In the banking sector, compliance is a critical element that is important for preserving client confidence and assuring the efficient operation of the financial system. Given the continuously shifting regulatory climate, banks must keep up with the most current compliance requirements to avoid possible fines, penalties, and reputational harm. This piece will examine the compliance environment for 2023 and the outlook for the financial sector.
Banks need to prepare for several regulation adjustments as 2023 approaches. The Basel III framework’s application is one of the most significant shifts. Basel III’s new capital, leverage, and liquidity requirements are intended to improve the financial system. The framework seeks to increase the resilience of banks to economic shocks, lessen the likelihood of bank failures, and enhance the security of the financial system as a whole. According to a Bank for International Settlements report, the Basel III framework is anticipated to raise banks’ minimum common equity Tier 1 (CET1) capital standard from 4.5% to 7.0%. The study also notes that banks’ profitability and financial adequacy are anticipated to impact the framework’s execution significantly. Banks that don’t comply with the new standards risk fees, penalties, and possible reputational harm.
Banks must prepare for several other regulatory adjustments besides the Basel III structure. The EU’s General Data Protection Regulation (GDPR), which went into force in May 2018, is one of these modifications. The GDPR applies severe penalties for non-compliance and seeks to safeguard the confidential information and privacy of EU residents. To escape fines of up to €20 million or 4% of their worldwide annual sales, banks that function in the EU must ensure they comply entirely with the GDPR.
Regulators all over the globe are now paying more attention to virtual assets and VASPs. The Financial Action Task Force’s (FATF) suggestions on virtual assets and virtual asset service providers represent another regulation shift for which banks need to plan (VASPs). The FATF is an intergovernmental group that develops global guidelines for preventing the funding of terrorism and money laundering. Virtual assets and VASPs must adhere to anti-money laundering (AML) and counter-terrorism funding (CTF) laws, according to new guidelines released by the FATF in June 2019. Banks providing services to virtual asset companies or participating in virtual asset transactions must comply entirely with the FATF’s guidelines to avoid fines and reputational harm. A blockchain security firm called CipherTrace released a study estimating that in 2019, cryptocurrency-related crimes cost a record-breaking $4.5 billion.
In addition to the abovementioned regulation adjustments, banks must be ready for several other compliance issues in 2023. The growing use of artificial intelligence (AI) and machine learning (ML) in finance is one of these issues. While AI and ML technologies can aid banks in streamlining their risk management and regulatory procedures, they also bring new dangers and difficulties. According to a study by the International Association of Privacy Professionals, AI and ML are among the top threats to privacy and data security in 2021. Banks that employ AI and ML must ensure that their data processing practices are open, that their algorithms are explained in a way that is both obvious and understandable, and that the proper safeguards are in place to prevent prejudice and discrimination.
Overall, the banking industry continues to place a high priority on compliance. To maintain their clients’ confidence and ensure the efficient operation of the financial system, banks must keep abreast of the most recent regulation changes and industry best practices. Banks can not only prevent fines and reputational harm by being vigilant and engaging in compliance, but they can also fortify a more robust and stable financial system.
