IN BRIEF:
• This year, firms continue to prioritize consumer impact, ESG, digital assets, the digitalization of finance and use of AI, financial crime, and operational resilience.
• An institution-wide approach is imperative for business strategy, governance, and risk management, which involves setting clear targets and supporting sustainability disclosures.
• There will be increased regulatory scrutiny on board and management oversight in various areas, including senior leadership compensation and culture, and whether these align with stakeholder goals and the firms’ fiduciary duties.
This year, the global financial services landscape will be impacted by factors such as volatile geopolitics, rising energy costs, and rampant inflation. The spillover regulatory effects from high-profile bank failures in 2023 will also be felt this year and beyond, but they are not entirely unfavorable.
For example, more global regulatory reforms are taking shape to address the impact of the TBTF dilemma, or the perception that “the banks are too big to fail.” This theory refers to the situation where interconnected financial institutions have grown so large that their collapse could severely impact the entire financial system.
The 2024 EY Global Financial Services Regulatory Outlook Report highlights areas of longstanding regulatory interests. Among the priorities discussed, this article will explore five trends for banks and financial institutions.
DIGITALIZATION OF FINANCE AND INTEGRATION OF AI
With digitalization becoming the norm, some firms are struggling to update legacy systems, leading to greater regulatory scrutiny. This challenge will impact not only banks but also other institutions. Consequently, regulators will raise their standards of operational resilience, particularly in areas like technology. Doing so requires firms to reduce deficiencies in IT outsourcing, IT security, and data governance.
Financial regulators are looking to implement new rules for better control and ethical use of artificial intelligence (AI). Adopting responsible AI practices bolsters customer trust and strengthens a company’s reputation, setting it apart from its competitors. This strategic positioning can unlock growth opportunities and drive long-term success.
INCREASING IMPORTANCE OF ESG
There is greater regulatory oversight on environmental, social, and governance (ESG)-related reporting and disclosures as well as climate-risk management and stress-testing. Financial regulators worldwide are focusing on net-zero transition planning, with a growing supervisory focus on carbon markets and greenwashing risks.
In 2023, the International Sustainability Standards Board (ISSB) issued disclosure standards with the goal of harmonizing sustainability reporting. The Philippines is one of the countries planning to adopt these standards.
The significant decline in the variety and variability of life forms on Earth, also known as biodiversity loss, is also posing a systemic risk to economies and financial systems. This phenomenon encompasses the reduction of species, genetic diversity, and natural habitats on the planet. With the ISSB identifying it as an upcoming focus area, biodiversity loss is expected to receive increased attention.
Regulators require firms to have concrete plans to manage their financial risk exposure as they transition to net-zero. Net-zero targets will require an organization-wide transformation, a robust plan that considers biodiversity and climate-related risks, and a flexible roadmap for firms to enable these changes.
An institution-wide approach should incorporate business strategy, governance, and risk management when setting clear targets and supporting sustainability disclosures. Firms should also invest in ESG training for key personnel.
ADOPTION OF OPEN FINANCE AND CROSS-BORDER PAYMENT INTEGRATION
Several jurisdictions are developing open finance frameworks, such as the European Union, Australia, Hong Kong, Indonesia, the Philippines, and Brazil. Additionally, they have adopted a regulatory-driven approach for open finance. As such, a global standard may be necessary to avoid regulatory fragmentation. Open Finance regulation will require firms to set up multi-year strategic, operational, and technological transformation programs.
In the Philippines, the Bangko Sentral ng Pilipinas (BSP) launched its Open Finance Pilot project in 2023 and updated its Open Finance roadmap. More and more jurisdictions worldwide are expected to adopt and expand their Open Finance frameworks to facilitate seamless cross-border transactions. One example of a recent model for collaboration in the financial sector is the linkage of Singapore’s PayNow with India’s UPI and Thailand’s PromptPay.
PERSISTENCE OF FINANCIAL CRIME AND FRAUD
Addressing financial crimes remains a priority for regulators. The increase in scam payments requires new tools and regulatory compliance mechanisms. Firms may need to consider using more sophisticated technologies, such as AI-powered solutions, to enhance digital transaction security and anti-money laundering (AML) efforts.
Given the global nature of financial crimes, various regulators and governments are working together to expand AML measures. In 2023, firms faced supervisory scrutiny over AML violations as authorities intensified economic sanctions and re-evaluated the oversight of politically exposed persons.
While technology is creating new types of threat, it also offers new tools in the fight against financial crime. Fraud and investment scams, especially at the retail level, are pushing customers toward risk-taking behavior. Bank transfers account for most scam payments, requiring critical monitoring and analysis. Crypto crime prevention and regulatory scrutiny will continue to surge, and firms in other industries will need to adopt data and AI solutions for financial crime compliance.
BOARD AND MANAGEMENT OVERSIGHT
Several regulators released post-mortem analyses on 2023’s bank failures, highlighting the need for timely and comprehensive resolutions — a goal some banks failed to achieve. Consequently, boards must possess a thorough understanding of their policies, systems, and controls to identify and address risk management challenges and oversight weaknesses.
Firms must consider whether their performance and incentive structures work and whether they are aligned with stakeholder goals and the firms’ fiduciary duties. Furthermore, they should also consider board and management oversight issues from a new perspective, instead of relying on established practices.
NAVIGATING THE REGULATORY ENVIRONMENT
Given the ever-evolving nature of the financial landscape, firms will need to prioritize consumer impact, ESG, digitalization, financial crime, and operational resilience. By focusing on people, processes, and technology, firms can maneuver and leverage the tumultuous — but opportunistic — regulatory environment.
Next week, we will discuss critical areas that financial services firms need to prioritize in the age of digitalization and AI.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Christian G. Lauron is the Financial Services Organization (FSO) leader and Janeth T. Nuñez-Javier is the sector representative for Banking and Capital Markets (BCM) of SGV & Co.
