Global Bank Review 2024
Adaptation: Change is the only constant
23 Jan 2025
Insight
Global
4m read
Faced with novel issues and keenly aware that the slow process of regulatory and/or legislative change can fall short of consumers' and others' expectations, financial services regulators have begun to re-examine their existing tools and powers. When the perfect tool for the job is not available, something else in the toolkit may be pressed into service. In major jurisdictions, we have increasingly seen regulators using existing tools and powers during supervision, investigation, and enforcement activities in novel ways. We expect this trend to continue.
Using technology
Technology, in particular AI and data analytics, have reshaped the industry's engagement with regulators in the last few years. While the human resources available to regulators are inevitably limited, AI and data analytics have demonstrably increased capability.
In a nutshell:
Under pressure from stakeholders, regulators are adapting their approaches. Novel and creative strategies and approaches to effectively address individual and corporate behaviour are emerging.
As resource constraints, technological developments and the demands of stakeholders to respond promptly to crystallised risks remain constant, regulators can be expected to continue to adapt how they use their tools and powers to achieve palatable results.
Financial firms will need to be agile and ensure their own approaches to compliance and regulatory engagement are suitably innovative – including through use of technology.
For example, in Australia, we are seeing an increased ability of regulators to consider and triage large amounts of data (for example, documents produced or breach reports lodged by financial firms) with a view to strategically targeted supervisory and enforcement action. What was once 'too much' is now manageable with the use of data tools.
In Hong Kong, the Securities and Futures Commission (SFC) has also adopted technologies to enhance its operational efficiency and strengthen its risk-based supervisory approach. For example, a new platform analyses intelligence from law enforcement agencies and an AI model has been applied to correlate key matters with targeted entities and highlight specific areas that require regulatory attention. The SFC is using AI to fuse information from previously siloed data sources into one unified view, so that it can identify patterns, trends and hidden links among members of a crime syndicate.
As novel application of tools is a trend that looks set to continue, constructive engagement with regulators will become even more important for firms.
Andrew Eastwood
Partner, Sydney
Supervision – Putting the burden on firms
The UK Financial Conduct Authority (FCA) is adapting to its ever expanding remit (eg, to cryptoassets, funeral plans and critical third party providers) and to the expectations that it facilitate the government's growth agenda. There was a noticeable increase last year in use of so-called 'skilled persons' to conduct investigations. Unlike investigations conducted by the regulator's own staff, firms themselves bear the financial cost of appointing a skilled person. In part, the increase is driven by work on motor finance commission, politically exposed persons (PEPs), and pensions transfer advice. However, it seems likely that with the Consumer Duty bedding in, the compliance deadline for the UK operational resilience regime in mid-2025 and the continued focus on financial crime systems and controls, there will be abundant opportunities for both of the UK regulators to resort to skilled persons in 2025 and beyond.
Alongside the uptick in use of skilled persons, use of so-called 'requirements' and 'attestations' is also increasing. The UK regulators have the power to impose limitations on firms – 'requirements'. They may do so on their 'own initiative' – an OIREQ – or may ask the firm to request a requirement be imposed – a 'voluntary requirement' or VREQ. The FCA more frequently requests that executives make formal attestations as to action to be taken and/or compliance. The FCA's victory in the Court of Appeal in the challenge to its use of its power to impose requirements on a firm's permissions in respect of a redress scheme lays the groundwork for the FCA to be even more creative.
It's fair to say that using regulatory tools in a novel way has potential for increased efficiency but can backfire if the tools were not designed for that purpose.
Jon Ford
Partner, London
In Australia, attestations by executives are also an increasingly popular method for the regulator to satisfy itself of compliance steps (including after an investigation and/or enforcement action). ‘Corrective notices’ informing customers and/or the public what went wrong and how it is being fixed are also popular – sometimes raising thorny questions about the appropriate audience and channel for such communications (eg, in the age of digital banking primarily through apps).
Focusing the approach to enforcement
In the UK, these 'supervisory' changes feed into changes in enforcement at the FCA, although both the UK Prudential Regulation Authority (PRA) and the FCA have taken steps to reform enforcement approaches recently. In an effort to achieve quicker resolutions to investigations, the PRA has introduced the 'Early Account Scheme' whereby investigation subjects would make early admissions of breaches (supported by an attestation from a senior manager) in return for a discount of up to 50%. It remains to be seen how many firms take up this opportunity, but it again shows the pressure on regulators to act quicker and get higher impact outcomes. With the 'new' enforcement leads now settled in at the FCA, the drive towards a more targeted enforcement approach has become apparent. Enforcement data (published as part of the Annual Report package in September 2024) presents a significant uptick in case closures, alongside a marked reduction in the number of new cases opened. However, the FCA's controversial plans to be more transparent when opening an investigation – otherwise known as the 'name and shame' proposals – remain a cause for concern across regulated firms and listed entities. These proposals are an example of the potential for regulators, in an effort to optimise their resources, risking inflicting unwarranted harm.
It's a given that firms need to be on the front foot to respond to regulators' changing approaches. But anticipating where regulators are – or might be – going next is a key skill firms need to grow.
Danielle Briers
Executive Counsel, Sydney
Another example of efforts to expedite enforcement can be seen in Hong Kong where the SFC, which has powers to impose sanctions on listed company directors, faces lengthy court proceedings to disqualify directors. It now collaborates more with the Hong Kong Stock Exchange by sharing its findings with the Exchange for it to consider disciplinary sanctions through a 'Director Unsuitability Statement'. This essentially achieves the same result, but without the long-winded process that takes up the SFC's resources, leaving the regulator free to tackle more serious matters.
In conclusion
Across jurisdictions, regulators are demonstrating increasing creativity and novelty in the way they utilise their tools and powers to fulfil regulatory mandates across the investigation, enforcement and supervisory stages. We can expect this trend to continue as regulators adopt, adapt and improvise amid the ever-changing regulatory landscape. Financial firms will need to be agile in responding to regulatory action and ensure their own approaches to compliance, operational risk and regulatory engagement are suitably innovative (including through use of technology) – in keeping with the increasing sophistication and expectations of regulators.
Key contacts
Chapters
- Global FSR Outlook 2025: Perpetual Motion
- The long and winding road of regulatory overhaul
- Adopt, adapt, improvise – The new regulatory approach?
- Many roads lead to Rome: Paths to redress and remediation
- The sanity of crowds – Can smart data initiatives transform consumer finances?
- Juggling water – How to regulate AI in financial services?
- Teetering on the brink of quantum utility – Not if, but when ...
- Rewiring the infrastucture – Making transactions faster
- A growing clamour – Can NBFI get out of the shadows?
- The anxiety of ageing – What changing demographics mean for financial services
Legal Notice
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2025
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