Financial services regulatory compliance involves adherence to laws, regulations and rules, as well as the observance of guidelines, relevant to the operations of a regulated entity within the financial services sector.

Regulatory compliance is necessary to, among other things, maintain confidence and integrity in the financial sector, ensure safety and soundness of the financial system, as well as protect consumers.

In that regard, appropriate legal and supervisory frameworks facilitate the imposition of various regulatory requirements to safeguard the financial system.

Some common key requirements include:

1.   Fitness and Propriety

Entities are required to ensure that persons carrying out key roles and obligations within their institution are competent and fit to do so. The purpose of fit and proper requirements is to ensure that a regulated entity is owned, controlled, or managed by appropriate and competent persons; and to that end (from a regulatory perspective) to safeguard the financial system and consumers against inappropriate and/or harmful practices. It is important that persons carrying out certain duties and responsibilities are rightly able and competent to do so. While fitness and propriety assessments vary case by case, there are key characteristics that are considered including integrity, honesty, expertise, reputation, and financial soundness.

2.   Corporate governance

Regulated entities are generally required to have in place appropriate structures, policies, and practices used for their management and operations. The onus falls on the board and senior management to ensure that the entity’s governance framework promotes prudent and diligent discharge of responsibilities, encourages high standards of professional conduct and facilitates the implementation of prompt corrective actions, among other things.

3.   Cybersecurity

It is of key importance that entities have an adequate cybersecurity framework in place that safeguards data confidentiality, integrity, and availability. Entities are also expected test their frameworks, from time to time, to assess suitability for dealing with risks/attacks and responses thereto.

4.   AML/CFT

Regulators require entities to have in place adequate systems, policies, and practices to prevent (as far as possible), detect and report suspicious activity wherein the financial system may be used for the purposes of money laundering, terrorist financing and proliferation financing. In doing so, entities are expected to have in place an effective customer identification program, among other things. 

5.   Capital and Liquidity

The financial crisis of 2008 highlighted the importance of capital and liquidity requirements. Regulated entities are required to have in place sufficient capital to cover potential financial losses, as well as adequate liquidity to meet financial obligations. These requirements contribute to ensuring financial soundness of the entity, as well as the wider financial system, and to manage periods of economic stress. 

6.   Data Privacy and protection

The protection of data in the financial sector is of critical importance and most times goes hand in hand with cybersecurity requirements. Regulated entities must implement adequate procedures and safeguards for the use, storage, transfer and processing of customer data and ensure at all times the security, integrity and confidentiality of information in their possession. 

7.   Internal Controls

Internal control requirements involve the implementation of an effective control structure that facilitates the orderly conduct of operations, adherence to all relevant policies and procedures, the safeguarding of assets, security of the entity’s information (financial or otherwise), compliance with regulatory requirements, etc. Most jurisdictions require entities to implement controls that are appropriate having regard to size, complexity and the nature of activities conducted. 

8.   Outsourcing

A number of regulated entities engage in outsourcing significant parts of their operations/activities in order to reduce costs, manage economies of scale and leverage technological and innovative infrastructures. However, outsourcing brings with it concerns such as risk transfer to unregulated third parties and inadequacy in compliance monitoring. Furthermore, outsourcing has the potential to jeopardize the safety and soundness of the entity depending on the services/activities outsourced. In that regard, regulators require entities to implement policies that address these outsourcing matters, including negotiating appropriate outsourcing contracts with third parties and assessing their resources (e.g financial and infrastructure)[i]. 

9.   Market conduct/conduct of business

Market conduct requirements focus on, inter alia, ensuring the fair treatment of consumers, transparency, adequate disclosure in the marketing of products and services, diligent handling of customer complaints, management of conflicts of interests, etc.

10.  Audit

Entities are required to engage an independent auditor for the purposes of assessing its financial statements, compliance with regulatory requirements (including AML/CFT requirements) as well as other information that may be submitted to the regulator. Entities are usually required to seek approval for the engagement and use of a particular independent auditor. 

Conclusion

Regulatory compliance plays a crucial role in ensuring the safety and soundness of the financial system, maintaining integrity, and protecting consumers. It is therefore vital that entities wishing to operate, or operating, within the financial sector be aware of all relevant requirements and make best efforts to ensure compliance with same.

References

[i] ‘Outsourcing in Financial Services,’ Joint Forum – BCBS, IOSCO and IAIS, February 2005.