Insights Blog Compliance Challenges Banks, Insurers and Financial Services Firms Face in a New Digital World

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Compliance Challenges Banks, Insurers and Financial Services Firms Face in a New Digital World

What you need to know about the emerging regulatory and compliance challenges of technological innovation for banks, insurers and financial services providers.

Simon Pickersgill, Senior Vice President, Account Management

Magnifying glass on "Compliance" text on chart, dice, spectacles, pen, laptop calculator on wooden table - banking, financial services and insurance concept.

Banks, financial services firms and insurers can gain a competitive edge by adopting new technology and alternative data sources and creating a connected partner ecosystem. But ongoing technological innovation presents difficulties for compliance departments and industry regulators.

These difficulties include the risks and compliance requirements of data and artificial intelligence (AI), and cloud, infrastructure and security. Here’s what you need to know.

The regulatory environment and disruption

The banking, financial services and insurance (BFSI) sector and its regulators face major challenges. These can be categorized as falling into two main areas.

First, global economic, social and environmental factors, including the climate emergency, will elicit a variety of different responses and initiatives from the industry and regulators worldwide.

Second, the financial services frameworks governing and regulating the BFSI sector will need to evolve to meet the industry’s changing attitudes toward risk. These attitudes have shifted as a result of the velocity of technological innovation and the need of individual banks, financial services providers and insurers to stay competitive.

Data and AI

Building a compliant, AI-powered, data-driven organization to improve customer experience and maintain or increase competitive advantage requires a strong foundation. This should be secure and scalable, allow linkages to internal and external data sets (possibly as microservices) via APIs, and support advanced analytics and automation capabilities.

As banks, financial services and insurance companies introduce innovative technologies into their organizations to help build this strong foundation, security, resilience, agility and regulatory compliance will be critical to their success.

The challenge that they face is maintaining GDPR compliance as databases grow exponentially, while also delivering AI solutions that are trustworthy and meet the new EU AI Act.

Cloud, infrastructure and security

Cyber security spending to put in place “zero trust” principles and “security by design” tops the list of an expected increase in investment among those surveyed by Deloitte.

Cloud transformation projects are also set to increase, as building a cloud foundation is a fast and cost-effective way to store and process big data, implement advanced analytics and automation, and more. It also moves businesses toward continuous change delivery.

But customer experience and business profitability will be hit hard unless banking, financial services and insurance firms can introduce new technology and ways of working while maintaining compliance with external regulations and internal standards for risk.

A move to the cloud will support BFSI businesses in meeting changing regulatory reporting requirements. But a fundamental challenge for organizations is how to anticipate, identify and address security risks where responsibility for security compliance is split between the cloud provider and themselves.

Regulatory compliance

Regulation for areas such as big data processing and AI systems, cloud computing, cyber security and more will have a big impact on the BFSI industry over the next few years. In short, regulators will become more demanding in ensuring that standards are adhered to.

What will make this more challenging is existing privacy laws, such as GDPR and the UK Data Protection Act 2018. There’s also the California Consumer Privacy Act (CCPA), and the data-related rules from the New York Department of Financial Services (NYDFS).

The challenge BFSI firms face is how to mitigate the regulatory risks posed by technological innovation (open banking, crypto, etc.) while embracing digital and business transformation that supports rapid change.

Regulation as an enabler for technological innovation

Keeping pace with new technologies and the changing regulatory and risk landscape is a constant challenge for the BFSI sector. But it’s as well not to lose sight of the opportunities this affords.

Indeed, Bo Li, deputy managing director of the International Monetary Fund recently highlighted that the question financial regulators now face is how best to unlock the benefits of technology around financial inclusion, efficiency, risk management and oversight, while managing financial stability and integrity risks.

“Overall, technological advances in finance should be broadly welcome, together with preparations to capture their benefits and mitigate potential risks to the financial system’s integrity and safety.

“But many steps are needed to strengthen domestic and international policy frameworks on data, artificial intelligence, and cybersecurity; to promote cooperation among countries and regulators, and to build capacity.”

International Monetary Fund, Deputy Managing Director, Bo Li.

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