Regulators and Financial Institutions Grapple with the Changing Enforcement Landscape in 2018

2018 is to be a year where the regulatory environment in Asia continues to make dramatic changes. In Australia, 2018 also marks the end of some major enforcement actions, along with a Royal Commission into the financial services sector. However, new technology and a heightened enforcement climate mean that there are more changes ahead.

The changing regulatory trends are highlighted in a recent report from Thomson Reuters, which outlines some of the key issues financial institutions in Asia are currently facing. Some of the major issues include the heightened levels of cyber risk around the world, tighter controls around counter-terrorism financing and an enhanced enforcement climate. However, the report suggests that it’s the role of new technologies such as blockchain and fintech that will be vital to both regulators and financial institutions.

Improving Compliance

The role of compliance officers within financial institutions is set to change as we move into 2018. According to Senior Regulatory Intelligence Expert, Niall Coburn compliance will no longer simply be a final check and will be an integral part of a company’s operations.

The issue has been highlighted by The Commonwealth Bank’s ongoing issues around alleged money laundering. The Commonwealth Bank allegedly failed to correctly notify regulators about the activity of clients with links to terrorist organisations. AUSTRAC has alleged The Commonwealth Bank is continuing to avoid money laundering and terrorism funding reporting procedures.

The Thomson Reuters report suggests that for too long, regulatory compliance has simply been an exercise in checking boxes. With the case against CBA and a potential fine in the order of AUD$500 million, it will be up to senior management to effectively incorporate compliance into daily operations.

The heightened levels of compliance have also been seen in the US with the comeback of one of the world’s top performing hedge funds. Steve Cohen, the founder of SAC Capital, was banned from managing outside money after he was found to have been involved in insider trading. Cohen has recently announced that when Point72, his family office, starts taking on outside money, it will do so with a 50-strong in-house compliance team. This marks a change in trend, where companies begin to do increasing levels of independent compliance.

Technology Changes and Cryptocurrency

The role of technology will also change the way in which both regulators and financial services operate. In the last 12 months, there has been a growing level of interest in cryptocurrencies and blockchain technology.

The ASX is getting set to introduce its own distributed ledger technology (DLS) found in blockchain. As the global equity world watches on, the ASX hopes the technology that will replace CHESS, will cut the cost of transactions, while making them quicker and safer. Blockchain uses computer encryption to track transactions. This will also help facilitate foreign exchange payments, secure settlements, debt issuance programs and digital identity platforms. The new technology will hopefully make transactions more transparent for both regulators and institutions.

The other side of the cryptocurrency world will also be in the eyes of the regulators. As retail interest in digital currencies continues to grow, regulators will be putting increased focus on how financial services firms incorporate them into their offerings. Up until this point regulators have been able to overlook cryptocurrencies. But as they have grown and become widely adopted regulators need to catch up. At this point in time, there are only limited protections in place for retail investors. So this will tighten in 2018 and will do so on an international level. It also goes to highlight the need for effective financial product disclosures going forward and to ensure that advisory firms and brokers are acting in the best interest of clients.

Niall Coburn also suggests that financial services firms are no longer able to simply sell all financial products to all clients. In years gone by, financial advisors were able to simply sell the house products. Since the Global Financial Crisis, we’re starting to see that there are consequences with not operating in the best interest of clients. This is also one of the key points that will likely come out of the Royal Commission into the financial services sector.

Growing Cyber Risk

As technology and new forms of payment continue to evolve, so too does the risk of cyber attacks. Despite how secure financial institution feel their assets are, they need to become extra vigilant to ensure their safety and those of their clients.

In recent days, hackers managed to steal 58 billion yen (US$532.6 million) from cryptocurrency exchange Coincheck. It’s believed that this is the largest theft on record.

The Coincheck theft is the latest in a series of attacks targeting cryptocurrency exchanges. Given the fact that these exchanges are new and largely unregulated make them ripe for cybercriminals.

Niall Coburn suggests that financial services firms need to increase their planning around such attacks and understand where companies house their most important digital assets. He also advises that senior management have an action plan in place to deal with these types of incidents.

Tech Revolution

By far the largest challenge in 2018 will be the role that technology is playing. With the rate of change of the financial industry growing exponentially, it’s up to regulators to keep pace.

However, the new environment of compliance is also an opportunity for companies of all sizes to become proactive and incorporate increased levels of independent compliance.

Thomson Reuters






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