms. The opportunities and benefits arising from the implementation of technological solutions cannot be underestimated; however, taking best advantage of those opportunities is not without its challenges.

The challenge of cryptocurrencies too will have a profound impact on financial services firms.

9. Financial crime

Financial crime remains a perennial concern. Some factors are pandemic-related, with concerns about the rise of cyber-enabled financial crime.

A few of the more immediate concerns are the approach to Afghanistan following the Taliban takeover, the emerging use of sanctions against a crypto-exchange deemed to be a conduit for illicit funds, and the implications of the Chinese counter-foreign sanctions law.

10. Skills

The increasingly wide range of challenges coming under the compliance umbrella all demand appropriate resources and skills — and attention from compliance officers. On one level, compliance functions need up-to-date skills, but it is part of the challenge to identify the particular skills, knowledge, and experience required for dealing with emerging new risks such as climate, diversity, operational resilience, and digital transformation.

You can listen to the Compliance Clarified podcast series here. (Episode 1 of series 4 features a discussion with author Susannah Hammond about this report.)