8 areas of change for financial services regulatory policy in 2023

The EY 2023 Global financial services regulatory outlook helps firms prepare for evolving regulations in a highly complex operating environment.

In brief

• Complexity is increasing for financial services firms worldwide. Evolving regulations, in response to those challenges, present a further complicating factor.
• By anticipating regulatory changes, firms can unlock new areas of growth and reinforce competitive advantages.
• Leaders need to understand the regulatory landscape and potential changes in the near- to medium-term, to recognize the implications for their businesses.

The complexity of the operating environment for banks, insurers, asset managers and other financial services firms is arguably greater today than at any point in the past few decades.

Regulatory changes are both a reflection of these challenges and sometimes a complicating factor. This article aims to help those leaders make sense of the current regulatory landscape and the near-term direction of travel in eight core areas.

4. There will be ongoing digitization of financial services

Digital innovation continues to reshape the financial services sector. The pace and scale of technological change is only likely to increase due to factors such as artificial intelligence (AI), cloud and the entry of new, non-bank players offering bank-like services, such as retail payments.

In the absence of new legislation or directives, most regulators are applying the concept of “like rules for like risks”. They are seeking to regulate bank and non-traditional market entrant conduct that happens through the technology, rather than regulating the technology itself. Most large banks are embedding the unique risks from AI and cloud into their established practices around model risk management and model governance.

5. Firms look to maintain the integrity of the ESG investment market

ESG regulation continues to pose challenges for financial institutions, as regulations grow in volume and complexity. New thinking is increasingly required, as organizations must view virtually every decision regarding operations and business processes through a climate-focused lens. The scale and scope of those requirements is a major change for most firms. For now, the main areas of focus are greenwashing, disclosures and climate risk management via scenario analysis.

6. Financial crime is more focused on compliance than outcomes

The war in Ukraine and subsequent sanctions have given a new impetus to financial crime. The overall direction of financial crime regulation is greater harmonization of standards, with the goal of eliminating discrepancies among jurisdictions and gaps in enforcement.

In 2021, the European Commission put forth a broad Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) package – a big step forward in terms of addressing financial crime in the EU.³ That package is working its way through the EU-level standard setters and will likely be approved in 2023.

Similarly, the Monetary Authority of Singapore (MAS) is building a safe-harbor platform for banks and other financial institutions to share information about suspicious transactions and individuals.⁴

7. Strategic agility and operational resilience will enable positive change

In the past, supervisors have focused on a firm’s ability to respond to large-scale disruptions and minimize the negative impact on their operations and customers. Today, regulators are still focused on enterprise resilience and risk-management, but they are combining that with two related objectives:

• Ensuring that firms can operate in a business-as-usual environment that is far more complex.
• Ensuring that firms can implement positive changes – such as integrating a merger, upgrading technology, or improving business processes – without introducing new risks.

That is a three-part challenge, but the common thread across all three is organizational agility.

8. Global firms will need to prepare for greater prudential scrutiny

The finalization of Basel reforms will compound the challenges of the current economic environment. Virtually all jurisdictions want to get across the finish line in implementing the Basel Committee reforms – applying different timelines and without having the transition be overly disruptive.

Bank leadership teams agree that implementation is necessary, but they also have greater regulatory priorities. While the overall impact for the industry will be higher capital requirements, the precise impact on an individual institution will vary, and overall fragmentation and complexity will increase for global firms.