The Hidden Compliance Risks Of Digital Change In Financial Services

The financial services industry has undergone a remarkable transformation, as organisations increasingly adopt new technologies and digitise traditional processes. This swift evolution raises questions about our ability to comply with regulations designed to protect our customers.

According to a recent survey, three-quarters of banks have initiated digital transformation projects.

What digital risks should businesses be aware of when implementing their change strategies?

Let’s explore why financial organisations must keep compliance at the forefront during digital transformation.

The State Of Play

The pandemic has significantly accelerated digitalisation, prompting businesses to adapt existing processes and implement new technology rapidly.

While digital tools foster connectivity in a post-pandemic world, making businesses more agile, efficient, and customer-centric, they also heighten risks, with regulatory compliance being a primary concern.

Failing to comply with regulations and ensuring the privacy and protection of personal information can result in severe consequences, including reputational damage, decreased market share, and substantial fines.

Given the extensive financial and personal data they store and process, financial organisations are particularly vulnerable.

“As organisations pivot to increase the level of digital access offered to consumers and workforce members involving personal and business-oriented information, it creates entirely new forms of risk that must be mitigated compared to traditional ways of conducting business.”

— Ryan Smith, CIO, Intermountain Healthcare

Considering GDPR, KYC, AML, and ESG directives in the evolving digital landscape, financial services companies are realising that existing compliance management operations are inadequate to meet increasing regulatory demands.

How A Lack Of Compliance Facilitates Cybercrime

In the realm of digital risk, compliance and cybersecurity are closely intertwined.

Recent studies indicate that 85% of CISOs report that security issues have significantly impacted their business during digital transformation, with many experiencing an attack or breach leading to data loss or compliance issues.

71% of C-level respondents indicated that their organisations are more susceptible to security incidents during periods of digital change.

The 4 Main Digital Change Technology Categories Where Risk Is Introduced

There are four key categories of technologies in digital change that introduce significant risks to an organisation's infrastructure.

1. Multi-Cloud Or Hybrid Cloud Infrastructures

Hybrid or cloud infrastructures host data outside of an organisation’s defensive perimeter, including software-as-a-service (SaaS) and platform-as-a-service (PaaS) models.

Moving crucial data from legacy systems into mission-critical cloud applications can complicate regulatory compliance.

Although financial organisations may own the data within these platforms, they cannot maintain strict control over it.

This introduces potential risks of data loss or theft and issues with data privacy.

2. Automation And Analytics

Through technologies like AI and robotic process automation (RPA), analytics and automation capabilities are expanding rapidly across the financial industry.

However, RPA bots that aren't properly implemented and 'hardened' can lead to compliance risks and errors. This technology can also be utilised for regulatory mapping, allowing firms to monitor changes that affect their operations.

3. Digital Supply Chains And Sales Channels

While digitising channels can provide increased efficiency and cost reduction, it can also introduce significant compliance risks.

These risks include corruption, fraud, ESG requirements, labour law compliance, and health and safety regulations.

4. Internet Of Things (IoT)

IoT is being adopted across financial services to better understand customer needs and the value chain.

However, by introducing a network of interconnected devices, IoT significantly increases an organisation’s attack surface.

Offering multiple, connected entry points for cyber threats, IoT can place an organisation’s data, and thus its compliance, at risk.

Next Steps For Financial Organisations

Maintaining compliance with complex and evolving policies is challenging. However, with the right perspective, it's possible to allocate cyber resources to achieve both security and compliance objectives.

Research by McKinsey highlights that the most successful companies foster strong collaboration between risk, security, IT, and business units.

However, surveys show that 29% of businesses have not yet taken the necessary steps to address technology disruption, suggesting they are underestimating critical risks.

It is crucial to establish both a robust cyber resilience strategy and a risk management framework to manage associated threats and keep up with evolving regulations.

Below are some essential next steps for companies to ensure compliance and security during periods of digital change:

 Create Clear Policies

Implementing internal policies and processes that align with overarching regulations ensures everyone in your company is working towards the same goal.

These policies should be applied from the top down and communicated clearly, ensuring everyone adheres to them. Regular reviews should also be conducted.

“Effective financial policies and procedures provide efficient financial management, risk mitigation, and alignment of financial operations with the overall mission of the organisation.”

– Joe Purvis, CPA at Clark Nuber

 Carry Out Training

Firms must make sure that staff possess the necessary analytical skillsets and up-to-date knowledge to understand the compliance risks linked with transformation.

Regular training and awareness initiatives will help employees uphold key responsibilities.

“The data accumulation that accompanies digital transformation initiatives, whether external or internal, necessitates adequate training for all stakeholders not just on internal processes, but on basic privacy principles.”

– Brian Kane, Co-Founder and COO of Sourcepoint

 Conduct Risk Assessments

Performing risk analysis at strategic times helps businesses avoid costly delays or compliance issues.

Involving teams early in the process can accelerate efficiencies, offering greater scope to adapt projects compared to identifying issues in later stages.

“The foundation of all compliance programs is understanding the areas with the highest potential for legal violations. You need to identify and prevent the most serious types of risks in your organisation, which requires a thorough grasp of your operating environment.”

– Tim Cercelle, Director, Deloitte Advisory, Deloitte & Touche LLP

 Utilise Cybersecurity Software

Security software helps you manage data privacy obligations and meet compliance objectives in a cost-effective way.

Solutions like Mailock secure email protect the data in outbound messages using encryption and authentication technology, safeguarding your organisation from data breaches and regulatory risk.

References:

The End of Digital Transformation in Banking, Forbes, 2022.

Mitigating the Hidden Risks of Digital Transformation, CIO, 2021.

SoftwareONE, SoftwareONE, 2023.

Digital Transformation: What It Means for Third-Party Risk and Compliance, Aravo, 2023.

Digital Transformation: Three Priorities for Governance Leaders, Raconteur, 2023.

G2G Compendium, Deloitte, 2022.

Joe Purvis, CPA at Clark Nuber, Clark Nuber, 2023.

BDO Survey: Boards Strive to Keep Pace with Digital Transformation, Compliance Week, 2023.

Lessons from Banking to Improve Risk and Compliance and Speed Up Digital Transformations, McKinsey, 2023.

Reviewed By:

Sabrina McClune, 21.06.24

Sam Kendall, 21.06.24