2023 FINTECH PREDICTIONS AND GLOBAL COMPLIANCE OUTLOOK

The resilience of financial markets was really put to the test in 2022, when many of the risks outlined at the beginning of the year materialized. Inflation fears were confirmed – expected to reach 8.8% by the end of 2022. The crypto market was hit hard by the collapse of one of its leading players. The British government saw three different prime ministers. The devastation of the war between Russia and Ukraine rippled through Europe, triggering widespread supply chain problems and driving up energy prices.

In the financial industry, Wall Street was hit with $2 billion in fines for using off-channel communications channels, in a regulatory crackdown by the SEC that is set to continue. The industry faces increasing market and commercial pressures – which in turn can put undue pressure on the compliance function, so here, CEO and co-founder of compliance technology and data analytics firm SteelEye, Matt Smith, presents its predictions for the year ahead and advises firms on how to deal with these impending challenges.

Prediction 1: Regulators increase pressure

Regulators worldwide were notably more confident in 2022. FCA fines for the year so far have reached £59,574,925 and in the US the SEC has brought 760 enforcement actions, up 9% from 2021. This amounts to an eye-watering $6.4 billion — an all-time record — well above 2021’s $3.9 billion in fines.

While Gurbir S. Grewal, Director of the Division of Enforcement at the SEC, said they “don’t expect to break these records and set new ones every year because we expect behavior to change,” we expect 2023 to be another enforcement-focused year both in the United Kingdom and the United States.

At a recent conference, a senior rulemaker from the FCA said, “fines are very powerful agents of change and a key focus” and “no stone will be left unturned.” This, combined with the SEC’s strong stance on enforcement action, signals a clear drive on both sides of the pond to crack down on financial misconduct and market manipulation.

With regulators using powerful data analysis tools to more accurately identify wrongdoing among the companies they regulate, more firms are at risk of scrutiny. Investment in technology is key for businesses to ensure they can identify risks before the regulator comes knocking. As such, we expect many players to improve their skills and tools in 2023.

Those who believe this is a concern for the future need to remember that regulators have the power to act on historical breaches. This year alone, Citi was fined £12.5m for failings that took place between 2016 and 2018. Failure to move now could lead to fines for years to come.

Another area we expect more regulatory action around is market manipulation on social media. With numerous examples of what we call “modern” market manipulation using digital platforms, such as Elon Musk’s numerous share prices influencing Twitter updates, we expect stricter regulatory attention around social media in 2023.

Prediction 2: The communication breakdown will continue

In 2022, the Wall Street giants were fined billions of dollars for failing to control and monitor communications that took place on unauthorized communication channels. WhatsApp and other digital platforms have dominated headlines over the past 12 months as regulators crack down on communications compliance.

We expect this metric to continue into 2023, as data from earlier this year indicates that only 15% of firms are currently monitoring WhatsApp. Indeed, it is likely that attention will trickle down and that smaller firms will come into the spotlight, as evidenced by the SEC’s warning to broker-dealers and asset managers that they would be “well served by self-reporting and self-correction” of any deficiencies.”

Banning platforms like WhatsApp is clearly not the solution. We need industry-wide change where financial services firms of all sizes understand the serious risks of leaving communications unattended. It is reassuring that many companies are already investing in or starting projects to capture more e-communication channels. In fact, over the past 6 months, requests have skyrocketed among communication capture and archiving vendors for WhatsApp and iMessage compliance solutions.

Regulators are making it clear that companies can no longer bury their heads in the sand. So by 2023, it is highly likely that we will see the proportion of firms monitoring channels such as WhatsApp grow, and that the use of eComms monitoring technology will increase across the board. At the same time, some argue that challenges in balancing data capture and privacy will lead to the death of “Bring Your Own Device” (BYOD) policies, and that carrying two devices, one personal and one business phone, will once again become the norm.

Prediction 3: The voice will be in the spotlight

Voice capture is not a regulatory requirement in the US today as it is in Europe, but it is clear that it will play an increasingly important role in communications monitoring, with so many virtual meetings taking place in place of in-person interaction and the rise of sharing voice memos at work. Analyzing voting data is fundamental to detecting behavioral risk and market manipulation such as insider trading.

Regulators will eventually add voice to requirements for monitoring and archiving. Moving forward, many US firms are proactively self-regulating and investing in voice monitoring and transcription to improve monitoring. In 2023, we expect this to continue and that voice monitoring will accelerate.

Prediction 4: A catalyst for crypto regulation

While there has been a rapidly growing acceptance of cryptocurrency in recent years, the industry has been rocked by the recent FTX collapse, again highlighting how volatile the space is. It is a fragile market and represents a significant systemic risk, especially as the fall of one token significantly affects the entire market.

Crypto regulation is a responsibility that must be taken seriously by regulators worldwide, and we welcome debate about the future of the market. However, leaving crypto unregulated would be a serious mistake. With the uptake of crypto among private investors and financial institutions (especially in asset management), the ripple effects of simply letting “crypto burn” as some have argued, would have far-reaching consequences.

We believe we will see a regulatory accounting within the next 12 months. We envision a world where regulation is sufficiently sophisticated to protect retail investors and make crypto a more stable investment for financial institutions.

Prediction 5: Total solutions and market consolidation

As the regulatory landscape becomes increasingly complex, the market is gradually shifting towards holistic compliance practices. The benefits of covering multiple risk areas and overlaying multidimensional data to increase intelligence, speed up processes and reduce false positives are simply undeniable.

The move towards a holistic approach is evident in the industry partnerships that have emerged in recent years, where two vendors offering complementary solutions have come together – as we have seen with many communications and trade monitoring vendors.

We expect this type of market consolidation to continue in 2023 as the financial companies themselves begin to demand comprehensive data management. However, it is important to remember that a commercial partnership does not necessarily mean that processes are holistic. The key is to look for compliance solutions that natively aggregate trading activity, communications, market data and other key data sources.

Prediction 6: Fintech funding outlook – B2B comes into focus

After a decade of growth and record fundraising in fintech, with fintech companies accounting for 21 of the UK’s 44 unicorns today, we predict that by 2023 we will see this slow down to a much more modest pace. Data from investment manager Finch Capital shows that funding reached $6 billion in 2020 and $19 billion in 2021, but we’ve seen a 25% drop in 2022 so far. The number of new fintech firms founded is down 85% since 2020. Market consolidation continues and fintech M&A increased in the first half of 2022, with 591 recorded deals. So it is possible that we are now on the other side of the fintech sector’s “boom”.

Of course, the UK’s rich fintech ecosystem still offers exciting investment opportunities and there is no shortage of available capital. However, in the current economic environment, investors will be much more careful about where, when and how much they invest. The higher cost of capital combined with a generally tougher business environment will force some fintech firms out of the market, as we have already seen, creating a smaller sector. Those who manage to do so will be stronger and more resilient.

Before the pandemic, neo-banks and consumer-centric fintech companies dominated the conversation. Now, amid recession fears and after a period in which fintech values ​​fell faster than any other technology vertical, technology that powers back office and control functions is coming into focus. Tightening budgets and performance scrutiny are driving this trend, and the financial services industry is under pressure to improve operational efficiency while proving it has learned from past mistakes.

However, as the financial landscape becomes increasingly digital, so do the risks of fraud, cybercrime, money laundering, data breaches and market manipulation. In response, the RegTech market will continue to grow and evolve to meet the challenges of an increasingly technology-driven economy. SteelEye’s 2022 State of Financial Services Compliance report found that nearly half of businesses (44%) plan to invest more in RegTech solutions over the next year.