Regulatory inflation – How can financial firms manage the growing impact of regulatory constraints?Published on 10th August 2022
Regulatory inflation is a function of the acceleration of regulatory requirements which brings with it new technical challenges.
Regulatory inflation is being driven by:
- An evolving financial market to include new financial assets such as cryptocurrency, and FinTechs (financial technology firms) entering the traditional financial sectors.
- A heightened interest in sustainability and ESG themes.
- A constant battle to tackle money laundering and the financing of terrorism with new AML/CFT controls.
- New data privacy and cyber security regulations
- Since the crash of 2008, increased financial regulation has been followed by increased operational regulation in the financial markets – in a nutshell, the financial markets have seen a lot more regulation, and there’s a lot more coming.
This is very demanding on financial firms with increasing regulatory compliance and regulatory risk management challenges. Regulatory affairs and compliance teams have to continually identify both current and new regulations and the changes to those regulations as they are updated.
THE RISKS OF NON_COMPLIANCE
Non-compliance and weak regulatory change management increases regulatory risk which can cause:
- Reputational risk, through some violation or non-compliance of a regulation which can be costly to a firm with clients observing risk type behaviour.
- Risk of coming under the increased scrutiny of regulators and potentially losing necessary certifications key to business operations.
- Regulatory risk and the cost of penalties and fines.
TECHNICAL REGULATORY CHALLENGES
Technical challenges affecting the management of the impact of regulatory inflation:
- Firms unable to get a single view of regulations and regulatory updates that are pertinent in a digitised, searchable format.
- Risk rated regulatory content is available but it’s not being routinely used.
- Inability to easily incorporate regulatory data into a GRC solution in a smart way
- Using spreadsheets and finding that dealing with the increasing volume of regulatory content they are not suitable – with a risk of manual entry, lack of traceability and no single updated view.
- Unable to triage regulations with a workflow, ownership and audit of works.
To overcome these technical challenges a regulatory solution could be used to improve regulatory optimisation. Through a specialised taxonomy or categorisation solution of digitised, risk-rated data (updated hourly) regulatory affairs teams can better understand how to triage this data and establish its impact on the firm.
A SaaS Regtech solution, can provide triage access and audit trail across jurisdictions with built in agility to match a firm’s growth or shifting regulatory strategies – future proofing against the impact of regulatory constraints in this shifting regulatory environment.