New approaches by regulators in effort to protect consumers from frauds, failures and fads

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A new report suggests regulators across the globe are changing their focus, moving from an emphasis on 'aggressive enforcement' towards a more proactive approach designed to foster market stability, build operational resilience and protect vulnerable consumers.

The report, published today by Herbert Smith Freehills' global Financial Services Regulatory team, reveals that regulators in the UK, Australia, Hong Kong and Singapore are likely to increase the regulatory burden on firms in 2023 to proactively prevent harms from happening. In a direct response to the cost of living crisis it notes that financial institutions can expect regulators to use a range of new powers and legislation to protect customers from scams and threats to cyber security. It also suggests that, as financial institutions grapple with new technology and commitments to energy transition, tension will increase as they seek to comply with developing expectations.

The Global FSR Outlook highlights how, as operational resilience frameworks mature, regulators are increasingly exploring ways to oversee third-party technology suppliers and wrestling with managing the risks from the financial sector's dependence on them. However, the approach may differ across jurisdictions, with guidance in Hong Kong focusing on access to data, whilst in Australia new standards are being proposed for service provider management and, in the UK, moves are being made for firms to establish and communicate their tolerance levels, ensuring consumer expectations are better managed.

"There is no longer much doubt that we are living in turbulent times and it is precisely when consumers face economic uncertainty that we are more likely to see enforcement actions designed to protect them from frauds, failures and fads. Yet this isn't really about regulators taking a more muscular approach; it's about using the full breadth of their powers and impending legislation to provide a safety harness for consumers in a way that protects them and yet still encourage innovation in financial service offerings," says Karen Anderson, partner in Herbert Smith Freehills' global financial services regulatory practice.

The report goes on to highlight key issues likely to impact financial institutions over the next 12 months. Amongst these are:

crypto conundrums: how, with the latest 'crypto winter' expected to continue through 2023, regulators around the world now have increasing political licence to intervene. It also suggests that regulators and financial institutions are more ready to engage with the potential of blockchain technology
data deep-dive: as the move towards digital transformation has intensified, regulators have begun to staff data science teams, enabling them to better ingest and analyse a higher volume of data. The creation of these teams will also allow regulators to turn that information into actionable insights
social sustainability: progress defining reporting metrics for climate-related factors had, to date, not been matched in relation to social impact. However, recent dynamic global social change is pushing social transition and social sustainability to the fore. As 2023 progresses, regulators are likely to take steps to drive more positive social outcomes
energy transition: regulatory pressure is expected to increase, with the focus on climate change broadening out to a wider set of environmental issues
fraud by fad: moves are afoot to ensure victims of investment fraud can pursue the institutions facilitating them, even if banks or financial institutions are unaware of the schemes using their systems.

Anderson concludes: "National and global regulators are carefully monitoring the impact of geopolitical tensions, energy shocks and high inflation, meaning that firms can expect to see more policy decisions aimed at building resilience. Co-ordination of these efforts is essential to tackling the current risks in global markets effectively. Yet whilst a collective approach is necessary to stave off those headwinds, evidence suggests a more protectionist approach is emerging as individual governments drive central banks and regulators to batten down the hatches and protect [or prioritise] their own economies."

The report can be downloaded here.

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