Facing The Changes: Regulatory Outlook 2022

Rosalynd Smyth

Managing Director - Compliance

Colette Higgins

Vice President - Compliance

Published: 24 February 2022

Compliance officers across the financial services industry continued to face the formidable, shared challenge posed by the COVID pandemic in 2021. This disruption over the past two years will forever reshape the financial services industry. The pace of change in financial services regulation shows little sign of slowing down.

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Looking ahead to 2022, the financial services regulatory change agenda appears to be focusing on the following topics:

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• Conduct Risk

• ESG

• UK/EU Divergence

• Financial Crime

• Development of the Crypto-Assets Market

• Operational Resilience

These updates mean it is incredibly important that scanning the horizon for future developments remains critical for all concerned parties. In this feature, we explore these regulatory developments and what they might mean for our clients.

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Conduct Risk

Regulators are continuing to develop their thinking around how best to improve conduct and culture across the financial services industry. Firms need to be proactively assessing how poor personal conduct can impact the activities of their organisation. In 2021, Mark Steward, Executive Director of Enforcement and Market Oversight for the FCA, talked about moving away from the “tone from the top” to the “tone from within”, re-enforcing the message that every person in the organisation needs to be accountable. The FCA sees this as an important means of restoring and maintaining public trust in regulated firms.

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ESG

2022 will see a significant focus across financial services on the transition to a more sustainable economy. Over the course of the next 12 months, the EU and UK are set to introduce disclosure requirements:

• UK: A new integrated regime for disclosure of climate and other sustainability issues for UK companies (known as the Sustainability Disclosure Requirements).

• EU: The EU Sustainable Finance Disclosure Regulation (SFDR) aims to make the sustainability profile of funds more comparable and better understood by end-investors. It will require firms to disclose to the market their impact in two initial areas of a Sustainable Finance Taxonomy: (i) climate change mitigation; and (ii) climate change adaptation.

New strategies and regulation have resulted in the need for the creation of policies & procedures, ongoing monitoring and testing of investments. Many Compliance departments are still trying to nail down the role they are to play. They are likely to be key in decision making and form part of investment working groups. This could lead to a new pathway for budding compliance officers and exciting new technology offerings.

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UK/EU Divergence

The UK government has launched several reviews of its financial regulation landscape, with a focus on ensuring the UK remains internationally competitive. The EU is also continuing to develop its own regulatory framework. In 2022, we expect to see the first significant divergences between UK and EU regulations, thereby increasing the compliance burden on those firms operating across multiple jurisdictions. Areas to pay particular attention to are:

• MiFID: Firms should expect to see significant divergence in the MiFID framework across the UK and EU. The UK HM Treasury (HMT) put together a consultation entitled the “Wholesale Markets Review” which is expected to see legislation put forward that will differ from the EU.

• AML: The HMT’s review of the UK’s AML/CTF regime and the consultation on Money Laundering Regulations (MLR) amendments together anticipate various amendments to AML requirements and how they should be implemented post Brexit. There are industry suggestions of returning to the “FSMA model”, which would see regulators being primarily responsible for setting out obligations via rulebooks rather than statutes.  

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Financial Crime

Information sharing and transparency are stand out themes globally.

UK

Changes are expected in 2022 to enhance the operational effectiveness of the UK’s AML regime:

1. Information sharing – there is a proposal to review Regulation 52 to allow for reciprocal information sharing from relevant authorities to supervisors and from Financial Institutions to supervisors.

2. Transparency around beneficial ownership continues to be a focus; ongoing reporting obligations with regards to registry anomalies; more entities will be required to be registered with Companies House and non-taxable Trusts; express UK trusts able to register on the Trust Registration Service.

3. In 2022 the Government will introduce an Economic Crime Levy on MLR regulated firms to fund measures to tackle economic crime.

4. The structure and the format of the UK Sanctions List has changed as of February this year.

USA

Continued progress in the implementation of the Corporate Transparency Act (CTA) and the AML Act 2020 and ongoing reviews of the effectiveness of measures already introduced. Focus is again on increasing ownership transparency and information sharing, including a move to sharing Suspicious Activity Report information with foreign affiliates.

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EU

Of significant importance is the creation of the EU supervisory AML Authority (AMLA), improving coordination between regulatory bodies within the EU member states. In addition, we will see the continuing implementation of the 6th Money Laundering Directive (6MLD) and new AML/CTF regulation. We expect to see changes in beneficial ownership transparency and public data availability, including broader requirement for identification of a de facto controller and the sharing of domestic PEP lists with ESMA.

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Development of the Crypto-Assets Market

Regulators are becoming increasingly concerned about the crypto-assets market and the risks posed in the fraud and AML areas specifically. We anticipate further clarity on the UK’s approach to regulating stablecoins and other crypto-assets in 2022. There is also a proposal to bring crypto-assets under consideration of regulation governing financial promotions.

The FCA’s reporting obligations will be extended to substantially more firms, including many payments firms, e-money firms, and all crypto exchanges and custodian wallet providers. From April 2022, UK payment service providers must also comply fully with the EU’s Funds Transfer Regulation’s “travel rule”.

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Operational Resilience

One area that has gained momentum over the past few years is that of operational resilience. The UK’s operational resilience regime will start to apply from 31 March 2022, introducing a more prescriptive approach to preparing for cyber-attacks, failed IT upgrades, and other forms of disruption to firms’ systems. From March, impacted firms will have three years to update their operating model, controls and infrastructure, to address any vulnerabilities and meet impact tolerances for each important business service.

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The EU’s Digital Operational Resilience Act (known as DORA) will be finalised in 2022. Negotiations on the draft legislation will take place between the European Parliament and Council in early 2022 and it is expected to take effect in 2023.

regulations by jurisdiction and date

WHAT THE EXPERTS SAY

Michael O’Neill – Vice President – Trade Surveillance 

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The landscape within investment banking is constantly changing and requires

continuous evolution. Divisions involving Trade Surveillance are no exception and

there are many areas targeted for development in 2022 and beyond.

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Trade Surveillance teams have a number of key objectives in order to ensure their

compliance with the global regulators. Trade Surveillance teams are focused on

creating new surveillance work streams, improving processes in order to be as efficient

as possible and to be fully transparent when creating high level MI. All Surveillance

objectives are focused on mitigating against key risks.

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In the short term, some of the key focus areas include:

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• Migrating from legacy technology.

• Investment in innovation and the removal of false positives.

• Improvements with supporting Trade Surveillance evidence.  

• Moving away from a manual surveillance approach to automation.

• A proactive approach to the distribution of key MI.

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As with many Trade Surveillance teams, there are several challenges and hurdles to overcome. Many of these challenges require the introduction of new technology solutions.

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Some challenging areas include:

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• Smarter logic for surveillance programmes and the ability to set dynamic thresholds that allow for changing market conditions.

• The importance of conduct risk to include trader profiling and e-trading trend analysis.

• Comprehensive Cross –Market surveillance coverage.

• Convergence of Trade Surveillance / AML and Financial Crime for a more holistic approach to surveillance.

• Rise of retail investors and the market impact of social media / influencers.

• Enhanced communications surveillance.

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Matthew Stewart – Senior Associate – CRA

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Over recent months, global regulators have highlighted the need for improved rationale

and evidence within Risk Assessments, particularly with respect to mitigating Controls

referenced within Assessments as highlighted within the FCA’s Dear CEO letter on

22nd May 2021.

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The need for a robust Risk Assessment is important for firms to better understand and

accept the risks they face as well as mitigate the same risks through effective controls

and resource management. Further to this, initial conversations with regulators will often

focus on the relevant risk assessments undertaken by the firm, in line with the FCA’s

supervisory approach.

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A Compliance Risk Assessment affords firms the opportunity to identify the key regulatory risks they face and ensure that limited Compliance resources are deployed where they are needed most.

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A key part of ensuring a Risk Assessment is robust and provides meaningful data is ensuring that each assessment ties in with other assessments carried out across the firm, ensuring that risks and controls are mapped accordingly. The benefit to this is that assessments can then provide valuable insights across the firm, and increase connectivity.

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From a technology perspective, a number of firms have put together Risk Assessment packages geared towards Risk Assessments such as the ICA who have partnered with a RegTech company to produce two tools – AML Accelerate and Risk Assessment; the former a cloud-based AML Risk Assessment Platform and the latter designed to identify, assess, mitigate and manage different types of risk.

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Looking to technology, the ideal type of Risk Assessment Tool should look to factor in a ‘one-stop shop’ approach wherein initial assessment data can be stored and readily available, while also providing automated reporting metrics to support Control and Resource planning.

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Patrick Meighan – Senior Vice President

Investment Banking Compliance, Risk & Control

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A key area of regulatory focus in 2022 will be controls in relation to conduct, market

abuse and the management of conflicts of interest. In the past two years we have seen

instances of extreme market volatility caused by very sudden events and changeable

working practices. As such, regulators will further increase their focus on ensuring:

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• The correct identification of Inside Information.

• Inside Information is handled appropriately.

• Surveillance programmes are robust and appropriately identify red flags in all market conditions.

• Suspicious Transaction and Order Reports (STORS) are adequately reported to the regulator.

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These focus areas are further driven by the UK regulator issuing Market Watch 68 which included concerns in relation to Market Abuse Surveillance, Surveillance Data issues, Market Abuse Risk Assessments and Record Keeping, to name a few.

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It is therefore pertinent in 2022 that all firms and market participants continually review their market abuse systems & controls to ensure they are appropriate, fit for purpose and adequately fulfil their regulatory obligations including those under the Market Abuse Regulation.

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Aidan Cleary – Senior Vice President - Financial Crime Compliance

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The financial crime space remains a focus area for global regulators, law enforcement

agencies and supranational bodies.

Recent enforcement actions and thematic papers continue to highlight weaknesses

with firms’ financial crime controls and deficiencies in surveillance, calling for increased

focus on client behaviour.

Recent FCA fines have highlighted the need for holistic review of clients and thorough

investigation of atypical activity and red flags. Regulators are increasingly focused on how

firms implement their policies and procedures, and more importantly that they have the right

culture that facilitates proper application (e.g., senior Relationship Managers being appropriately

challenged where required).

In 2022, we should also see further development in the use of AI technology to aid in transaction monitoring and surveillance processes. This will continue the shift in focus from event-driven review to a better understanding of client activity - allowing firms to better understand when a change is suspicious or not, taking more than just transactional activity into account.

About FinTrU

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FinTrU is a multi-award-winning technologically enabled Regulatory Solutions company, specialising in the areas of KYC, Compliance, Legal, Risk & Controls and Operations. Working with Investment Banks around the globe, FinTrU design technology-enabled solutions to help our clients meet their regulatory obligations.

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The company considers itself to have a fundamental social purpose to create high-quality professional employment and  caring deeply about its culture and values of Partnership, Passion, People and Professionalism.

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FinTrU currently employs over 1,000 people worldwide across Belfast, Derry/Londonderry, London, Dublin, Maastricht and New York.

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