The regulatory landscape for financial firms in the UK and the US is becoming increasingly complex, necessitating adaptability and thorough preparation. As the Financial Conduct Authority (FCA) and the Securities and Exchange Commission (SEC) introduce new regulations, maintaining compliance is crucial for safeguarding firms and upholding high standards.
This blog delves into the latest regulatory developments and offers insights on how firms can proactively manage these changes, especially in light of potential shifts due to the upcoming US election.
Key regulatory developments
- FCA: Operational resilience
The FCA has placed a strong emphasis on operational resilience, requiring firms to ensure they can prevent, adapt to, respond to, recover from, and learn from operational disruptions. Firms must identify their critical business services, set impact tolerances, and implement effective measures to stay within these tolerances.
This focus will require firms to enhance their risk management frameworks, invest in robust IT systems, and regularly test their resilience strategies. Collaboration between compliance teams and IT and operations departments is essential to ensure thorough preparedness for any disruptions.
- SEC: Outsourcing by investment advisers
The SEC’s proposed rule under the Investment Advisers Act of 1940 aims to prohibit registered investment advisers from outsourcing certain services or functions without meeting specific minimum requirements. This includes conducting due diligence before engaging service providers and periodically monitoring their performance.
Advisers will need to thoroughly vet and supervise vendors, which might necessitate renegotiating contract terms. This adds a layer of complexity to compliance programs, requiring detailed documentation and regular reviews.
- FinCEN: AML/CFT programme requirements
FinCEN proposes to include certain investment advisers in the definition of “financial institution” under the Bank Secrecy Act. This would mandate them to establish anti-money laundering (AML) and countering the financing of terrorism (CFT) programmes and report suspicious activities.
Investment advisers will need to integrate AML/CFT measures into their compliance frameworks, including updated policies, increased employee monitoring, and regular audits. This represents a significant shift for firms not previously covered by such regulations.
- SEC: Safeguarding advisory client assets
The SEC is proposing a new rule to enhance investor protections by redefining how advisers safeguard client assets. This rule would expand custody definitions to include digital assets and cryptocurrencies.
More investment advisers will be deemed to have custody of assets, necessitating additional compliance obligations. This will require updates to record-keeping and reporting processes, as well as enhanced cybersecurity measures.
- SEC: Cybersecurity risk management
The SEC is proposing new rules requiring registered investment advisers and investment companies to adopt and implement written cybersecurity policies. Advisers must report significant cybersecurity incidents and adhere to new recordkeeping requirements.
Firms will need to develop comprehensive cybersecurity policies, prepare for incident reporting, and maintain detailed records. This elevates the importance of cybersecurity within compliance programmes and necessitates ongoing vigilance.
Adapting to regulatory changes: Expert insights
Impact on firms: Both large and small firms will be affected by these regulations. While regulators often provide grace periods for compliance, the overall regulatory environment can make simultaneous implementation challenging. Firms should anticipate compliance dates ranging from late 2024 to late 2025.
Barriers for new entrants: Despite increasing regulations, demand for financial services continues to grow. While smaller firms may face challenges competing on price, they can differentiate themselves through personalised service and trust. Partnering with compliance service providers can help new firms overcome regulatory barriers.
Election influence: The 2024 US presidential election could significantly influence regulatory activity. A Republican administration might focus on rolling back regulations, while a Democratic administration would likely continue the current path of increasing regulation. This political uncertainty underscores the importance of flexibility and adaptability for compliance teams.
Proactive preparation strategies
To effectively prepare for these regulatory changes, firms should:
- Enhance compliance programmes: Regularly review and update compliance frameworks to align with new regulations. This includes bolstering risk management, cybersecurity, and AML/CFT measures.
- Invest in technology: Utilise compliance software, like Stand On The Right, to streamline processes, ensure accurate record-keeping, and facilitate regular audits.
- Engage with regulators: Stay informed about regulatory developments and participate in consultations to understand upcoming changes and influence policy decisions.
- Employee training: Provide ongoing training to ensure staff understand new requirements and can effectively implement compliance measures.
By taking these proactive steps, firms can navigate the evolving regulatory landscape, ensuring robust compliance and protecting their operations in both the UK and US markets.
For more detailed guidance and to see how Stand On The Right can help your firm prepare for these regulatory changes, get in touch and book a demo today!