Compliance teams today face an ever-evolving regulatory landscape where the pace of change has accelerated significantly. Rapid growth in standards, laws, and regulations places a considerable burden on compliance professionals, with compliance costs rising by 45% over the past decade, raising concerns, particularly in the financial institution sector.
The convergence of traditional financial institutions with technology-driven FinTech companies presents unique challenges for regulators, leading to the continuous introduction of guidelines and policies, including AML and privacy, for consumer security. The emergence of decentralized finance and digital assets adds complexity to regulatory compliance efforts. As global digital transformations increase reliance on third-party technologies, financial institutions face cyber-attacks and data privacy concerns, driving the need for robust data management and cybersecurity practices. Environment, social, and governance (ESG) considerations add another complexity layer, demanding companies demonstrate sustainability commitment.
Compliance teams must align policies, controls, and risks with the evolving regulatory compliance landscape, requiring collaboration between compliance and chief information officers to address cybersecurity challenges effectively. We chatted with Pooja Azhalavan, Product Marketing Manager at Resolver, to dive deep into common compliance challenges and understand how modern AI solutions like RegTech revolutionize compliance efforts.
1. Rapidly evolving regulations: A burden on compliance teams
“No one working in compliance would argue that the pace of regulatory change has accelerated since 2008, particularly in the financial institutions (FIs) space. Compliance teams face the challenge of keeping up with the continuous growth of standards, laws, and regulations,” says Azhalavan, adding, “The commitment and vigilance required from compliance professionals have never been more demanding, as they aim to safeguard the integrity and stability of their institutions in an ever-changing regulatory environment.”
Citing regulatory change volume has increased by 10% annually in recent years, Azhalavan explains, “Consequently, compliance costs have risen by 45% over the past decade, resulting in growing concerns for compliance teams. The commitment and vigilance required from compliance professionals have never been more demanding, as they aim to safeguard the integrity and stability of their institutions in an ever-changing regulatory compliance environment.
2. Convergence of finance and technology: Addressing new guidelines and policies
“The introduction of technology-led financial services will require collaborative efforts between compliance teams of both Fintech and traditional institutions due to potential overlaps and gaps in regulatory requirements,” says Azhalavan.
Regulators must address the combined characteristics of these entities from both financial and technology perspectives. These pressures have led to the introduction of new guidelines — especially concerning AML and privacy — to ensure consumer security.
3. Cybersecurity and data privacy risks: Managing third-party technologies
“Global digital transformations have increased reliance on third-party technologies, resulting in a rise in cyber-attacks and data privacy issues, particularly for financial institutions.” According to Azhalavan, ensuring regulated industries manage third-party risks effectively is top of mind for regulators. “Managing third-party risks has become critical, and regulators are increasing the pressure on organizations to ensure proper data management and cybersecurity practices.”
4. ESG impact: Regulatory compliance burden for financial institutions
“The growing significance of Environmental, Social, and Governance (ESG) practices adds additional pressure to FIs and other businesses, necessitating comprehensive data collection and reporting,” says Azhalavan. Regulatory compliance teams must ensure that portfolios align with ESG standards, including those of third-party technology providers. This means integrating ESG criteria with policies, risk assessments, and investment decisions to meet investor expectations and demonstrate a commitment to environmental and social responsibility.
5. Compliance culture: Nurturing a proactive reporting environment
A strong compliance culture is essential for maintaining good employee conduct, yet misconduct scandals in banking have underscored its importance. Remote and hybrid working environments post-pandemic further highlight the significance of culture and conduct risks, urging compliance teams to foster a proactive reporting atmosphere.
“To overcome these challenges, compliance teams need innovative and collaborative software,” Azhalavan explains. These compliance management tools encompass building a robust regulatory knowledge library by providing alerts on regulatory updates, assisting in risk assessments by connecting regulatory obligations to business risks and controls, and aiding in compliance monitoring, ensuring risk, audit, and compliance teams work together to ensure the institution remains in line with latest regulatory requirements.
Going beyond: More challenges plaguing compliance teams
Compliance teams know that there’s more than meets the eye — especially when it comes to the obstacles they face. Here’s a closer look at lesser-known but equally important regulatory compliance challenges to be aware of:
Complexity in reporting structures: Aligning policies and risks
“As the regulatory landscape becomes more complex, compliance teams face the challenge of aligning policies, controls, and risks with the evolving regulatory environment.” Azhalavan highlights the importance of collaboration between compliance and Chief Information Officers in effectively navigating cybersecurity and data privacy concerns.
Regulating innovative industries
“Innovative industries like decentralized finance (DeFi) and crypto exchanges, including digital currencies and other digital assets, pose regulatory challenges due to their unique nature and classification ambiguity,” says Azhalavan. “Despite its current struggles, the sector still holds a significant market cap of about $900 billion, making it hard for financial institutions to ignore.”
“Given that FinTech companies often introduce innovative technologies that might not have well-established compliance standards. This will shift the burden on compliance teams to be proactive in evaluating and adapting to these new technologies while ensuring they meet regulatory requirements.” However, these sectors still hold significant market value, compelling financial institutions to address regulatory concerns.
Ready to navigate the complexities of regulatory compliance and transform them into risk intelligence? Watch the replay of our webinar, “Transforming Regulatory Complexity into Risk Intelligence,” to discover modern solutions and innovative tools for revolutionizing compliance efforts. Learn from industry experts at Resolver and Ascent as they delve into the top challenges facing compliance teams today and explore how AI-driven RegTech can empower your organization. Don’t miss this opportunity to gain a competitive advantage in the dynamic regulatory landscape.