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TOP FOUR COMPLIANCE TRENDS TO WATCH IN 2024

04 December 2023
Knowledge Base

--------------------------------------------------------------------------------

by Robert Houghton

As financial institutions gear up for the next 12 months, it’s time to reflect
on the key trends and developments, considering how they’ll shape the year
ahead. While the financial landscape is constantly evolving, we believe there
are four important issues that will shape 2024:

1. AI-powered compliance

AI and automation are the buzzwords of the year, significantly changing our work
landscape and set to transform our economy and social norms.Take generative AI.
It’s a game-changer for financial institutions in streamlining and securing
compliance processes. Imagine a trading floor where every call and message is
monitored. Certain phrases or words will trigger an automated alert to the
compliance team. These alerts are typically sorted into three tiers of concern.
A low-level alert might be triggered by a trader swearing in a conversation.
These are common occurrences that result in hundreds of daily alerts, usually
reviewed manually by offshore companies. This traditional review process is time
consuming, open to mistakes and inconsistent.

Enter generative AI, with its dual capabilities. Firstly, it can spot the
misdemeanour in real-time. Secondly, it can understand the context to see what
risk it poses. If someone swore, perhaps because they were quoting a strongly
worded news story, it’s not a risk. Generative AI can tell the difference
between that and someone using bad language in anger, thereby reducing false
positives. In the coming year, financial institutions will look at how these AI
and automated decision-making processes can be explained, recorded and saved.
However, it can’t be a “black box” that holds the fate of a trader within. By
creating an audit-friendly trail, businesses will improve their chances of
avoiding regulator penalties.

2. A smarter monitoring for the hybrid era

In today’s work-anywhere culture, monitoring employees in regulated sectors like
finance is key to managing risk. But it shouldn’t turn into a nine-to-five
spying game. It’s a mistake to treat remote work as if it mirrors an office
setting; this can damage trust. Instead, monitoring should aim to understand
work patterns, just like a heart monitor detects irregularities, signalling when
the compliance team should take notice. In the shadow of US banks facing over $2
billion in fines for unchecked use of private messaging and personal devices(1).
with the SEC imposing a $125 million penalty earlier this year(2) – the UK’s
financial sector is on alert. The Financial Conduct Authority (FCA) is already
looking into the matter and questioning banks about their use of private
messaging, as the watchdog decides whether to launch a full probe.

Financial firms must be proactive and ensure their Risk Review includes the
provision to document all comms channels used by those personnel affected. From
there clearly documented policies can be presented to the regulator. Ensuring
review of those policies are adhered to is an important part of the process.
They need to maintain a delicate balance between productivity, employee
wellbeing and strict adherence to regulations in the hybrid work era.

3. A demand for transparency

In 2023, the banking sector was shaken by a wave of raids on giants like Société
Générale, BNP Paribas and HSBC, as part of a large tax fraud probe in Europe(3).
Over $1 billion in fines looms as the industry, still shaky from significant
bank failures(4), faces a heightened demand for transparency. Investigations
into banks are essential when there’s evidence of criminal conduct, but they
must be conducted with care. Raids can expose vast amounts of sensitive data,
affecting not just the banks but numerous customers. Authorities should focus
only on specific accounts with clear signs of foul play rather than casting a
wide net.

The Paris raids, in particular, were an alarming example of the vulnerability of
personal information, with hundreds of thousands of accounts indiscriminately
scrutinised. These raids have set a dangerous standard where privacy is
secondary. As we approach next year, the financial sector must grapple with this
double-edged sword: pursuing fraudsters while safeguarding individual privacy.
The presumption of guilt will remain rife in the financial sector, however this
will be partnered with a call for institutions and regulators to be more
transparent with their activity.

4. A one source advantage

As the stakes for non-compliance get higher and regulators scrutinise financial
firms more closely, institutions will need to have a more comprehensive and
centralised approach to data integrity, management, access and risk management.
This includes creating ‘one source’ of data, which is a single, authoritative
source of truth that can be used for risk analysis, proof of adherence to
policy, reporting, analysis, and compliance. Currently, many banks have a
patchwork of data silos, which are collections of information that are not
easily accessible to the bank because they are recorded or stored differently.
This makes it difficult for banks to get a complete picture of their data and to
comply with regulations.

Historically, this would have required a significant investment in time and
resources. Now, modern solutions simplify this process, offering a more
efficient path. In the long run, having a single source of data will help banks
reduce costs, improve compliance and make better decisions. For those who
continue to turn a blind eye to this issue will face financial penalties,
operational risks, and irreparable reputational damage.

Overall, it’s safe to say that 2024 will continue to prove the need to strike a
balance between technology and people in a bid for demonstratable compliance. As
financial institutions prepare, they must consider their position on the
work-anywhere spectrum, and how the combination of AI, automation, transparency
and leadership can ensure they’re living by the letter of the law next year.

Roll on 2024!

(*1) https://www.bloomberg.com/news/articles/2022-09-27/wall-street-whatsapp-probe-poised-to-result-in-historic-fine#xj4y7vzkg

(*2) https://www.sec.gov/news/press-release/2023-149

(*3) https://www.reuters.com/markets/europe/french-financial-prosecutors-search-bank-offices-over-dividend-stripping-2023-03-28/

(*4) https://www.nytimes.com/article/svb-silicon-valley-bank-explainer.html

The author, Robert Houghton, is founder and CTO at Insightful Technology.

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