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The Evolution of Financial Compliance

Updated on March 8th, 2022
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The financial crisis of 2008 changed the playing field for financial services and FinTech. This traumatic time taught us a lot but also added new challenges by piling on the regulatory compliance to minimize future crises. We are now watching the evolution of Financial compliance, changing how we work and pushing innovation to develop the technology and strategies to work within this new regulatory environment.

Changing Laws and Additional Regulations

The winds of compliance change first started around 2002 with the passage of the Sarbanes-Oxley Act, which called for increased transparency in a company’s financial records to make them more accountable for their decisions and actions. The regulations tied to this set of laws were presented as a design to give a corporation a conscience and focus on ethical practice when it came to a company’s revenues and profitability.

Then there was the Dodd-Frank Act in 2010, which added layers of regulations on top of the existing financial services compliance environment. This law added more ambiguity to what banks and other financial service organizations could and could not do in relation to their relationship with consumers. Other compliance areas have also grown, including underwriting for all types of lending areas, default and foreclosure processing, fair lending, collections practices, anti-money laundering, operations risk, and vendor management.

The emergence of the Consumer Financial Protection Bureau furthered the degree of compliance expected from those organizations that conduct financial transactions with consumers, including credit card companies, banks, credit unions, payday loan companies, and mortgage companies.

Other reasons have emerged in relation to why governments are adding layers of regulation to financial systems and institutions. In their report entitled, “Retail Banking 2020,” PriceWaterhouseCoopers stated, “Regulation is increasingly prescriptive and local in nature. At the same time, governments are seeking greater influence over the financial system to advance various policy objectives including the fight against terrorism, promoting lending to certain favored sectors (e.g. students, housing, small businesses, national champions), financial inclusion and supporting the housing markets.” 

Compliance Fines and Penalties

The degree of monetary punishment has scaled up significantly in line with the burden of financial compliance. It was important to let companies know that these new rules and regulations were serious. As such, the number of court cases and settlements are on the rise.

Beyond just monetary punishments, not complying with new laws about financial transactions has led to social penalties by having companies called out for their lack of compliance. This public airing has adversely impacted the brand reputation of many organizations, creating a far greater financial penalty than just a ‘fix it’ ticket. 

Chief Compliance Officers

This new leadership position was just created in the last couple decades in response to the growing amount of compliance now required, especially in the banking industry after the mortgage meltdown, and previously from the savings and loan fiasco of the 1980s.

The job developed from a need to have someone within the organization who could keep up with the changing compliance rules, laws, and guidelines, and determine the most appropriate strategies to ensure the company was following those rules.

Technology to the Rescue

According to a report by the Metia Group entitled, “FinTech Insight 2014,” technology has helped financial services address the increased burden of compliance in innovative ways which have also yielded other benefits, including improved decision-making, better risk management, and an enhanced user experience for the consumer or investor.

For example, the Metia Group report noted, “The increasing levels of regulatory complexity and change are driving financial institutions to look more and more at software-as-a-service (SaaS) solutions for risk and compliance – some observers are referring to this as compliance-as-a-service (Caas).” Continued advancement in technology is geared toward addressing the evolution of financial compliance, including risk data governance, the use of artificial intelligence to manage risk, and further cybersecurity tools to protect financial data. Focus has turned to developing solutions for regulatory change management that involve rules mapping, dynamic modeling, and qualitative and quantitative risk metrics.

Looking Ahead

In the near future, financial compliance will gain more attention will most likely be directed at mobile banking and payment systems as more businesses and consumers migrate to these platforms while retailer data breaches continue to be an issue. The Consumer Financial Protection Bureau will focus more on payday loan companies and other online financial services companies to ensure compliance throughout all parts of the process.

These regulatory outlook trends illustrate that financial compliance will not just be about checking off a list of regulations to make sure that everything has been done according to the letter of law. Rather, the intent within this new regulatory environment is to encourage those within the financial services industry to take compliance to the next level.

This involves is actually embedding the laws and purpose for those regulations into the fiber of the company’s operating philosophy and culture, including its processes and systems. Instead of acting in a reactionary fashion as companies have done in the last decade, financial services organizations are poised to be proactive in how they approach the development and management of transparent financial transactions and relationships within capital markets as well as with businesses and consumers. The potential here is to eventually shrink the layers of compliance while growing the bottom line in an ethical way.

John Rampton

John Rampton

John Rampton is an entrepreneur and connector. When he was 23 years old, while attending the University of Utah, he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months, he had several surgeries, stem cell injections and learned how to walk again. During this time, he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time. He is the Founder and CEO of Due.

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