Top trends that shaped the global regulatory and financial crime compliance landscape in 2023

By International Compliance Association

The 2023 regulatory and financial crime compliance landscape was as volatile and complex as ever. As we emerged from the pandemic, we saw an influx of challenges, ranging from geopolitical tensions to the cost-of-living crisis, to inflation.

Regulators were active throughout the year, with several major developments taking place across Europe, North and South America, the Middle East and North Africa (MENA) region, and the Asia-Pacific (APAC) region. Besides this regulatory pressure, compliance leaders were faced with rapid technological developments.

The need for skills around understanding digital assets and cryptocurrencies, and managing and mitigating the associated financial crime risk, continued to grow. As the year began, employers globally were still battling with the consequences of the Great Resignation, talent shortages, and prioritising employees’ mental health, each a result of the covid pandemic.[1]

In addition, throughout 2023 the global regulatory and financial crime compliance community saw a wave of regulations covering a wide range of issues, from financial crime prevention, climate reporting and broader environmental, social and governance (ESG) matters, to digital currencies and consumer protection.

Global regulatory changes

The UK’s Financial Conduct Authority (FCA) Consumer Duty took effect in 2023, with significant implications for all FCA regulated firms. The Duty has been in force since the end of July, but much implementation and remedial work is still ongoing. In a recent piece for ICA Insight, Matti Pekkola, Principal Consultant at investor services group IQ-EQ, discussed the state of compliance at firms as well as some of the associated challenges.[2]

‘In 2024, product manufacturers are expected to collect information from their distributors. This data – which includes core data such as sales numbers, redemptions and complaints – should then be used by the product manufacturers as part of their product review process,’ Pekkola said.

‘By now it is clear that the different financial services sectors are moving towards standardised and automated information sharing models, whereby outsourced service providers request and collate data from distributors on behalf of multiple FCA regulated firms,’ he added.

In the US, the Consumer Financial Protection Bureau (CFPB) is paying more attention to overdraft and insufficient-fund fees, and particularly the large share of overall fee volume comprised by these two categories.[3]

Last month, the Financial Times reported that the CFPB is seeking new powers to oversee technology companies that offer digital wallets and payment applications.[4] The proposed rule would apply to the industry’s largest tech companies, that facilitate more than five million consumer transactions a year, subjecting them to regular supervision. This is estimated to capture about 17 companies accounting for 88% of market share.

In 2023, regulators in the APAC region were focused on inclusion and the digitisation of financial services. In Hong Kong, the duty to act fairly and in the best interests of customers incorporates this notion, but Hong Kong regulators have not yet articulated a consumer duty as explicitly as the UK FCA.[5]

Across MENA, the focus on financial crime prevention and anti money laundering remained stronger than ever. Notable was the UAE completing all requirements to be taken off the Financial Action Task Force (FATF) grey list, although the country still remains on the list as, traditionally, FATF does not automatically remove a grey listed country but waits to observe a continuing trend of compliance with its requirements.[6] All eyes will be on the UAE in 2024 to see how the country’s commitment to tackling financial crime threats will progress.

Digital assets and cryptocurrencies 

Wider technological innovation and regulatory clarity continued to drive the adoption of digital assets in 2023.[7] As regulatory scrutiny on digital assets increased globally over the last 12 months, so did compliance expectations for firms transacting in digital assets.[8]

At the same time, we saw an increase in criminals using cryptocurrencies such as Bitcoin for laundering money, scamming victims out of funds, defrauding investors, monetising ransomware or buying illicit goods.[9]

This, in turn, has been driving the need for more specialised skills in compliance to successfully detect and manage the associated financial crime risk digital currencies present.

Throughout the year, the need to enhance the understanding and skills of compliance and financial crime prevention professionals to identify and report suspicious activities involving digital assets remained particularly strong.

Environmental, social and governance

In 2023, the subject of sustainable finance was high on the European Union (EU) regulatory agenda.[10] In September 2023, the Commission published targeted and public consultations on the Sustainable Finance Disclosure Regulation (SFDR).[11] Once confirmed, asset managers will be required to provide disclosure on the sustainability credentials of their product.[12] Following the completion of the consultations, a finalised report on the SFDR is expected to be published in Q2 2024.

Another important regulatory update of 2023 was on the EU’s Corporate Sustainability Due Diligence Directive (CSDDD). Proposed by the European Commission in February 2022, the CSDDD will oblige both EU and non-EU companies — including those in financial services — to demonstrate what action they are taking to protect the environment and human rights. Negotiations on the final text began in June this year and are expected to conclude by no later than March 2024.[13]

Also in November this year, the FCA issued Sustainability Disclosure Requirements (SDR) and a fund labelling regime for asset managers due to take effect in 2024.[14] The requirements were developed after extensive consultation with asset managers, asset owners, and other financial services stakeholders, the FCA said. This is against the backdrop of global assets under management in ESG-orientated funds expected to increase to $34 trillion by 2026, underscoring demand for investments with a positive environmental or social impact, the regulator added.

Following COP28 in Dubai, UAE, the compliance community will see greater scrutiny on firms’ climate action and ESG priorities in the new year.

Technology and artificial intelligence (AI)

Compliance requirements around technology use and adoption, and the rise of artificial intelligence (AI), continued to prevail in 2023. Although signs of a slowdown in the international growth of the FinTech sector were reported in 2022, the UK FinTech marketplace continued to grow.[15] Earlier this year, Thomson Reuters reported continued use of FinTech applications, from payment systems to know your customer verification, to robo-advice and claims handling.[16]

With financial services firms being required to deploy and maintain these applications, they increasingly relied on third-party providers that have the expert knowledge and technical resources to be able to manage such systems. Therefore, managing the risks associated with outsourcing to third-party service providers was an important requirement for compliance professionals.

2023 was deemed as the year of AI, with a series of developments taking place in the AI space both in the UK and globally. The UK AI Safety Summit, hosted by UK Prime Minister Rishi Sunak at Bletchley Park in November, saw a number of key announcements, including the establishment of AI safety institutes by the UK and the US.

The UK presented a whitepaper on AI, in which it placed substantial responsibility on regulators. However, in a recent piece for ICA Insight,[17] Claire Trachet, CEO and Founder of business advisory firm Trachet, made an urgent call to action: ‘With no concrete AI law in the pipeline, UK MPs have issued warnings about the nation's potential lag in the regulatory race. Even with a £100 million investment in an AI task force, the UK must address these concerns to safeguard its position as a global tech leader,’ Trachet said.

Final thoughts

In 2023, regulatory and financial crime compliance challenges continued to evolve, placing greater pressure on firms and professionals to stay up to date with the latest regulatory developments, widespread technological adoption, and the risks that technology presents, as well as mounting regulatory pressure on ESG and climate reporting.

Regulators globally paid more attention to consumer protection, digital currencies, sustainability, due diligence and environmental, social and governance rules for regulated firms.

Wider adoption, technological innovation and regulatory clarity continued to drive the adoption of digital assets in 2023.

The need for greater automation and digitisation of financial services, growing the skillsets required to manage this trend and successfully mitigate the risk associated with technological adoption and AI will continue to be a key priority for the industry in 2024.

As we go into the new year, managing the risks associated with outsourcing to third-party service providers will also remain a crucial requirement for compliance professionals.