Financial services compliance: what is it and why is it important?

What is compliance in financial services?

Financial services compliance refers to the rules, regulations, and processes that govern financial institutions and ensure transparency, security, and adherence to legal and ethical standards. Financial services compliance measures implemented by banks, insurance companies, fintech firms, and other financial service providers serve to prevent fraud, money laundering, identity theft, and other illicit activities.

Financial services compliance includes customer due diligence, know your customer (KYC) procedures, anti-money laundering (AML) checks, and ongoing monitoring of watchlists and transactions. These compliance measures aim to safeguard the integrity of the financial system, protect consumers, and maintain trust and confidence in the industry.

Why is financial services compliance important?

Financial services institutions should prioritize regulatory compliance because adherence to these standards is both a legal requirement and a strategic imperative. Failure to meet regulatory obligations can lead to severe penalties, legal consequences, reputational damage, and even the loss of operating licenses. By adhering to regulatory standards, financial institutions save the cost of non-compliance and demonstrate their commitment to ethical practices, consumer protection, and the overall stability of the financial system.

Financial services compliance also serves to mitigate risk, protect customers, build trust, and ensure long-term success in an increasingly competitive and regulated industry. By embracing regulatory compliance, institutions can demonstrate their commitment to responsible practices and maintain a strong position in the marketplace.

Financial services compliance and the global regulatory landscape

With financial transactions occurring across borders, financial institutions face the challenge of complying with a multitude of regulations and laws across different jurisdictions. The global regulatory landscape encompasses a wide range of requirements, including: 

• Anti-money laundering (AML) regulations

  • AML regulations require financial institutions to implement measures to detect and prevent money laundering, terrorist financing, and other illicit activities. Examples include the Bank Secrecy Act (BSA) and USA PATRIOT Act in the United States and the EU's Anti-Money Laundering Directives.

• Know your customer (KYC) regulations

  • Mandate that financial institutions verify the identity of their customers to prevent fraud and identity theft as part of AML programs. The ways in which they are permitted to conduct identity verification varies worldwide, and is outlined in regulation and guidelines such as those published by the Financial Action Task Force (FATF) globally.

• Consumer Protection regulations

  • Safeguard consumers' interests and ensure fair treatment by financial institutions. Examples include the Consumer Financial Protection Bureau (CFPB) regulations in the United States and the Financial Conduct Authority (FCA) regulations in the United Kingdom.

• Data Privacy regulations

  • Govern the collection, storage, and use of personal data by financial institutions. Examples include the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA) in the United States.

• Market Conduct regulations 

  • Focus on fair practices in financial markets, preventing insider trading, market manipulation, and unfair competition. Examples include the Securities and Exchange Commission (SEC) regulations in the United States and the Markets in Financial Instruments Directive (MiFID II) in the European Union.

• Cybersecurity regulations 

  • Require financial institutions to implement robust cybersecurity measures to protect customer data and prevent cyber threats. Examples include the New York Department of Financial Services (NYDFS) Cybersecurity Regulation and the EU's Network and Information Security (NIS) Directive.

• Capital Adequacy regulations

  • Mandate that financial institutions maintain a certain level of capital to ensure their financial stability and ability to absorb losses. Examples include the Basel III framework and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This is not an exhaustive list, and the specific regulations applicable to a financial institution may vary based on its jurisdiction, type of business, and other factors.

Upholding trust: The crucial role of financial services compliance

Compliance regulations provide a framework that ensures ethical and responsible conduct by financial institutions, safeguarding the interests and rights of consumers. By adhering to compliance regulations, financial services institutions are held accountable for their actions, promoting transparency, and minimizing the risk of fraud, malpractice, or unethical behavior. Compliance measures such as know your customer (KYC) requirements, anti-money laundering (AML) protocols, and identity proofing standards like ETSI instill confidence and allow consumers to trust that their personal and financial information is being handled with care and security. The strict enforcement of compliance regulations also serves as a deterrent for fraudulent activities. Ultimately, the robust implementation and continuous monitoring of compliance regulations create an environment where consumers can have faith in the integrity and reliability of financial services institutions, fostering a healthy and sustainable relationship built on trust.

Staying ahead of financial services compliance regulations and policy

Keeping up with evolving financial services compliance regulations is essential for businesses operating in the industry. Staying informed about changes in KYC and AML regulations, as well as sanctions and politically exposed persons (PEPs), ensures that banks and other financial services institutions can adapt their processes and systems accordingly to meet regulatory requirements. Keeping up with policy changes requires trusted sources, like government websites, or a summary of global policy changes, like the monthly OnPolicy blog series.

The crucial role of the compliance manager

A financial services compliance manager plays a crucial role in ensuring that an organization operates within the boundaries of regulatory frameworks and maintains ethical standards in its operations. They are responsible for developing, implementing, and overseeing compliance programs that align with industry regulations and best practices. The compliance manager conducts regular assessments to identify potential risks and vulnerabilities, and then devises strategies to mitigate those risks. They stay up to date with evolving regulations, industry trends, and emerging risks to ensure the organization remains compliant. Additionally, compliance managers work closely with internal stakeholders, such as executives, legal teams, and operational departments, to provide guidance and ensure that compliance requirements are effectively communicated and integrated into day-to-day operations. They also liaise with external regulators and auditors, facilitating inspections and audits to demonstrate the organization's adherence to regulations. By effectively managing compliance, these professionals help protect the organization's reputation, build trust with customers and regulators, and safeguard against legal and financial penalties.

Balancing financial services compliance and user experience 

Adhering to financial services compliance regulations should not come at the cost of a seamless user experience or hinder user onboarding. However, traditional compliance processes often result in cumbersome onboarding experiences, leading to customer frustration and drop-offs. Innovative technologies like digital identity verification enable financial institutions to verify identities quickly and securely while minimizing friction for customers.