2024 is proving another standout year for the regulatory space, finding itself under the spotlight, for better and worse reasons. This month, The Fintech Times will look at some of the biggest issues regarding compliance and financial rules, as well as the solutions hoping to ease the compliance journey for firms and make the fintech world fairer and safer.
Throughout this month, we’ll be looking into how regtech can help firms ensure compliance and what the space can do to better support financial institutions and fintechs. However, it is key not to forget the role of the regulator.
In July, the Competition and Markets Authority (CMA) revealed four UK high-street banks had failed to comply with banking rules designed to keep customers safe. Despite this, the UK regulator didn’t hand out any fines or punishments, prompting us to ask if tougher penalties or consequences would lead to better outcomes.
Now, we return to this question on a global scale. Should regulators impose tougher penalties on firms that fail to comply?
David O’Neill, chief operating officer at APIContext
“Short answer: yes, absolutely,” explains David O’Neill, chief operating officer at APIContext. “Longer answer: yes, but there are challenges on both sides of the equation.
“Challenge one: who determines if there is a breach of compliance? Often the complaint is coming from a third party who may well have some part in the issues observed – leading to a regulatory body needing to adjudicate a technical problem with both sides bringing receipts to prove their point.
“Challenge two: Has enough time been given to truly implement a solution? The answer for some areas is clearly yes and in some areas and jurisdictions, likely because of the first challenge, the regulators have been slow to act, leading to a problem with slow followers not implementing systems as requested.”
Striking a balance
Emem Etim, global head of compliance at Verto
“It’s a complex issue,” adds Emem Etim, global head of compliance at Verto. “While harsher penalties can create a strong deterrent, they might not always be the most effective solution—especially for larger companies that can afford to pay them without changing their practices.
“Instead, there should be more collaboration between regulators and firms, especially given the constant technological innovations and changes in the industry.
“By working together, they can find more creative ways to meet regulatory goals that still encourage innovation and maintain market stability. This approach fosters a better understanding of the regulatory intent and brings market participants into the process, ensuring that regulations are effective in practice.”
Kader Djouadi, EMEA director of financial crime compliance at LexisNexis Risk Solutions
Kader Djouadi, EMEA director of financial crime compliance at LexisNexis Risk Solutions, also believes that there is a correct balance for regulators to strike when it comes to fines: “Whether regulators should impose tougher penalties on firms that fail to comply depends largely on the severity and frequency of the non-compliance.
“Higher penalties can act as a significant deterrent but could also negatively impact the growth and innovation in the industry. It’s important that the penalties are proportionate and consider the intent and impact of the non-compliance.”
‘Stepping up’ regulation could be more impactful
In many cases, larger fines could be a viable solution, but not always, according to statistics shared by Iain Armstrong, regulatory affairs practice lead at ComplyAdvantage.
Iain Armstrong, regulatory affairs practice lead for ComplyAdvantage
“Our 2024 State of Financial Crime survey of 600 global compliance leaders showed that 39 per cent believe larger fines for anti-money laundering violations would most impact financial crime.
“Higher percentages said stepping up regulation in areas like real estate, gambling, and legal services—alongside strengthening beneficial ownership rules—would have a greater impact.
“So fines are certainly part of the picture, especially for the reputational damage that can be inflicted. But strengthening regulations themselves in areas like beneficial ownership and applying them more systematically to a wider range of firms, is also important.”
Considering supervision
Vanessa Padberg, head of legal-corporate matters at Helios
Vanessa Padberg, head of legal-corporate matters at Helios, also suggests that heavy fines aren’t necessarily the way forward. Instead, she suggests enhanced oversight could be the answer: “Rather than tougher penalties, I think that better supervision by some authorities of compliance with certain regulatory requirements at companies would be a fair approach, giving firms the opportunity to correct their actions in advance, if necessary, before any major consequences have to be faced.
“This would also set the right tone for young, ambitious, but inexperienced new start-ups, encouraging them to go into the market despite the more and more challenging complexity that comes with compliance requirements, especially on a global scale.
“In the recent past, we have seen some companies growing at the speed of light to unbelievable heights, which later turned out to have lost touch with reality and legality time ago. I am convinced that this type of situation should and can be avoided.”
Relaying the path to compliance
Charles Maniace, vice president of regulatory analysis at Sovos
“Most sellers want to be compliant,” says Charles Maniace, vice president of regulatory analysis at regtech developer Sovos. “Companies are frequently found ‘out of compliance’ when they did not know a requirement existed, did not understand it, did not understand it applied to them, or did not have the necessary time to put the processes in place that would have enabled compliance.
“While penalties will likely be a part of any overall enforcement strategy, governments and taxing authorities must ensure that the path to compliance is manageable. This includes ensuring that the enabling statute and any implementing regulations are clear and complete. The rules must be available well in advance of the requirement coming into effect and ideally, both taxpayers and technology providers will have had opportunity to provide information and insights.
“Finally, to the extent any new requirement follows a common nomenclature or framework across multiple jurisdictions, it will generally make compliance more manageable.”
A culture of fear brings ‘toxic’ results
Simona Covaliu, chief risk officer at PayU GPO, believes history has already proven that tough penalties have failed to have the desired impact.
Simona Covaliu, chief risk officer at PayU GPO
“I am a strong believer in the power setting the right example(s) has on shaping the desired behaviour. But the key word here is ‘right’. We have seen plenty of examples of tough penalties issued for non-compliance which failed, in my view, to change the tone at the top of the industry and even in the company suffering the penalty. In many cases, these penalties have resulted in ‘check the box’ approaches to risk and compliance.
“We’ve also witnessed cases where severe breaches of law and regulation were left unpunished or not proportionally addressed by regulators. So clearly tougher penalties are not necessarily the answer in ultimately driving positive change. A culture of fear, which could be the result of this approach, brings unintended and toxic results. A lack of boundaries and clarity on the penalties and their enforcement in case those boundaries are breached, is also not to be desired.
“So it comes down to balance and proportionality, to informed risk taking versus blind risk avoidance. Regulators need to set rules of play that companies can understand with ease, and which are proportional to the risks these companies can trigger. With a regulatory landscape that is constantly changing and sometimes contradictory, companies may struggle to keep up, even with the best intentions.
“Regulators can also not be surprised at non-compliance rules that stifle innovation, economic growth and competition. Instead, regulators should look to create a healthy environment by encouraging open conversations with and between companies, helping to develop a strong risk and compliance culture within these companies by making an example of the good and bad behaviours.”
Focus on support before handing out consequences
“Tougher penalties can act as a significant deterrent, encouraging firms to prioritise compliance,” concludes Marcello La Rosa, co-founder and CEO of Apromore. “However, penalties alone are not a solution.
“The focus should also be on providing firms with the tools and support they need to achieve compliance efficiently and more proactively. Rather than solely imposing harsher penalties, regulators should promote the adoption of technologies like process mining and AI that enable companies to proactively manage, monitor and report on compliance, significantly reducing the risk of violations before they occur.”
The post Should Regulators Impose Tougher Penalties on Firms For Non-Compliance? appeared first on The Fintech Times.
