Financial crime is an issue that financial services business leaders cannot avoid. We outline six issues to look out for in 2015.
The scrutiny the financial services industry is under has never been greater with increasing aggressive action against banks, insurers and funds and now individuals.
The hard numbers illustrate the increased clampdown. In the two and a half years to 30 September 2014, the FCA and FSA imposed more than £1 billion in fines – some £680 million more than in the entire decade before.
With that in mind, the sector is under huge pressure to prove it can successfully mitigate risks, uncover past misconduct and improve resilience – or pay the price. With public opinion still broadly mistrustful of financial services, 2015 is a crunch year for many firms in handling financial crime.
Here's six issues to look out for in 2015:
1. Credit crunch: a long term legacy
The UK recovery may be under way, but the impacts of the 2008 crisis on business are still keenly felt. The latest surge of legislation – including Dodd Frank, Foreign Account Tax Compliance Act (FATCA), Basel III, Solvency II and new anti-money laundering rules – places a strain on compliance and change functions, as well as continuing to drive major disputes within the industry.
Where retail customers may have been disadvantaged in the past, regulators’ increasing focus on conduct means they tend towards redressing the balance in favour of consumers, often leading to complex remediation work.
2. Market abuse: rebuilding trust and confidence
Interest and foreign exchange rate manipulation and commodities price fixing have continued to damage the reputation of banks and asset managers. The resulting fines and settlements are unprecedented and financially devastating for the institutions concerned. The biggest casualty may be future consumer confidence in traditional financial markets and exchanges.
Trading institutions need to clean up their act – or prepare for future financial pain in terms of fines and lost business.
3. Senior Persons regime: individual responsibility for corporate failings
Accountability drives change. As regulators seek to pull these levers more directly, senior executives are increasingly being held accountable in more ways for the failures of their firms and any resulting losses suffered by consumers and investors.
With personal fines and even custodial sentences being applied to future failures, the message from government is clear: improve or suffer the direct and immediate consequences. With this in mind, comprehensive due diligence on individuals in key roles and improved management information are crucial.
4. Macro-politics: a changing trade landscape
Upheaval in Crimea and the Middle East has led to international condemnation and stiff sanctions against states such as Russia who have previously been accepted participants in international trade. The ongoing democratisation of former Soviet states and continuing instability in both the Middle East and North Africa further complicate the picture. Unravelling whom you can trade with from whom you can’t is increasingly problematic, meaning corporate due diligence is both more complex and more critical.
5. Changing culture: a new approach to risk management and governance
Long term behavioural change is now recognised as key to limiting exposure to financial crime risks. Regulators have taken the lead, encouraging and in some cases forcing firms to address underlying organisational culture and be more transparent in their governance, as evidenced by the focus of Skilled Person’s reviews.
Many firms now understand that addressing behaviour at this fundamental level has commercial benefits beyond mere regulatory compliance. The challenge they face is how to embed appropriate values in practice.
6. Shifting borders: new frontiers in financial services
Disenchanted financial services consumers, new patterns of market behaviour and new digital technologies are all combining to build viable new channels and an entirely new infrastructure for ‘virtual’ financial transactions, much of which sits outside the control of existing financial institutions and regulators.
Whilst regulators catch up, firms need to understand what these changes mean, in terms of opportunity, future exposure to financial crime and other specific risks to their business models.