The Effect of Growing Regulatory Enforcement on Financial Institutions

Regulatory bodies worldwide are tightening their grip on compliance, putting violators in a world of hurt.

For instance, take the EU GDPR — even though 800+ fines have been imposed since 2018, enforcement was initially slow. But between July 2020 and 2021, there was a significant increase in the number and size of fines, amounting to a 113.5% surge.

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The biggest penalties for GDPR violation were levied on:

 

  • Amazon — $877 million
  • Google – $56.6 million
  • H&M — $41 million
  • British Airways – $26 million

 

Failing to comply with KYC and AML regulations is also leading to serious consequences. From 1st April to 30th June 2021, twenty-five banks were fined a staggering $722,275,805 globally.

The worst offenders include:

 

  • Dutch bank ABN Amro — $574 million
  • Swiss bank Julius Baer — $79 million
  • Norwegian bank DNB ASA — $48.1 million

The Imminent Basel IV

Since the 2007- 08 financial crisis, financial institutions have had to follow agreed-upon sets of regulations and compliance standards, known as the Basel Accords. Since December of 2017, financial institutions in the EU have had to comply with Basel III, and by January 2023, Basel IV will be enforced.

Business executives are expected to implement appropriate technical and organisational measures to maintain compliance in the ever-changing landscape.

Financial regulations and compliance are becoming more difficult due to:

Continuously changing international regulations

The compliance function is becoming especially more demanding for small- and medium-sized institutions that have weaker compliance departments. They will be mandated to bolster their operations by training their professionals, increasing their working proficiency and leveraging IT tools that will help automate and streamline their regulatory activities.

 

Increased effort for risk management

Basel III put more pressure on financial institutions for proper detection, measuring and reporting risks, and Basel IV will continue to emphasise risk mitigation. As emergent risks increase, financial institutions will have to evolve the way they work, leverage innovation and technology and become more cost-efficient to meet increasing regulations.

 

Financial institutions being made liable in money laundering scams

Even when banks or financial institutions are not aware of playing a role in laundering money, they are held liable. In 2016, for instance, in the “Russian Laundromat” — an international money laundering scheme — the Deutsche Bank was involved. Although it was unaware of illicit activities, the bank could face penalties for non-compliance with AML laws, and its senior management could risk prosecution.

 

Greater focus on reporting

Reporting for financial institutions is a convoluted and demanding process as standards vary with jurisdiction. Each jurisdiction the financial institution operates in will have its own reporting standards, which banks are required to carry out.

Enforcement of GDPR requirements

Data storage and management is a significant compliance project for banks and financial institutions. As GDPR is more assiduously enforced, institutions will have to become even more careful about how they handle large quantities of personal information.

On the other hand, banks that are able to demonstrate GDPR compliance will augment customer trust and engagement.


The forthcoming Basel IV will require detailed disclosure of reserves and other financial statistics from banks, making controlling regulations manually even more difficult.

Curiously, last year ABN Amro doubled the size of its team dedicated to detecting and investigating suspicious transactions. The Dutch bank was still liable for a staggering $574 million fine.

This indicates that simply adding to an organisation’s risk management roles will not guarantee compliance — especially as the regulatory sector moves away from manual processes and into standardised machine executable forms.


Financial industry business leaders not only need to adopt regulatory technology, but also need to train their employees with new capabilities.

 

Register for the Cambridge RegTech: AI for Financial Regulation, Risk, and Compliance programme to gain a foundational understanding of how technologies like AI and ML can help your institution remain compliant with constantly changing regulations and prevent business losses.

Cambridge RegTech: AI for Financial Regulation, Risk, and Compliance Programme is delivered as part of a collaboration with University of Cambridge Judge Business School and Esme Learning. All personal data collected on this page is primarily subject to the Esme Learning Privacy Policy.

 

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