Navigating the perfect storm: global shocks, technological evolution, and the new regulatory maze

The global financial landscape is currently battling a variety of simultaneous shocks that have made it vulnerable to market abuse. In March of last year, Fabio Panetta, of the European Central Bank’s Executive Board, delivered a speech where he declared that we are in the wake of a series of global shocks. From events such as the pandemic, supply chain crises, geopolitical upheavals and economic volatility, to the developments in AI and digital assets, these events have altered the state of play in regulation. Collectively, they are providing criminals with a variety of new tools and methods to harness, and businesses with new regulatory problems to solve.  

Of these shocks, our research has revealed that regulatory professionals cited global economic instability as the second most likely cause of compliance issues in the next 12 months, after the use of AI (57%). With so many factors at play, regulators face the dilemma of, as Penetta highlighted, underreacting, which could exacerbate criminality, or overreacting, which could worsen market instability. 

This environment is leading to a wide range of regulatory changes spanning different countries, creating quite the headache for financial firms as they strive to remain compliant. Moreover, an increasingly diverse and congested financial market is making it harder for firms to detect and deal with market abuse.  All in all, this leaves companies in desperate need of tools that can keep up with ever-evolving regulations and ease the increasing operational burden that firms face. 

The result of the global shocks

The financial landscape we find ourselves in is starkly different to that of  five years ago. Amidst the range of global shocks that have impacted the industry, we are in the position where volatility and instability have become the natural state. Whether this state remains for the long-term or not, the nature of market abuse has changed indefinitely and is now more challenging to detect than ever. 

Constant, rapid and unpredictable price movements can camouflage manipulative activities, with bad actors taking advantage of increased market noise, reduced liquidity, and broader market uncertainty.

Commodities markets are particularly vulnerable to abuse in the current environment – limited supply and fewer participants leads to increased vulnerability to manipulation, as scarcity and lower liquidity makes it easier for bad actors to influence prices. Additionally, the market's relative technological immaturity, marked by manual processes and information silos , further exposes it to exploitation and manipulation due to slower, error-prone systems and uneven access to data.

Other market impactors 

There is also, of course, the rapid growth of AI. While its rapid development  has opened up new and innovative applications of the technology, it has also brought with it growing concern about inadvertent or deliberate market abuse, as it can lead to complex and unpredictable market dynamics. As a result, market integrity has become opaque, and whilst on one side AI offers advanced capabilities to detect non-compliant behaviour more effectively, the other side paints a story of heightened risk and increased potential of market manipulation.

Finally, the global market is becoming increasingly interconnected, which is opening new avenues for market abuse. This interconnectivity is enabling bad actors to exploit regulatory gaps and unmonitored spaces, previously beyond the reach of traditional surveillance and regulations.

 An interconnected landscape

So, what role are the regulatory bodies playing in this new landscape? Well, like most businesses, regulators are having to adapt accordingly – and quickly. 

As mentioned, increasing global interconnectivity exposes the market to greater risk. This has led to new initiatives being developed to address these challenges. These include a heightened focus on underrepresented assets, cross-border partnerships and new investment into advanced surveillance technology.  

Regulators are being faced with the problem of transparency, and their answer to this is increased collaboration with national authorities, enforcement agencies, and the private sector. These partnerships, as highlighted by the FCA and IOSCO, are key to moving towards an intelligence-driven approach to market integrity, capitalising on shared objectives between regulators and the private sector. The aim is to  reduce regulatory disparities and gain a deeper understanding of the most immediate risks to market integrity. But how is this practically being achieved?

What was once a case of fighting fire with fire, is now combatting tech with tech. Regulators are increasingly utilising AI and SupTech to improve monitoring and combat market abuse, acknowledging that traditional surveillance methods are no longer sufficient for the new landscape we find ourselves in. This represents a significant shift in the industry, setting a new standard for market oversight. And it brings with it a new weight of expectation. 

Why financial firms need regulatory technology - and quickly

For regulated firms , the current landscape isn’t short of problems. On one hand, they face a volatile and ever-evolving market landscape that demands constant vigilance to remain compliant. On the other hand, they are subject to shifting regulatory tactics, which bring an onslaught of new demands and heightened expectations. Choosing how to proceed in such a climate is extremely difficult, but one thing is unmistakably clear: it can’t be done without technology. 

Technology has become more than just a ‘tool’ and it's now a long way from being considered a luxury. It’s a necessity for businesses to fulfil their regulatory responsibilities. For starters, having an efficient and streamlined compliance process is a minimum requirement. The days of slow, outdated reporting systems are in the past. Just relying on a single individual as the ‘compliance expert’ in your business isn’t going to cut it.

With evolving regulatory expectations around advanced technologies, businesses’ systems and controls are under more scrutiny than ever. And as companies work to avoid the risks that come with hefty fines and reputational damage, technology will be the key component in keeping them compliant. These innovations can help ease the burden of compliance, taking the pressures away and placing them into more capable, automated systems. 

This not only allows businesses to stay compliant in real time, but it also puts them in a better position to be ready for any upcoming regulations, such as the EMIR Refit,  that are due to arise this year. 

The bottom line 

A poor workman blames his tools, but a workman with no tools must blame himself. Simply put, if a business doesn’t have the technology in place, then they will struggle to remain compliant. And gone are the days where this approach may be accepted by a regulator. 

Instead, they are now proactively encouraging businesses to adopt more advanced technology to comply with requirements. If regulators are capable of catching these compliance oversights, then the expectation is that firms should be too. A lack of technology can no longer be an excuse. Rather, it’s a point of failure. And those who fail to adopt it will be met with an awakening that is nothing if not rude.