Top 5 Compliance Challenges in the Financial Sector

AUGUST 24TH, 2017
The financial crisis of 2008 resulted in huge regulatory changes for the financial services industry. Banks, insurance companies, brokerage firms, and other businesses engaged in financial activities face an ever-changing regulatory landscape full of requirements that are arguably more complex than most. Regulatory compliance is not only complicated but costly when factoring in the fines and damage your brand reputation might suffer when failing to deliver.
Complications aside, it seems finance professionals are committed to tackling the challenge of compliance head on. According to Accenture’s 2017 Compliance Risk Study, which surveyed 150 compliance officers at organizations around the world, respondents plan to up their investment in compliance management 89 percent over the next two years. And 66 percent of respondents said they now report directly to their CEO or Board of Directors, suggesting the heightened importance of compliance and perhaps a desire to be more strategic in their approach. To give you an idea of the regulatory issues surrounding the industry, we have outlined five of the biggest compliance challenges in the financial realm.

1. Keeping Pace with Consumer Laws

Consumer laws have traditionally been a monumental challenge for financial institutions. In many cases, the challenge is both a matter of having a number of different laws to satisfy and simply trying to keep up with all the changes. For instance, in 2015, the Consumer Financial Protection Bureau (CFPB) announced an update to the Home Mortgage Disclosure Act (HMDA), citing the need to improve the quality of data reported by financial institutions as the primary objective. Though most of the changes won't officially go into effect until January, 2018, that hasn't stopped industry pundits from calling the new rule the most dreaded compliance acronym since TILA-RESPA Integrated Disclosure (TRID). The fact that the Bureau is essentially rolling out these HDMA updates over the course of three years is a prime example of the ongoing challenges associated with consumer compliance laws.

2. Combating Cyber Attacks

The sensitivity and potential value of the data in their possession makes financial institutions a prime target of cyber attacks. Whether it's ransomware or inside exploits, these attacks can hinder your ability to maintain compliance and cripple your business in the process. Regulators at the federal and state levels have stepped up by introducing a slew of new regulatory standards, technologies, and guidance to help address the issue. However, many firms have struggled with implementing security programs and policies that effectively keep threats at bay. Financial institutions must buckle down with comprehensive risk assessment planning and strategies that protect their digital assets as well as improve their ability to respond to attacks.

3. Safeguarding Sensitive Data

For businesses in the financial sector, cybersecurity isn't just a matter of neutralizing threats; it's a matter of data privacy. These companies are naturally responsible for a wealth of financial and personally identifiable information that requires special handling. Those responsibilities are amplified by existing and emerging compliance regulations that call for specific processing, storage, and security practices. From HMDA and PCI-DSS to SOX and GDPR, there are more than enough compliance frameworks designed around data privacy and security to keep institutions frustratingly busy.

4. The Fintech Factor

There's no denying that technology has been hugely influential in improving speed, performance, and reliability across multiple industries. On the other hand, it can make the already complex task of compliance even more challenging. Often referred to as “fintech,” financial technology such as mobile e-commerce, digital currencies, and web-based business in general has introduced even greater risk. When it comes to technology, financial institutions must master the ultimate balancing act by juggling risk management, security, consumer protection, and profitability.

5. Controlling Compliance Costs

When hearing the term “cost” used in a regulatory context, I can't help but think of the repercussions in non-compliant scenarios. However, tackling compliance requires a real monetary investment, and the costs can get rather outrageous. According to a survey by Duff & Phelps, compliance costs in the financial sector are on pace to double by 2022. Financial professionals said they currently pour roughly 4 percent of their total revenue into compliance, but expect that to increase to 10 percent over the next five years. So what's driving the increase in spending? Well in addition to the cost of taking steps to actually comply with the rules, Duff and & Phelps cited budgeting for the salary of compliance officers, regulatory fines, and cases of personal liability on the part of high-ranking executives guilty of misconduct as likely factors. It all adds up to a need for companies to reevaluate how to best allocate their resources and better manage compliance costs. The combination of regulators, investors, customers, and other stakeholders has financial institutions feeling the pressure to optimize their infrastructures in ways that address the ever growing scrutiny of compliance. These challenges will surely become even more complex as both technology and the regulatory landscape continues to evolve.

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