The legal and reputational risks associated with providing cross-border financial services have risen sharply in recent years. Current national lockdowns and travel restrictions, alongside major regulatory upheaval, such as Brexit, are only adding to the challenges facing global banks. With bankers, wealth managers, asset managers and other financial professionals, who provide services and products across borders, now working from home, but still legally obliged to comply with the regulations of the host country, the financial industry is facing a perfect storm in maintaining cross-border compliance:

• Regulatory complexity - as Thomson Reuters identifies in its latest Cost of Compliance Report regulatory experts currently see managing and coping with increasing regulatory complexity as their greatest challenge. Neither do compliance team expect this dynamic to change soon. With financial services companies anticipating significant increases in regulatory density in the future.
• Regulatory divergence - The issue of regulatory divergence is being examined by the OECD and the International Federation of Accountants (IFAC), and their report shows that the cost of regulatory divergence was significant or very significant to the financial performance of 75 per cent of the institutions surveyed. 71 per cent of respondents indicated that these developments were an obstacle to expanding their business to new jurisdictions. 69% of companies use cross-border manuals that cover different regulatory restriction for legal entities in different countries.
• Digital banking - Banking services and products are becoming increasingly digital. Compliance with regulations must adapt to these developments. The challenge for financial institutions is not only to master the complexity of regulations but also to find a way to ensure compliance in the digital space and support banking applications such as client advisory tools, online banking, trading systems or mobile applications.

Since 2009, financial institutions have been fined more than $342 billion, a figure that is expected to rise to more than $400 billion imminently. However, any financial institutions who are unable to manage cross-border compliance efficiently, not only face fines, penalties, and unnecessarily high operating costs; but they also risk missing-out on significant business opportunities.

Take a simple, everyday use case like planning a virtual client interaction in a cross-border banking scenario as an example. Businesses may not realise it yet, but many regulations are as applicable to virtual meetings as they are to in person meetings. According to our own research nearly 50% of businesses find it difficult to understand the legal boundaries of meeting remotely, and only 32% have taken steps to understand the ‘new’ requirements.

Even if we take virtual scenarios out of the picture, traditional forms of compliance guidance, such as manuals, are often out of date and provide ambiguous input. So, either compliance has the capacity to advise their advisory teams at short notice, or those teams must use their own judgment to interpret the restrictions. That is a risk, but the alternative could mean delaying or cancelling a meetings and losing the business.

There is no easy answer. Unsurprisingly, governance, risk, and compliance (GRC) functions currently comprise between 15-20 percent of total run-the-bank costs. With 10-15 percent of an average, universal bank’s workforce now dedicated to GRC. To put that into perspective, between 4 -10 percent of a bank’s revenue is typically spent on compliance.

So smart, efficient ways to master regulatory compliance can have a huge impact on a financial institutions’ bottom line. Sadly, to minimize risk, it is an all-too-common response for financial institutions and their teams to choose not to take a client meeting, or to expand into new business areas, with many retreating into only a few core markets.

In other words, those financial institutions who have found an efficient way to manage financial regulation now have a clear competitive advantage over their competitors, who are still struggling to comply with cross-border banking rules. Indeed, according to our research, only 55% of financial services companies are currently actively marketing their services to clients abroad.

Cross-border compliance in the digital age

In the present climate, competitive financial institutions must find new ways to ensure compliance, especially in cross-border financial services. With cross-border financial services subject to comprehensive control in an increasingly stringent regulatory environment, many compliance teams cite implementing a technology-enabled solution as being a key strategic objective for this year (2021). The good news is that plenty of digital transformation is already taking place. With over 40% of financial services institutions reporting that they already operate or plan to implement a digital compliance solution, either inhouse or externally. Meanwhile, 31% plan to integrate cross-border restrictions into their existing compliance processes in the next 12 months.

By digitalising text-based compliance manuals into powerful digital regulatory rules and bringing them under a single loupe, compliance automation tools are helping to minimise the risks of human error, reduce operational costs and supervisory controls, and avert potential penalties. Providing a robust system of compliance and organisational agility.

As a result, it is only a matter of time before regulators start to distribute regulations digitally. Financial service providers will transform these regulations seamlessly into digital rules to be distributed and executed at the click of a button. Client-facing employees will have direct access to these digital rules on their devices. Avoiding the need to implement time consuming, expensive, and inefficient compliance training; while transforming the role of the compliance team, from a function that stops business from happening, to one that can use its data to drive business strategies.