The world of financial institutions are used to a state of constant evolution and development. Regulations affecting their work take place in their own jurisdictions on a regular basis, but these regulations are not the only restrictions they face. Very few institutions can ignore regulatory changes in other jurisdictions with whom they have connections of one sort or another. No financial institution is an island, and therefore the changes taking place on a worldwide- or certainly regional basis affect every business.
This article explores four particular trends or shifts in regulatory demands placed on financial institutions globally in recent years and seeks to understand how organisations are adapting to them. It also attempts to consider what may be ahead within each area that organisations need to monitor in 2024.
Increased Regulatory Scrutiny
There’s a notable trend towards heightened regulatory scrutiny of financial institutions. This is particularly pronounced in the U.S., where federal banking regulators are expected to intensify supervisory attention. This trend encompasses not just large banks, but also midsize regional banks and nonbanks like fintech and payment companies. Enhanced governance, risk management frameworks, and compliance with new regulations such as liquidity, debt and capital requirements will become increasingly important going forward.
In recent years, all financial institutions globally have faced an increasingly stringent regulatory landscape. This trend is also expected to continue in Europe and the United Kingdom. In the EU, there is an ongoing focus on wholesale markets reform and the legislative process for the Retail Investment Strategy. The UK government is advancing the Smarter Regulatory Framework, indicating a sustained emphasis on regulatory evolution. Financial institutions have had to adapt by enhancing their compliance systems and ensuring that they are prepared for these evolving requirements. The adaptations also include aligning their business models and operational strategies to meet the changing regulatory demands. In 2024, institutions are expected to continue refining their frameworks to comply with the latest regulatory changes, which may include updates to market practices and investment strategies.
Focus on Environmental and Climate Risks
The focus on environmental and climate risks in the regulatory landscape for financial institutions has intensified globally. Financial institutions face increased expectations to manage these risks, including implementing stress testing programs that incorporate environmental factors and updating strategies to effectively address such challenges. The European Central Bank (ECB) has been a frontrunner in this movement, emphasising the need for adequate management of climate and environmental risks, with a clear indication of potential enforcement actions against banks failing to meet these standards. Additionally, there’s a growing trend towards integrating environmental and sustainability factors into external credit assessments.
In the UK, the Financial Conduct Authority (FCA) has focused on sustainability disclosures, with the Prudential Regulation Authority (PRA) emphasising the management of climate change risks. Meanwhile, the U.S. is witnessing a gradual shift, with individual states like California leading the way in requiring climate-related disclosures from businesses.
To adapt to these developments, financial institutions have been enhancing their climate risk management strategies and improving disclosures related to environmental impact. In the coming year, further refinement of these approaches is anticipated, particularly in the areas of risk management and transparent reporting. Institutions are likely to continue evolving their frameworks to align with the dynamic regulatory environment, focusing on both compliance and strategic positioning in the face of environmental challenge
Amendments to Disclosure Regulations
In recent years the global regulatory environment for financial institutions has seen a significant shift towards more stringent disclosure regulations, especially in the realms of sustainability and environmental impact. In Europe, the amendments to the Sustainable Finance Disclosure Regulation (SFDR) are set to extend and simplify sustainability disclosures, marking a significant step towards greater transparency in financial services. Additionally, the Corporate Sustainability Reporting Directive will compel firms to report on their environmental impact starting in 2024, significantly influencing Pillar 3 disclosures and risk management practices for financial institutions.
In the United Kingdom, similar trends are observed, with the FCA introducing new rules around sustainability disclosure requirements. This regulatory shift has necessitated adaptations in the way financial institutions approach and report sustainability and environmental data, aligning with the increased focus on responsible investing. In the United States, the trend is towards harmonising with global standards, though the federal regulatory framework is evolving more gradually. Institutions are increasingly adopting practices to align with international norms, preparing for potential federal mandates in the near future.
To adapt, financial institutions have had to bolster their data collection and reporting mechanisms, enhancing their systems to capture a broader range of environmental, social, and governance (ESG) data. Looking ahead, they will need to continue refining these systems, ensuring accuracy and comprehensiveness in reporting to meet both current and forthcoming regulatory requirements.
ESG and Crypto Asset Regulations:
The landscape of financial regulations has been evolving rapidly in the areas of ESG and crypto assets. ESG continues to be a major focus, with significant changes in corporate reporting regimes. ESG rating providers are increasingly being brought within the regulatory perimeter, reflecting a global shift towards more accountable and transparent sustainability practices in the financial sector.
On the crypto asset front, the regulatory framework is becoming more structured. The European Union and the United Kingdom, in particular, are moving towards more comprehensive regulatory frameworks for crypto assets. This move signifies a growing recognition of the importance of crypto assets in the financial sector and the need for robust regulatory mechanisms to manage risks associated with these digital assets.
Financial institutions have had to adapt to these regulatory changes by enhancing their ESG reporting capabilities and integrating considerations of ESG factors into their investment and risk management processes. In terms of crypto assets, institutions are developing new compliance and risk management strategies to align with the emerging regulatory requirements. In the coming year, these adaptations will likely need to be further refined as the regulatory landscape continues to evolve and new standards and requirements are introduced.
The Challenging Path Ahead
In the rapidly evolving financial industry, balancing innovation with regulation remains a challenging task. As the sector grapples with burgeoning digital landscapes and escalating environmental concerns, regulatory frameworks are being continuously adapted. These changes aim to maintain financial stability and consumer protection while fostering an environment conducive to entrepreneurship and technological advancement. The pace of change, particularly in response to environmental sustainability and digital transformation, demands agility from financial institutions. They must navigate a complex terrain, aligning their operations with emerging regulations without stifling growth and innovation. This dynamic interplay between development and control defines the current and future state of the global financial industry.
