How effective risk management can safeguard banking institutions against the ever evolving regulatory landscape

October 29, 2020
How effective risk management can safeguard banking institutions against the ever evolving regulatory landscape

Risk management and compliance have always been priorities for banks and financial service institutions, even more so since the great crash of 2008.

With large amounts of money, jobs and stakeholders of various types all in the mix, the risk function is now an essential part of a bank’s armoury. 2020 has demonstrated the necessity of having an effective risk management strategy in place - with the unfortunate arrival of Covid-19 illustrating how no one can predict the future.

From economic shocks such as the one caused by the pandemic to exciting technologies and consumer trends, risks can come in different shapes and sizes. As the global finance industry has travelled on a journey of great transformation with the arrival of digital, there’s an ever-evolving regulatory landscape banks need to navigate too.

Here’s what financial providers and institutions must consider when analysing risk amid this backdrop of constantly changing rules and legislation.

Trading in new territories

Regardless of the country of operation, banks need to comply with national regulatory standards. These rules often concern tax collection and fraud prevention, and could be applied to future standards around employment and product. For the most part, regulations differ between nations. Complying to these rules is a key challenge for banks, particularly when they continue to grow their operations thanks to new opportunities created by faster, more reliable technology.

Consumers want greater transparency

Customers are demanding more from their banks in terms of transparency about how they operate. More legislation is coming into place to offer them greater protection and financial service providers are having to take action to demonstrate how their operations are ethically sound.

Consumer trust is a big driver for banking businesses, so they must adhere to rules around how they market and promote their products. Institutions also need to provide more details around financial advice, pricing and remove any obstacles between switching providers. As concerns around our climate and the environment increase, banks may need to show their green credentials to win consumer trust and demonstrate the sustainability of their business and products.  


Monitoring for financial crime

Banks need to do more to monitor for financial crime in the form of unethical or unlawful transactions. These can include mispayments around tax collection, money laundering or even fraud.

There are also increasing concerns from new threats from scammers launching cybercrime attacks, alongside model and contagion risks.

An effective risk management system will not be able to counter current issues but also have enough capacity and flexibility to handle future problems, detecting and mitigate them.

New technologies offer both challenges and opportunity

Consumers often push technological change forward and, as such, banks are having to adapt to new behaviours. With the huge adoption of mobile technology and payments, banks now face new pressures to refine their digital banking offering, automating services and ensuring the account-opening process is as simple as possible.

Consumers often want customised and tailored services with prices and products all served directly. Managing risks from these new technologies while providing a personalised service will be part of the challenge.

At the same time, technologies including machine learning and automation can help enhance the risk management process. With more data available than ever, these technologies will enable information to be analysed faster and with less errors, leading to deeper and more effective risk decisions while simultaneously cutting costs.

Risk models will be more robustas a result of the adoption of these new processes. Banks which embrace these innovations should enjoy an advantage over those who don’t. However, potential issues around data privacy and protection could become another risk these providers subsequently need to tackle.


Cost-saving pressures

As more digital players come to market, usually operating more streamlined and cost-effective businesses, bigger banks and providers will come under increasing pressures to reduce operating costs.

Institutions will need to look to head counts and embracing digital processes to ensure they keep margins tight and remain competitive.

The risk function can play a part in helping to create cost savings, but also must ensure standards are maintained.

With 2020 being a year of surprises, banks are expected to ensure risk management strategy is at the heart of their business.

In the last decade, regulations have arrived in the wake of the financial crisis such as the Dodd-Frank Act and General Data Privacy Regulation. These new rules have been introduced to offer greater stability to the sector, putting additional responsibilities with the banks and financial institutions.

Amid this regulatory landscape, we know utilising an effective risk management strategy can be essential.

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