Whether it’s global reforms in combatting financial crime, the impact of Brexit or the acceleration of digitalization in financial services, 2021 promises to be a year to watch in terms of financial regulatory trends. Fenergo’s Rachel Woolley covers the top regulatory trends to watch for this year.
1. Increase in Reforms Across the Globe
Many countries and regions across the globe are in the process of introducing AML reform in an effort to enhance the industry’s response to financial crime. Over the next few years, we can expect to see sweeping change in the Americas, Europe and the APAC region. While financial institutions have been subject to AML and counter-terrorism financing (CTF) legislation for many years now, many key industry stakeholders have not been held to account for their roles in some of the biggest money-laundering scandals in recent years. As such, the legislative environment has evolved in many regions, with legal, auditing and other professional services firms under the spotlight. Additionally, regimes continue to evolve in response to emerging technologies, with many countries now introducing AML/CTF requirements for cryptocurrency and digital asset exchanges.
Filed as an amendment to the National Defense Authorization Act, the Anti-Money Laundering Act (AMLA) of 2020 seeks to address issues relating to the use of anonymous companies by improving corporate transparency. Amongst a number of other proposals, the AMLA will introduce new reporting requirements relating to beneficial ownership. Both new and existing companies will be required to report information on the beneficial owner, with limited exceptions; existing companies will have two years to file such information.
In the EU, six AML directives have been adopted over the last 30 years, with further reform proposals under consideration. In May 2020, the EU Commission published a six-point action plan, aimed at improving the response to financial crime. This included a public consultation that sought industry feedback across a number of topics and is intended to inform a proposed AML regulation. Currently, there are concerns regarding the use of AML directives to consistently enhance the regime across all EU Member States, largely due to the delayed or incomplete transposition status of some countries. The expectation is that an EU AML Regulation will be published in the early half of this year that would become directly applicable to all Member States on the effective date.
The EU also conducted a public consultation on the digital finance strategy, as well as an industry survey on the regtech environment. This activity, combined with the guidance issued across the EU in response to the coronavirus pandemic, speaks to the role that technology will continue to play in enhancing the industry’s response to financial crime in a robust, innovative and more effective way.
2. The Impact of Brexit
Much like Norway, Switzerland, Iceland and Liechtenstein, the U.K. is no longer subject to EU directives or regulations post-Brexit. However, it is likely that the U.K. will continue to align with the EU’s approach to addressing financial crime. As such, the U.K. transposed the 5th EU AML Directive in January 2020, giving full effect to the relevant measures. The U.K. money-laundering regulations were further updated with minor amendments at the end of the transition period by way of the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020.
The U.K. Companies House will also introduce a number of changes early in 2021 as it seeks to close what has long been considered a significant gap in effectively addressing financial crime risk. Currently, there is no obligation to verify information when registering a company in the UK. New Year’s Day 2021 saw the most significant changes to Companies House rules in the last 150 years. Directors and other individuals associated with U.K. companies are now required to verify their identity.
3. Ubiquitous Endorsement of Technology
Although financial regulators have acknowledged the use of technology for some time, the pandemic has resulted in an increased focus on digital operational resilience and continuity in the provision of financial services. In response to the pandemic and the resulting social distancing measures introduced across the globe, many prominent financial regulators including the Financial Conduct Authority (FCA) in the U.K., the Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) have endorsed the use of technology solutions to ensure business continuity throughout the pandemic. In 2021, we expect the fintech/regtech industry to continue to grow rapidly as financial institutions focus on digital transformation and enhancing their approach to both compliance obligations and effectively addressing financial crime risk.
4. More Focus on Effectiveness Than Compliance
Since 2008, over $46 billion in penalties have been issued to global financial institutions for noncompliance with anti-money laundering (AML), sanctions and other financial crime compliance obligations, with $10.6 billion issued in 2020 alone. However, the true cost of noncompliance is more than the financial penalty paid by financial institutions, with global industry bodies continuing to highlight concerns with other areas, such as human trafficking and the drug industry.
This begs the question: Is compliance helping to fight financial crime? Simply meeting minimum standards or mere “compliance” isn’t, in fact, an effective mitigant to financial crime. The industry as a whole is reflecting on the response needed to enhance our approach to financial crime prevention, including enhancing the legislative, regulatory and supervisory activities. The industry also needs to adopt an outcome-based approach, rather than simply following a prescriptive rules-based approach. In order to meet the objective of enhancing the response to financial crime, the industry will need to consider the role played by technology, particularly with regards to automation, robust risk assessment processes and appropriate risk management measures. Collaboration is also key, and a more partnered approach with key stakeholders, along with robust guidelines, will be beneficial in helping to combat money laundering, terrorism financing and other financial crimes.
As the financial industry moves through 2021, financial institutions will need to continue to bolster their response to financial crime by embracing regulations, while at the same time taking a closer look at the effectiveness of compliance. If 2020 has taught us anything, it’s that regulatory complexity will only continue to increase, so having the most cutting-edge technology will be a critical tool to help navigate the compliance landscape.