Disruption in global financial services: Move fast on compliance, but don’t break anything

As they look to the future, financial services organizations are confronted by significant change, uncertainty, and disruption. Increasing deglobalization, macro-economic headwinds, the rise of big data, AI, and other new technologies, and evolving regulatory guidance are creating increasing pressures – all against the backdrop of transitioning to net zero.

DLA Piper has conducted a survey of the financial services industry to gauge sentiment on three key areas of future disruption: the impact of the ESG agenda, digital transformation, and the role of regulation (on these themes and more broadly). Data was sourced from nearly 800 financial services executives and senior-level decision makers from organizations of all sizes across the globe, and in all major industry subsectors.

The result? The industry understands transformative change is there but, far from being daunted by that prospect, 80 percent of all organizations surveyed are optimistic about the next two years. This is driven by positivity about the product and service opportunities that new technology will bring, and the potential benefits of the ESG agenda. Respondents were, however, pessimistic about the pace and uncertainty of regulation in the coming change.

ESG

Over the past five years, ESG factors have played an increasingly pivotal role in shaping the financial services industry, influencing its strategies, operations, and wider responsibilities. There is now an industry-wide drive towards ethical growth and sustainable value creation, driven by regulatory pressure, stakeholder demands, and the potential reputational benefits. Interest in sustainable finance and the opportunities it presents has likely never been higher.

Approaches to ESG vary across jurisdictions

While a majority of survey respondents want to be leaders and innovators in the ESG space, we found that different geographies, with different ESG maturity levels, have notably different priorities and strategies. Western European organizations are prioritizing the integration of statutory ESG factors into their risk management frameworks, while organizations in North America are still focused on enhancing ESG reporting and disclosure and addressing political tensions. ESG still remains less of an immediate priority in the Asia-Pacific’s boardrooms.

An opportunity and a challenge

Across all geographies and subsectors, respondents voiced a consistent view that ESG is somewhat of a double-edged sword: It represents an enormous opportunity, but also presents significant challenges. Over half (58 percent) of respondents consider the ESG agenda to be one of their biggest challenges in the next two years. The specific challenges identified include: (1) regulatory inconsistency between jurisdictions, (2) difficulty in gauging stakeholders’ ESG appetite, (3) a lack of readiness in the wider economy to meet the demands of existing regulation and accompanying litigation risk, and (4) the hurdle of compliance and delay before seeing a return on ESG investment.

Digitalization and AI

Financial services firms have consistently been early adopters of new technology. So, it is perhaps unsurprising that over 86 percent of respondents said AI and wider digitalization will transform financial services over the next two years. In fact, 66 percent of respondents indicated it will be their single biggest business opportunity in that time.

Digitalization’s retrospective application

The majority of industry operators confirmed they are using digitalization to better deliver their existing products, rather than reinventing the wheel, and leveraging strategic partnerships with fintech firms to do so. The areas predicted to see the biggest impact from digitalization going forward are digital customer channels and digital assets.

AI primarily seen as risky for financial services institutions

But many organizations are at an earlier stage when it comes to adopting AI. Firms are currently more conscious of AI’s risks, with over half (53 percent) seeing it as a major challenge, and one in ten as the most critical issue faced by their business. Key identified risks include: the ethical AI usage, its integration with legacy systems, the potential for AI to widen existing societal inequalities, and litigation risk – with the US already seeing AI-related claims in the copyright and privacy spaces.

FS institutions as AI responders rather than first movers

The shared consensus among 79 percent of respondents is they don’t want to be market leaders in AI. They would instead prefer to adopt tried and tested approaches that have already been successfully deployed by others. Nevertheless, most industry players don’t want to be left behind. Our survey found that six in ten firms are investing in the technology required to leverage AI, with 63 percent targeting uses relating to regulatory compliance, 62 percent targeting fraud detection and prevention, and 58 percent targeting operational efficiency.

The challenge of future regulation

Financial services organizations around the world are no strangers to navigating new regulatory requirements. Although many aspire to be leaders in managing regulatory compliance, the majority (58 percent) consider complying with new regulation to be a monumental challenge. A key concern for respondents is the creation of balanced and proportionate levels of regulation that offer clear, consistent guidance and support good business. However, 75 percent of respondents indicate that regulators are struggling to keep up with the rapid pace of change in the industry, that current regulation is stifling innovation, and that future regulation is unlikely to provide the desired clarity of approach.

While less than ten percent of respondents said that current regulation levels are satisfactory, the desired way forward varies by topic. A majority said there is too much existing regulation around digitalization, but not enough on AI, ESG, and cybersecurity and financial crime. Respondents were also consistent in the view that existing and future regulation needs to be clearer. Financial services organizations appear to be ready to embrace change, but don’t seem to feel like they yet have a rule book that will support and guide them in that process.

Conclusion

The global financial services sector has a markedly positive outlook, with change-driven opportunities supporting this optimism. However, the sector is keenly aware of the accompanying challenges and risks and is already preparing by:

• Implementing ESG risk management frameworks and drawing up ESG-related policies and procedures, for example around public statements on ESG, to mitigate future litigation risk
• Partnering with fintech to deliver new digital tools
• Training staff on the appropriate use of AI, including avoiding bias in its deployment, and
• Proactively seeking legal advice on imminent regulatory changes so they can hit the ground running when these arrive.

As the industry navigates today’s key disrupting forces, regulation may present as both an ally and potential foe, with the cost and burden of compliance remaining a real concern. Bottom line: A wave of disruption is likely under way, but the financial services sector is poised to ride it to new opportunities for growth and expansion.