KPMG view of the key regulatory challenges of 2020 for financial services

3 January 2020: KPMG published the fifth edition of its annual Financial Services Ten Key Regulatory Challenges. The report lists issue that will likely affect business imperatives ranging from technology transformation to market expansion and cost efficiencies. This is an overview of the key takeaways from the 25-page report:

Geopolitical change: expect disruption and embrace business change

There is a geopolitical trend geared towards “protectionism, sovereign rights and anti-globalization”. This will undoubtedly create disruption and uncertainty for financial services. There is also a heightened risk of fraud and financial crime, which thrive in uncertain times. Disruption could take the form of technology transformation (including real-time monitoring of fraud/financial crime and internal risk management), customer interaction and market expansion, among other things. 

Divergent regulation: “merge the diverge” with both enterprise and localized needs

The report suggests that companies will need to anticipate differences in state, federal and global regulations. Regulators, while encouraging innovation, are moving towards increased supervision, enforcement and parameter setting when it comes to technology.  They will also expand their oversight to third-party vendors, though approaches will likely differ globally. 

Data protection and governance: protect your data as the asset that it is

Data is gold dust. KPMG recognises this and notes that it is an asset in need of increased protection, robust data governance and controls. As technology advances, so will the ability to classify and use data. Businesses should ensure they do not open themselves up to conduct risks where using third parties to deploy or manage their data. Companies should be creating and maintaining forward-looking cyber security strategies; there should be strong third-party risk management in place. 

Operational resilience: plan for the unexpected operational impacts to happen

Ongoing business transformation will see operational resilience becoming a key focus for the regulators. In particular, they will focus on regulatory and operational change management, new technology and data governance strategies, use of third parties and enhanced risk management practices. Regulators will want to see that firms control operational risk, but also that they successfully manage disruptions where they occur and preserve business continuity throughout.

Credit quality: apply the learnings from prior credit cycles

Financial institutions should use prior credit cycles as a foundation on which to build their 2020 credit quality. In particular, they should focus on risks associated with expanded delivery channels, new products, technology and risk layering. 

Capital and liquidity shifts: easing buffers doesn’t mean weakening risk management 

It is likely that most financial services companies will see an easing of regulatory capital and liquidity requirements over the coming year. They should anticipate final rulemaking surrounding the Stress Capital Buffer, the Net Stable Funding Ratio and the Total Loss Absorbing Capital. 

Compliance agility: solutions available now for agile and streamlined compliance

KPMG recognises that financial services industries are changing fast. In order for businesses to keep up, they will need to anticipate and adapt to emerging risk and transformation across all areas including industry, process and regulatory developments. The increasing use of fintech and AI requires enhanced due diligence. Technology can also improve compliance, however, and the use of data analytics and natural language processing will enhance firms’ ability to identify compliance risks.

Financial crime: innovate, but not at the cost of increasing risks of financial crimes

Technology and data analytics will play a crucial role in identifying patterns that indicate financial crime and fraud risks. In the same breath, the increased use of technology is also creating loopholes and opportunities for fraudsters. KPMG’s report suggests that expanded controls will be essential for a company looking to thwart and minimize misconduct, fraud and financial crime risks.

Customer trust: remember that you are in the business of customer trust

Competition from fintechs and some non-banks can pose new threats to financial services. Existing businesses must continue to build customer-centric business models and ensure the protection of customer data in order to remain successful.

Ethical conduct: do the right thing even when no one is looking

No area of your business will be left untouched by technology. Even misconduct (from ethical misconduct to market manipulation) is being captured by tools that can proactively detect and prevent such incidents. The increased use of AI, however, is not yet perfect and KPMG recognises that ethical issues continue to exist around machine bias and transparency. It adds that conduct risk management frameworks should, and are expected to, be applied enterprise-wide to capture and assess information that can inform compensation plans, sales practices and other employee behaviors.