December 12, 2023 | Mark Taylor
Estimated reading time: 7 minutes
CUBE’s Regulatory Outlook for 2024
As we approach 2024, the global financial regulatory landscape is in a state of flux.
In recent years, compliance teams have become accustomed to handling event-based challenges in tandem with constant regulatory change. Maintaining that balance will be crucial under heightened regulatory intensity, economic fluctuations and technological advancements powered by artificial intelligence (AI).
In this article our regulatory intelligence team explores the key trends in financial regulation across different continents, offering insights into what lies ahead in the coming year.
Geopolitical tensions have increased over the past few years amid conflicts in Ukraine and the Middle East, and ongoing issues in Africa. For multinational financial services firms, dissolving diplomatic ties creates an uncertain environment given the tendency for nationalistic agendas to take over.
The regulation of technology, data, AI, payments and climate issues are trending in the direction of fragmented, domestic rules rather than the harmonised, global approach businesses have called for.
At a local level, multiple high-profile bank failures in 2023 led regulators to focus on prudential matters, from liquidity reporting metrics to stress testing of non-financial risks.
During the coming year, governments are expected to increase scrutiny of both regulated firms and the agencies that oversee them.
“Macro concerns and the full and timely implementation of final Basel III rules remain primary focuses, though there is potential for looser macroprudential policy as risks linked to households and corporates start to crystallise,” said Monsur Hussain, Head of Financial Institutions Research at Fitch Ratings. “Tighter supervision across risk-management disciplines, including cyber and anti-money laundering risks are likely.”
Further advances in crypto
Throughout 2023, regulators consistently issued warnings about the safety and marketing of crypto tokens to the public. The expectation is for further cracking down in 2024 and the expansion of rules governing the sector to include Anti-Money Laundering/Counter-Terrorist Financing risks, market conduct, resilience, cybersecurity and sales conduct.
The next 12 months is set to be pivotal for the cryptoasset sector as regulatory frameworks mature. Supervisory actions in the US over marketing of tokens has not slowed, and the UK recently enshrined a set of rules that treat the sale of crypto tokens no different from any other complex financial product. Traditional financial services firms must decide on how they will approach cryptoasset markets, given the nature of risk management and compliance frameworks.
The European Union will become the first major global jurisdiction to formally adopt a series of comprehensive laws and regulations governing the cryptocurrency sector when it does so in 2024
The Markets in Crypto Assets regulation, or MiCA for short, establishes harmonised rules for crypto assets at EU level, and aims to provide legal certainty for crypto assets not covered by existing EU financial services legislation. CUBE’s data team has covered this and more in our latest report, Crypto Compliance Insights.
Increased regulatory intensity
We expect a continued increase in regulatory intensity across the globe in 2024. This is driven by several factors, including:
The global economy is facing a number of challenges, including rising interest rates, inflation, and geopolitical tensions. This is leading regulators to take a more cautious approach and implement stricter rules to ensure financial stability.
Ongoing development of technologies such as AI and blockchain creates both challenges and opportunities. At both national and supranational level, frameworks are being developed and adapted to keep pace with these changes and ensure that markets remain fair and efficient.
Heightened risk awareness
The collapse of multiple banks and crypto exchanges has highlighted the importance of robust risk management practices in the financial sector. Regulators will be placing greater emphasis on risk management and governance in the coming year.
Areas of focus
In addition to the general trend of increased regulatory intensity, there are several specific areas that will be a focus in 2024.
Regulators will be expecting financial institutions to have robust risk management frameworks in place, including strong data security practices and transparent governance structures. Capital and liquidity requirements for financial institutions are also being tightened in response to the current economic climate.
The growing focus on data governance, model-risk management, and algorithmic bias given the importance of data and AI in the financial sector, continues to escalate
, whilst sustainability and ESG (Environmental, Social, and Governance) will play an increasingly important role in financial regulation. Multiple, often competing, frameworks are being developed to measure and report ESG matters.
Cybersecurity will also remain a top priority for regulators, as financial institutions continue to be targeted by cyberattacks.
Here is a brief geographic overview of the regulatory landscape:
In the United States, the Biden administration is likely to continue to prioritise consumer financial protection and financial inclusion, however it remains to be seen how the regulatory agenda develops in an election year.
A crisis at the top of the Federal Deposit Insurance Corporation, a federal financial services regulator, may have an impact on a wide set of proposals that were being drawn up for commercial banks and savings banks. A broad-ranging set of capital rules expected to enter force may be delayed until an internal investigation into misconduct at the regulator is complete. Other progress on regulatory reforms in areas like fintech and cryptocurrencies is also underway.
Across Latin America, several governments including Argentina and Brazil are working to update financial regulations, with a focus on promoting financial inclusion and stability.
The European Union is currently in the process of implementing a number of major regulatory reforms to the continent’s banking system. Approximately 25 financial services-related legislative proposals are still to be finalised, including the Clearing Package, amending regulations like the European Market Infrastructure Regulation (EMIR), the Capital Requirements Regulation, and the Listing Package, which aims to bolster the attractiveness of public capital markets.
Other major proposals cover the Retail Investment Strategy, revising investor protection rules, the Sustainable Finance Package focusing on ESG rating transparency, and the Payment Services Strategy and Data Access Package.
In the UK, continued Brexit-related divergence from the European Union on financial services matters will play out in tweaks to sustainability, financial crime, capital requirements and cryptocurrency rules.
Earlier in 2023, the Bank of England launched its first system-wide stress test of the financial sector that included banks and non-bank financial institutions, such as insurers, central counterparties and a wide variety of funds. Findings are expected to be published in 2024.
The regulatory landscape across Asia-Pacific continues to be diverse and complex. Hong Kong is to mandate new climate disclosure in early 2024.
Across the jurisdictions there are also plans to tie together remuneration and risk. Australia is pushing forward prudential measures that aim to ensure firms have governance, processes and a board-level view on risk culture and excessive risk-taking. In Hong Kong, financial regulators are going through the courts to recover remuneration for firms’ senior management if their actions are deemed to be intentional, reckless or negligent.
China is expected to continue focusing on financial stability and capital controls, while India is prioritising financial inclusion initiatives, with its Unified Payments Interface (UPI) at the heart of it.
Across Africa, the focus will be on promoting financial inclusion and developing robust regulatory frameworks. The continent has become renowned for its pioneering use of mobile money, and during the next 12 months regulators will continue to focus on payments. South Africa is carrying out a major overhaul of the regulatory framework underpinning the payments ecosystem as part of the central bank’s Vision 2025 Programme.
CUBE Regulatory Outlook 2024 summary
The economic outlook for 2024 is unclear, which adds complexity to the regulatory environment. Businesses are expected to react to incoming rules whilst staying ahead of macro-economic changes in areas such as digital tools, AI, crypto and ESG.
Financial crime rules will continue to tighten as regulators probe for areas of improvement, with record fines and supervisory interventions a near certainty given the trends of the last few years.
Technology offers new tools in the fight against financial crime, with adoption of sophisticated AI-driven solutions also expected to broaden.
Facing such uncertainty, engaging with supervisors and deploying AI to monitor for regulatory trends, best practices and developments can help firms better understand their obligations and adjust their compliance priorities in a timely manner.
Financial institutions can leverage CUBE’s horizon-scanning solutions to proactively adapt to regulatory changes and protect themselves from developing risks that can emerge during periods of market turbulence.