Financial Services
Introduction to compliance in financial services and why it matters
Market studies show that global financial institutions collectively paid a staggering penalty of $6.6 billion in 2023. This represents a 57% increase from 2022. Some of the reasons were failing to comply with anti-money laundering (AML), environmental and social governance (ESG), customer due diligence, sanctions, and KYC.
Compliance with the financial sector’s laws, industry standards, and regulations is crucial for building trust and protecting investors’ interests. One example of a financial regulation is the Federal Deposit Insurance Corporation (FDIC), which protects bank deposits in case they are unable to pay the customers.
This article highlights the importance of financial services compliance, outlines key regulatory bodies, and provides steps for implementing compliance within your organisation.
Regulatory bodies and authorities that oversee financial compliance
Government and independent regulatory bodies govern the global financial and investment markets to protect investors. Examples of such regulatory bodies include –
- Securities and Exchange Commission – SEC regulates and monitors the securities and investments in the U.S. It protects investors from misconduct and fraud and promotes fair and efficient securities markets. It also requires public companies to disclose important financial information. The SEC came into existence after the market crash of 1929 and, since then, continues to enforce laws against market manipulation.
- Financial Conduct Authority – FCA ensures the protection of investor interests and the integrity of financial markets in the UK. It is an independent body that regulates over 50,000 financial services firms and financial markets.
- Central banks – Central banks are the key regulatory bodies of many countries. They oversee banking regulations and compliance with the monetary policy, annual inflation, money to print, and federal funds rate. Examples include the Federal Reserve of the U.S. and the Reserve Bank of India (RBI).
- Financial Industry Regulatory Authority – FINRA is an independent body that governs and regulates stockbrokers in the U.S. Securities and Exchange Board of India (SEBI) is the Indian regulatory body with similar objectives.
- Federal Deposit Insurance Corporation – The FDIC bolsters customer confidence in the U.S. financial system by insuring deposits in banks and thrift institutions, covering savings accounts, checking accounts, and certificates of deposits. However, It does not insure investments such as stocks, mutual funds, and bonds. Additionally, the FDIC ensures that banks comply with the Truth-in-Lending Act, Community Reinvestment Act, and the Gramm-Leach-Bliley Act.
Depending on the geographical location and the nature of the business, the financial institution must comply with the regulations set by the governing body.
Why should you ensure financial compliance?
Financial compliance protects both the end customer and the financial institution. It builds reputation, creates transparency, and fosters healthy market competition –
Build and maintain reputation
Financial institutions with a long history of regulatory compliance are viewed as a reliable partner for investment. Customers seeking long-term security and profitability of their investments choose such institutions over their competitors.
By consistently demonstrating compliance with legal frameworks and profit margins, a financial institution establishes trust and credibility in the consumer market.
Thrive in a competitive market
Enforcement of compliance in finance encourages fair and healthy competition. By following the same regulations, every institution is on the same platform and with the same potential for growth. Businesses are discouraged from using unethical practices and act outside the purview of industry regulations to increase profits.
Ensure customer safety
The rules and regulations in the financial industry are in force to protect consumers from fraud, manipulation, and other similar events. The dot-com financial crisis of the early 2000s was such an event where brokers traded risky shares, causing a market crash when the startups went cash dry. Similarly, in 2007-08, global financial institutions took excessive risk by underwriting mortgages for subprime homebuyers, leading to a buildup of toxic non-performing assets.
Improving regulatory compliance within an organisation
Complying with regulations is a mix of strategic and technology-driven initiatives for financial institutions. Here are a few ways –
Preventive measures
By incorporating data protection and privacy laws, cybersecurity standards, consumer legislation and regulations, and corporate governance rules, financial institutions create a robust net of preventive measures to protect their clients.
Compliance monitoring strategies
Monitoring compliance with the regulations must be technology-driven. With the help of artificial intelligence (AI), robotic process automation (RPA) and machine learning (ML), financial institutions can proactively monitor any deviation from current mandatory compliances.
Integration between compliance and risk management
By integrating risk management processes and systems with financial compliance solutions, a business ensures stability, security, and greater protection for its customers.
How can Infosys BPM help in financial compliance?
In today’s complex financial landscape, regulatory compliance is not just a legal obligation but a foundation for trust, transparency, and sustainable growth. By implementing robust finance compliance strategies, aligning with regulatory bodies, and integrating risk management solutions, financial institutions can thrive in a competitive market while safeguarding the interests of their clients. Explore Infosys BPM capital market financial services that help wealth and asset managers, private equity firms, investment banks, brokers, and financial information providers optimise performance and reduce complexity in compliance, enhancing market stability and promoting ethical business practices.