This year will be full of opportunities and risks for the financial services sector. Alex Ellerton explains the key themes, trends, and challenges for firms.

Tough macroeconomic environment and evolving regulatory landscape

In 2024 sluggish economic growth and high interest rates combine with the persistent cost of living crisis to produce a challenging backdrop. It will mirror 2023 in terms of uncertainty, but each year presents unique challenges. Adapting to pressure from several factors will be key for financial services firms.

Regulators, however, remain unfazed by this gloomy forecast and continue to march forward with a string of changes and tightening expectations.

Navigating regulators post-Brexit is a core challenge, throughout the process of repealing and replacing EU law. Hopefully, the Government’s priorities for this transition will be clarified this year, which will drive regulatory focus.

The FCA is continuing to focus on embedding Consumer Duty. While the initial implementation date is behind us, the regulator has emphasised the need to evidence delivery of good consumer outcomes. Notably, the end of July marks the deadline for firms' first annual Board report on how they are complying with the Consumer Duty.

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Securely leveraging AI and new tech

The sector is embracing the latest technology, such as artificial intelligence (AI) and machine learning (ML). While these technologies provide plenty of opportunities, they also pose material risks. Security remains a core concern.

The National Cyber Security Centre (NCSC) has published guidelines to lead firms through the development of AI systems and ensure that security remains at the core. This includes considering secure design, development, and deployment, as well as operations and maintenance.

UK financial regulators are engaging in ongoing discussions with the industry regarding the potential impact of AI on the supervision of financial institutions. Firms must have the right policy for their business model in place. There’s no one-size-fits-all approach.

Strengthening cyber resilience

The UK ‘s cyber security regulations follow a cross-cutting approach – regulations are mostly embedded within a broader range of rules. Key expectations include alignment with the FCA and PRA rulebooks, overall responsibility within the Senior Managers and Certification Regime (SMCR), the Bank of England’s CBEST and CQUEST requirements, and breach reporting.

Financial services firms need to stay ahead of regulatory expectations, map the path to better resilience, and ensure they invest sufficient resources in security. This includes developing effective cyber risk reporting processes to communicating risks and opportunities to decision-making stakeholders.

Creating a strong cyber risk culture is essential. Developing a culture that prioritises cybersecurity has firm-wide implications. This includes elements, such as bridging training gaps, board awareness, tone from the top, managing people risk, phishing training, and awareness of social engineering. The Bank of England provided guidelines in section 5.2 of its 2023 review of the CBEST programme.

Expectation and guidelines are likely to turn into mandatory risk reporting – having the right frameworks in place will support future-proofing.

ESG, sustainability, and diversity and inclusion

While ESG in financial services continues to develop and evolve, the most pressing deadline is 31 May 2024 – all firms must comply with the FCA’s anti-greenwashing rule. At its core, all sustainability-related references must be:

  • consistent with the sustainability characteristics of the product or service
  • fair, clear, and not misleading

All firms should prepare to grapple with further consultation and development of policy, which in turn will become requirements – building future-proof frameworks now will help firms get ahead of the curve.

Climate transition plans are also in the FCA’s eyeline, with a consultation on new rules expected this year. Additionally, the FCA will seek input to revise its TCFD-aligned disclosure rules for publicly traded companies, incorporating the ISSB's standards.

Interlinked with ESG is diversity and inclusion (D&I). Regulators see D&I as a core part of culture, governance, and therefore, as a component of risk. Firms will have to continue effort to boost D&I to meet regulatory expectations.

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Using data to drive growth

Data underpins key objectives. Capturing the right data and improving data quality are ongoing projects for firms across the sector.

Throughout the year, data trends will affect how firms comprehend risk, personalise offerings, interact with customers, and streamline operations. As the sector becomes more data-driven, data quality and governance will take centre stage, crucial to building trust and credibility.

Firms will have to address challenges arising from legacy systems, acquisitions, and product diversification, which often lead to inconsistent, incomplete, and inaccurate data.

They will also need to establish clear standards and agreements on data sharing, ownership, and usage, and ensure data security and privacy, as well as adopt a transparent approach to data governance. Investment will be essential to allow for seamless and efficient data exchange and analysis.

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What's next for the financial services sector?

2024 will be another fast-moving year for financial services. Change and uncertainty presents risk, but also opportunity.

To learn more about the key trends, opportunities, and risks for firms, contact Alex Ellerton.


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