As we prepare to embark on a new year, the scope of global compliance is ever shifting and expanding, presenting both challenges and opportunities for financial institutions. Reflecting on 2023, it is evident that the intersection of technology, regulatory evolution, and market dynamics continue to redefine the compliance landscape.
A recap of 2023
Before looking to 2024 and predicting some of the themes that we think will impact market participants in the year ahead, it is crucial to take a step back and look at the headlines that shaped the financial services market this year.
2023 started with a banking crisis that saw regional banks Silicon Valley Bank (SVB), Standard Bank, and First Republic Bank collapse. The scare extended beyond the Americas, as Credit Suisse – one of the world’s biggest banks – suffered the same fate soon after and was bought by one of its competitors. The string of failures, which took place in rapid succession, rocked the banking world.
The issues compounded, as in the wake of the high inflation and geopolitical ripples from the Russia-Ukraine war, the financial industry faced a formidable regulatory crackdown. Firms were dealt a colossal level of fines and enforcement actions, particularly when it came to their record keeping failures, emphasizing the critical need for proactive compliance measures.
Perhaps the biggest storyline of 2023 though has been the hype surrounding artificial intelligence. When OpenAI released ChatGPT in November 2022, it set off a generative AI frenzy that few could have predicted. Suddenly, every sector – including financial services – was rushing to find ways to incorporate the latest AI technology into its framework. It truly has been a year dominated by artificial intelligence.
In this article, SteelEye's CEO Matt Smith considers the impact these seismic events of 2023 will have on the compliance landscape in 2024, including his predictions for the year ahead and the advice he would offer to firms when it comes to handling these impending challenges.
Contents:
Prediction 1:
Continued complexity in the regulatory landscape
In 2024, the regulatory landscape will remain characterized by persistent complexity, presenting a formidable challenge for financial services firms.
It's crucial to consider the various challenges faced by compliance teams in 2023. From reduced budgets, disparate and outdated systems, and the constant threat of bad actors damaging a firm's reputation, compliance practitioners are finding that their roles are becoming more stressful than ever before, with their responsibilities constantly compounding. Combine this with the fact that compliance teams must work tirelessly to stay in the good graces of regulators, who are imposing record fines and intensifying crackdowns for those violating rules. This dynamic can create an intricate and, at times, tense landscape, as financial institutions must navigate the delicate balance between meeting regulatory standards and addressing internal constraints.
So far in 2023, the Financial Conduct Authority in the UK has handed out £52.8 million worth of fines, with the Securities Exchange Commission (SEC) fining firms a colossal $4.95 billion in total. Financial institutions will continue to grapple with an ever-expanding web of rules and standards, each carrying its own set of intricacies. For them to avoid any further penalties, they will need to navigate the complex regulatory landscape efficiently and effectively.
Regulatory bodies' heightened scrutiny, combined with a growing emphasis on transparency and risk management, underscores the need for financial firms to adopt a proactive and adaptive approach to compliance procedures and policies. Additionally, firms must swiftly adapt to evolving regulatory requirements by integrating advanced technologies to stay ahead of the compliance curve.
Prediction 2:
Communications surveillance crackdown will continue
We predicted at the end of 2022 that the communications crackdown would continue, which has proven to be true. I believe we can continue to expect a heightened focus on communications surveillance across the regulatory landscape globally in 2024, especially as we see new communications platforms emerging all the time.
In September of this year, the SEC announced that 10 firms would pay $79 million in penalties for failing to comply with regulations surrounding the maintaining and preserving of electronic communications. The news came as no surprise for those who had been following the storyline, as it had already been a year of strict enforcement. Just weeks earlier, North American regulators also fined 13 firms a total of $549 million for record keeping failures. When you consider these eye-watering totals, smaller fines – like the $15 million and $7.5 million penalties handed down to two tier-one banks in May for record keeping failures – pale in comparison.
There is still a great deal of work to be done on this front, and bad actors will continue to look for ways to circumvent the rules and communicate on unmonitored channels. Until regulators feel like they have the problem under control, I believe we can expect the crackdown on communications surveillance to continue.
Prediction 3:
Small firms need to be vigilant
Interestingly, the 13 firms that were fined a total of $549 million in the Americas for record keeping failures did not only consist of tier-one banks. Smaller financial institutions were also targeted for their neglect in meeting their regulatory requirements. This was also the case in early 2023, when the SEC requested a number of firms to hand over personal mobile devices belonging to certain employees as part of their ongoing investigation around the use of unauthorized communications channels. Included in the probe were numerous small and mid-size hedge funds.
Some have argued that the choice by regulators to focus primarily on tier-one banks over the last couple of years when it came to these massive fines was deliberate and calculated. By focusing on large organizations that could absorb the cost of a hefty fine, small and midsize firms would receive the message loud and clear and take action to ensure their house was in order.
However, in 2024, regulatory bodies will continue to intensify efforts to ensure transparency and accountability, impacting firms of all sizes. Financial firms, including smaller hedge funds and asset managers, need to expect stricter enforcement measures, necessitating a proactive approach to compliance.
Prediction 4:
Increased Adoption of AI in compliance solutions
Despite being around since the 1950s, 2023 was the year AI became the star of the show. Collins English Dictionary even announced it as its ‘Word of the Year.’
While there is great excitement around AI’s potential use cases in the financial services spaces in 2023, there has also been caution and at times, skepticism, from some market participants. Rightfully so, any new tech as groundbreaking as what we have witnessed with AI over the last year should be thoroughly tested and analyzed before it is incorporated into any work-related processes, especially when it comes to something as serious as regulatory compliance. However, solutions providers like SteelEye have continued to report on the benefits AI can offer towards compliance processes when paired with human judgment.
Across the globe, some regulators have even begun to adopt sophisticated AI-driven tech to assist in bringing forth enforcement actions, signaling to market participants that its use is acceptable. As the stigma around the unknown of AI continues to die down, we fully expect to see a heavy increase in adoption in 2024. The use of AI-driven compliance solutions will become not just a competitive advantage but a necessity, as the regulatory landscape continues to become more complex. Automation, machine learning, and advanced analytics will be integral in navigating the complexities of compliance, allowing firms to streamline processes, reduce costs, and enhance accuracy.
Firms will have to increasingly leverage these technologies to enhance risk management, automate routine tasks, and gain predictive insights. AI-driven compliance solutions will provide more accurate and timely assessments, enabling proactive identification of potential issues and streamlining compliance processes.
Interestingly, 47% of firms have fully invested and successfully implemented ML, according to SteelEye’s 2023 Annual Compliance Health Check Report. Another 42% have started investing but have not yet implemented anything. Even more encouragingly, 82% of those who have implemented AI or ML say that they have seen a major improvement in their compliance processes. Another 16% have seen a minor improvement, meaning 98% of those surveyed have benefitted from their investment in AI and ML. In 2024, AI will continue to play a pivotal role in risk management, offering real-time insights and empowering decision-makers to make informed choices, as it has in 2023.
Prediction 5:
Collaborative compliance ecosystems
This theme may sound familiar, as it is one that we feel strongly about and even included last year in our wrap up! However, we stand by the belief that we were ahead of the trend in 2022 and it is only a matter of time before this one becomes a reality. As we saw in 2023, the compliance landscape is becoming increasingly intricate, and as this continues in 2024, the industry will witness the emergence of collaborative compliance ecosystems. Firms will seek integrated solutions that offer a holistic view of risk and compliance, facilitating more informed decision-making.
Many market participants have already started this journey. SteelEye’s 2023 Annual Compliance Health Check Report revealed that 22% of firms view enhancing data quality as their top investment priority. The report also found that 73% of firms expected to invest more in RegTech over the course of 2023. And while we don’t expect every one of these firms to make the jump to an integrated surveillance approach, it is safe to assume many are revisiting topics like data enhancement and regulatory technology because they see the value that collaborative systems offer.
In 2024 we will likely see a demand for customizable and scalable compliance technology solutions with firms seeking solutions that can be tailored to their specific needs, adapting to the evolving regulatory landscape without compromising efficiency.
SteelEye is dedicated to fostering such ecosystems through strategic partnerships and in 2024, we anticipate a continued focus on collaboration within the industry, leading to the development of comprehensive compliance solutions that address the multifaceted challenges faced by financial institutions.
Closing thoughts
Heading into 2024, the roadmap for global compliance is charted with both challenges and opportunities. As the compliance landscape continues to become more intricate, firms will seek integrated solutions that offer a holistic view of risk and compliance, facilitating more informed decision-making.
SteelEye is dedicated to fostering such ecosystems through strategic partnerships and interoperability. In 2024, we anticipate increased collaboration within the industry, leading to the development of comprehensive compliance solutions that address the multifaceted challenges faced by financial institutions.
At SteelEye, we are unwavering in our commitment to providing innovative, technology-driven solutions that empower financial institutions to not only meet regulatory requirements but also thrive in an era of unprecedented change.
Our journey continues, hand in hand with our clients, as we navigate the complexities of global compliance and shape the future of a resilient and technologically advanced financial industry. Stay tuned for more insights, updates, and breakthroughs as we embark on this exciting chapter together.
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