The current geopolitical climate, environmental demands, economic concerns, and other factors are set to make 2023 even more demanding when it comes to compliance.
As a result, a new white paper by Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence examines ten major regulatory concerns that compliance officers should keep uppermost in their minds throughout the coming year.
1. Environment, Social, and Governance (ESG) facing increased scrutiny
2023 is set to be a crucial year for ESG, with governments across the world implementing new initiatives. The EU has adopted a range of broad ESG-related measures. The UK has amended its Companies Act to incorporate new guidelines from the Task Force on Climate-Related Financial Disclosures (TCFD), while the Financial Conduct Authority (FCA) holds companies’ compliance performance with this update to account.
According to the Thomson Reuters white paper, “Asian regulators have implemented climate risk management policies, and in turn, they expect firms to have dedicated resources and risk management frameworks.” In the US, the ESG landscape is somewhat more complicated due to the country’s especially partisan political landscape, with “new rules and regulations emerging across federal and state jurisdictions.”
2. Shifts in regulations and the resultant demands on compliance
In the United States, compliance officers are urged to be especially careful with regard to falling foul of the elevated importance of ensuring Regulation Best Interest (BI). The US Securities and Exchange Commission (SEC) proposed a “significant structural overhaul of the way securities are traded” in December 2022. If this proposal becomes law, compliance departments would have to enforce various adaptations.
The UK wants to separate itself from EU law through its Edinburgh Reforms. Legislation will likely make its way successfully through parliament before the end of March 2023. Meanwhile, the EU is focused on continued implementation of the Basel III reforms and on reviewing packaged retail investment and insurance products (PRIIPs), as well as more broadly ensuring financial stability across the economic bloc.
3. Global geopolitics and enforcement of Russia-related sanctions
Compliance professionals will know how much work was required in 2022 to comply with anti-money laundering (AML) and know your customer (KYC) regulations in response to the sanctions placed on Russian individuals and entities. With some finding ways to circumvent sanctions, there is considerable pressure on compliance officers to ensure that their organisations are fully compliant. Thomson Reuters highlights the reputational damage that a failure to do can generate. The white paper also urges compliance professionals to keep abreast of progress over the ongoing tensions between China and the United States regarding Taiwan.
4. AML and other financial crimes
UK AML fines in 2020 and 2021 totalled £476 million. According to the white paper, financial fraud is set to increase in 2023. Thomson Reuters highlights the 2022 outcome of the US probe into Danske Bank which resulted in the bank paying a $2 billion forfeit, as a precursor of what to expect in 2023 in terms of greater global regulatory oversight. It discusses how the UK’s Economic Crime Bill, which is currently progressing through parliament, will make it easier for authorities to take action against financial criminals and how Germany’s financial regulator, BaFin, “ordered Deutsche Bank to take specific measures aimed at preventing money laundering and terrorist financing.”
5. Proliferation financing
Particularly for financial services organisations compliance departments, proliferation financing refers to the act of providing a financial service, asset, or transaction to support the proliferation of weapons of mass destruction. It also extends to “the use of third-country nationals to facilitate proliferation financing and evade sanctions through trusts” to evade sanctions. With the war in Ukraine ongoing, Thomson Reuters underlines the importance to financial service compliance professionals of staying alert to such activity taking place via their organisations.
6. Crypto and digital assets
The EU agreed on its Markets in Crypto-Assets (MiCA) regulation in 2022. Once it becomes law in mid to late-2024, it will provide a strong set of protections for customers. Similar to how the EU’s GDPR regulation changed the global data protection landscape, this crypto legislation “will become the blueprint for crypto-regulation in other jurisdictions during 2023,” especially with the collapse of crypto exchange FTX in mind.
7. Accounting practices attract more regulatory attention
Regulators are paying more attention to accounting and the use of external auditors, as a result of malpractice and negligence.
According to Thomson Reuters, “in 2023 senior management, compliance professionals, and legal departments should raise the overall importance of accounting-related compliance.”
8. Data governance and data protection
Globally, regulators are placing a greater emphasis on the importance of strong data governance and protection infrastructure, with the EU’s European Commission and the UK government both publishing data framework visions, and the FCA publishing a 2022 report on its data strategy. Regulatory data concern covers how firms create, manage, and destroy their data. Moreover, compliance officers must be able to report on data use efficiently to regulatory bodies. The failure to do so can result in reputational damage as well as regulatory fines.
The white paper also highlights how criminals seek to exploit data management gaps with techniques including the use of malware, while cyber warfare proliferated in 2022 to successfully inflict significant damage in Ukraine.
9. AI, technology, and cybersecurity
Global trends have increased the demand on firms to respond in kind. Remote and hybrid offices have led to a corporate scramble to ensure companies are not vulnerable to data leaks or hacks. Meanwhile, artificial intelligence and digital technology have continued to advance at unprecedented pace.
While financial service organisations have broadly implemented digital technology and AI solutions, 2023 may see a shift in focus for compliance officers away from internal use to the outsourcing of development and collaboration to third-party providers.
10. Compliance expertise challenges
Thomson Reuters notes the increasing need for compliance professionals with expertise in ESG and other specialist areas, including digitalisation and the crypto asset space. It also discusses the struggles that many compliance departments face due to a lack of such expertise, while a competitive labour market makes it difficult to address.
In order to limit disruption to compliance performance, the white paper highlights the importance to compliance professionals of keeping up to date with market developments, such as the rise in new products like buy-now-pay-later digital consumer finance.
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