Why Compliance is The Achilles Heel Stunting Growth for Financial Services Firms

Jamie Hoyle, VP of Product at MirrorWeb

“Computer says no” or rather “Compliance says no” is an all too common phrase in Financial Services. In fact, compliance in general has been causing a headache for these institutions for decades now – forcing them to grapple with the rising complexities of regulatory change. This is largely due to the evolving landscape, impacted by both regional and global legislation, as well as the emergence of new technologies, such as AI.

To make matters worse, according to UK Finance, the collective annual price tag for UK banks and financial services firms to comply with regulation has hit a staggering £38.4billion! To put that into perspective that is equivalent to nearly three-quarters of the UK government’s spend on defence.

Bottom line? Compliance is complex and costly – and many businesses are now struggling to keep up with the rapid evolution and innovation within the compliance market.

With 2024 beginning to draw to a close, it is clear that the stakes have really never been higher when it comes to financial compliance. As financial institutions continue to navigate an increasingly dispersed workforce and the widespread use of multi-channel communications, compliance should be seen as a critical part of their growth strategy.

The Impact of a Dispersed Workforce and Multi-Channel Communications

It is a well-known fact that since 2020 there has been a shift towards more hybrid or remote working models globally: “Shall we have a quick Slack Huddle, Teams call or WhatsApp chat?”.

Our workforces are now often dispersed, and naturally this has impacted the way a workforce communicates. These days, communication within an organisation is extremely varied, and more and more businesses operate with a multi-channel communication strategy – and the financial services industry is no exception.

With this shift to remote and hybrid work models, a whole new set of compliance challenges has been born. Employees increasingly rely on a patchwork of communication channels, from messaging apps to personal devices, to get their day-to-day jobs done.

This has caused a major compliance headache, blurring the lines between personal and professional communications at work – and FS (Financial Services) firms need to find a way to strike a balance between enabling employee productivity and maintaining the robust compliance frameworks that financial regulators require.

These regulators are already coming down hard on multi-channel communication compliance, with the US Department of Justice formally incorporating off-channel communications policies into its Evaluation of Corporate Compliance Programs. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are also flexing their authority, having slapped huge fines on FS firms that fail to meet record-keeping and multi-channel communication compliance standards – leading to a $2.5 billion communications compliance crisis within the wider financial landscape.

The state of play can’t be understated here.

It is a big crisis. A crisis that has involved 16 major Wall Street firms, including household names such as HSBC and Goldman Sachs,  being fined a collective $1.1 billion in September 2022 alone. All for non-compliance related to off-channel communications. In August 2023, additional fines totalling $392 million were dished out to 26 firms for similar infractions.

These fines were all a result of regulators finding evidence of these firms using personal devices and messaging apps, like WhatsApp, to conduct business-related communications.  Off-record and unmonitored. Bank of America, in particular, has faced legal challenges related to its “longstanding practice” of utilising off-channel communications.

What does all of this mean? There is increasing pressure on FS firms to adapt to the evolving regulatory environment – reinforcing a real need for robust compliance strategies to survive. But how can FS firms maintain a comprehensive record of all of these multi-channel interactions and stay on top of critical and evolving regulatory compliance requirements?

The Harsh Reality of Non-Compliance – The True Costs in 2024

There are consequences to every business decision, good or bad. And for FS firms, the consequence of poor compliance is…a hefty growth stunting fine. Last year alone, the US Securities and Exchange Commission and Commodity Futures Trading Commission imposed $2.7 billion in penalties on financial institutions for record-keeping failures; and the impact of these fines extends far beyond the immediate financial hit.

In a world where “perception is reality”, any reputational damage can be devastating, breaking down those hard-fought-for customer relationships, in addition to overall investor confidence. An example of this is Capital One; when it was slapped with a $390 million fine by the Financial Crimes Enforcement Network for anti-money laundering violations – a blow that has undoubtedly left a lasting mark on the bank’s standing reputation in the industry.

The more worrying consequence is the impact on overall operations. Non-compliance can lead to sanctions that actually restrict FS firms’ operational capabilities, hindering their growth strategies and their ability to compete in the market. In the UK, we’ve already seen Ofgem impose a £5.4 million settlement on Morgan Stanley for traders’ use of WhatsApp to discuss energy trades. This is a not-so-subtle message that regulators are taking a hard stance on off-channel communications.

FS firms take note. The message is clear. Prioritising and investing in compliance is no longer just a box to be ticked; it’s a strategic choice that can ultimately make or break a financial firms’ future.

How Technology Can Bring FS Firms into the New Era of Compliance

Fortunately, the financial services industry is not without a solution to its compliance conundrum. Technology is its saving grace – a solution helping to maintain regulatory adherence and navigate the complexities of a dispersed workforce and multi-channel communications.

One of the key areas where compliance-enhancing technology can make a significant impact is communication monitoring and archiving. How does this work? Compliance-enhancing technology enables FS firms to  automate the process of sifting through the seemingly evergrowing volume of digital communication data, flagging potential risks in real-time and freeing up compliance teams to focus on more strategic and rewarding tasks, such as:

• Developing and implementing more effective compliance strategies,
• Conducting in-depth risk analysis
• Collaborating with other departments to ensure a comprehensive approach to compliance across the organisation.

These compliance-enhancing technologies can also enable FS firms to increase the effectiveness of compliance training and awareness by ensuring that employees understand the importance of using approved communication channels and the consequences of non-compliance. Put simply, by using technology to do the grunt work, FS firms can focus on embedding compliance into the fabric of the organisation – fostering a culture of accountability and responsibility, and further mitigating the risk of regulatory breaches.

So what is the key takeaway here? Compliance may currently be every organisation’s Achilles heel – but using the right tech solution to bolster your compliance can act as a steel boot. The path to effective compliance requires FS firms to embrace technology as a strategic enabler. An enabler that not only mitigates the compliance risks posed by a dispersed workforce and multi-channel communications but also turns compliance into a competitive advantage.