Business
The 2023 Regulatory Outlook for the Financial Services Industry
For the past five years, financial services changes have reshaped the financial services industry from all directions. Financial technology is evolving at an astonishing rate, with financial service (FS) providers having to sprint at full speed to keep up. Simultaneously, public health crises and geopolitical conflicts are must be considered from an operational standpoint. The transition from the digital innovation of the late 2010s to the economic uncertainty of the early 2020s has been rocky, to say the least. In turn, FS providers and financial institutions alike are facing some of the most challenging and complex regulatory changes to date. What do regulators have in store for the FS industry in 2023? And what can FS providers and institutions do to adequately prepare for the costs and requirements of ongoing regulatory change in the financial industry? Join me as I take the plunge into today’s financial services regulatory landscape and what it means for the FS industry.
Key Cost Considerations for Financial Services Regulations in 2023
The global financial sector continues to embrace digital innovation at faster and faster rates, increasing the number of new business opportunities — and the potential for financial crime. In the UK alone, FS providers are spending roughly 13% more on financial crime compliance now compared to 2020, according to the Oxford Economics True Cost of Compliance 2023 report. Additionally, in 2022, the total financial crime compliance costs in the UK were estimated to be £34.2 billion, a 19% increase from two years prior. Globally, the 2022 True Cost of Financial Crime Compliance Study found that the total cost of financial crime compliance for all financial institutions in 2022 was more than $274 billion (USD). This represents an 18% increase compared to the $213.9 billion spent in 2020. When broken down by regions, Europe accounts for the highest amount spent on financial crime compliance at $157.3 billion, followed by North America ($42B) and the APAC region ($12.1B). Though there are many different components at play in any compliance budget, the following four factors have the biggest impact on the total cost of compliance:
-
Substantive Compliance
Your substantive compliance costs encompass all investments and expenses needed to adequately adhere to current regulatory requirements. This necessitates a strong compliance strategy, as your business or institution needs the ability to not only make sense of new regulations quickly but also to act quickly to adopt the right technologies and support, all while remaining aligned with your business budget and objectives.
-
IT Costs
The IT costs associated with compliance management include infrastructure, development, maintenance, support, and training. Each of these comes with its own cost-related hurdles, especially when it comes to sourcing the right resources and talent for the job at hand. Within the category of IT costs, your business must remember to consider customer-side IT impacts alongside business-side considerations, such as user-friendliness and data protection.
-
Administrative Burdens
Compliance always comes with some degree of an administrative burden as business documentation and operational procedures must be adjusted to changes made by new regulations. Additionally, this administrative burden can also include the necessary communication tasks that ensure your entire business team as well as partners and stakeholders are on the same page as one another.
-
Supervisory Reporting
Reporting continues to be one of the more challenging elements of compliance, encompassing both administrative and substantive costs. Supervisory reporting can become even more complicated and costly when you consider how many different supervisory authorities your specific business needs to attend to. For instance, a UK-based FS provider that offers services to North America would need to report to authorities in both regions, widening the overall scope and complexity of compliance.
New & Upcoming Regulatory Changes to Know About in 2023
Regulatory change in the FS industry can vary on both a regional and international level. Even financial services regulations that apply to one specific region can impact other nations and regions as well. For instance, a regulatory change in the U.S. still presents considerations for FS providers in the EU that conduct business in the U.S. With this in mind, here are six financial services regulatory changes to know about in 2023.
Markets in Crypto-Assets (MiCA)
MiCA is an EU regulation governing the issuance and legal management of crypto-based assets, like cryptocurrency and stablecoins, with a particular emphasis placed on consumer protections and how these assets can be transferred. The regulation was officially adopted on April 20, 2023, by the European Parliament.
SWIFT ISO 20022
Swift — a widely popular financial services provider for secure financial messaging — is launching the latest iteration of its technology called ISO 20022. This updated version of Swift mainly deals with cross-border payment regulations and changes to reporting requirements. Migrations to ISO 20022 began in March 2023 and must be completed by November 2025 at the latest. Swift has a full timeline available online for more information.
T+1 Security Settlements
In February 2023, the U.S. Securities and Exchange Commission (SEC) released a new ruling on standard settlement cycles, changing the cycle from two-day settlements to one-day settlements, also known as T+1 settlements. This regulatory change is one of the largest in the U.S. financial sector in recent years and will undoubtedly have both domestic and global impacts to account for. The deadline for T+1 implementations is May 28, 2024.
Financial Services and Markets Bill
In July 2022, the UK government introduced the Financial Services and Markets Bill which, among other things, aims to address the financial and regulatory issues stemming from Brexit. The bill was passed by the House of Commons and sent along to the House of Lords, where it is currently in the report stage. If passed, the bill will then proceed to the final stages of amendments before being granted the royal assent. The release of official timelines and deadlines is likely to begin following the passage of the bill by the House of Lords.
Digital Operational Resilience Act
The Digital Operational Resilience Act (or DORA for short) is an EU-based regulation published by the Official Journal of the European Union in December 2022. DORA places new requirements on financial institutions for better maintaining operational resilience and reducing operational risk, namely through stricter requirements for the allocation of capital. The deadline for DORA migrations is January 17, 2025.
Payment Services Directive 3 (PSD3)
While PSD3 is not officially in progress just yet, PSD2 was placed under review beginning in May 2022 with a public consultation. The most recent update to this potential regulatory change came in February 2023 with a study on the application and impact of PSD2. Though no regulatory changes are yet official, a legislative proposal is expected in the second quarter of 2023. That proposal is likely to place immense focus on making Euro instant payments universally available and secure.
Though these six financial services regulatory changes are certain to have a significant influence on the FS industry in 2023 and 2024, they are far from the only shifts in regulation occurring. It is imperative to have a strong compliance strategy in place that can easily adapt to regulatory change as it occurs.
How RegTech Can Help Reduce the Cost of Compliance Regulations for FS Providers
For financial services providers and financial institutions alike, the cost of compliance can be a major burden brought on by frequent regulatory change. Yet, today’s regulators must continue to be vigilant, especially in the wake of so many new technologies that are reshaping the global financial sector in often unpredictable ways. So, where does that leave the FS sector as a whole in terms of reducing the cost of compliance? The answer to this question is multi-faceted and almost certainly requires RegTech to play a key role. In Exadel’s recent report RegTech for Banking and Financial Services in 2023, I highlighted several key ways in which regulatory technology (RegTech) can help support various institutions and FS providers better manage their regulatory responsibilities such as compliance, reporting, risk management, online identity verification, transaction monitoring, and auditing. Additionally, our report identifies four challenges that currently inhibit the adoption of RegTech.
Legacy Tech
Without question, the biggest problem area for many businesses and institutions working to reinvent their approach to regulatory change is legacy technology. Legacy tech can make it difficult to implement and integrate RegTech solutions, requiring your organization to first address the state of your digital infrastructure before even thinking about overhauling your strategy for dealing with compliance and regulatory change.
Regulatory Talent
Along with overcoming the hurdle of legacy technology, FS providers must also consider whether they have adequate in-house talent for addressing the increasingly digital and complex requirements of regulatory compliance. If you do not possess the adequate in-house talent necessary, then it is essential to look outside your business walls for either new team members or strategic partners that can provide the talented professionals you need.
Strategic Resourcing
Talent may not be the only thing you need to source in your quest to build a better regulatory strategy — you may also need access to the right tools and technologies at an affordable cost. Strategic resourcing can be a challenge to implementing RegTech, as you may need to find a RegTech partner that can work with your existing systems and get them up to date with the latest regulations, and a partner who can provide you with the necessary technical resources or infrastructure.
Cybersecurity
With digital opportunity comes digital risk — something that is certainly not being overlooked by regulators during this time. A major part of regulatory compliance is having the appropriate security measures and protocols in place to prevent, identify, and inhibit cybersecurity threats. This translates into not only a need to build a highly flexible system that can adapt to regulatory change quickly but also a need for a deep understanding of the cybersecurity risks present and what regulatory requirements are in place for addressing that risk.
Face the Challenge of Regulatory Change Head-On with Exadel
Reducing the cost of compliance is no small task — especially when new financial services regulations seem to be appearing at the forefront of the financial sector every day. At Exadel, we offer your organization the regulatory support you need to keep up with compliance. Our experts can help you achieve a financial services regulatory strategy that is as effective as it is affordable, including essential guidance on how to migrate away from cumbersome legacy tech. With decades of experience in the financial services sector, Exadel has expertise to provide your organization with an automated and adaptable approach to compliance. Chat with the Exadel team today to learn more about our regulatory compliance services.