By Ludo Rubin, Director of Product MarketingThe global financial crisis (GFC) of 2008 was the catalyst for large-scale financial regulatory reform. This period of extreme stress in global markets exposed major weaknesses in the financial data regulatory framework. What followed was over a decade of new laws and regulations, intense enforcement, and severe penalties for non-compliance. Partner this changing landscape with simultaneous, rapid progress in technology, and it is easy to see why both businesses and compliance teams tasked with ensuring financial data security are struggling to keep up.
And this struggle is not showing any signs of slowing down. While organizations are still working hard to comply with the regulations being enforced post-GFC, regulators are already focusing on unaddressed and emerging challenges such as an increased focus on data privacy, greater regulatory scrutiny of third-party vendors, a focus on emerging technologies, and the need for more cross-border cooperation.
There is a lot to be concerned about. GDPR fines alone have amounted to 2.5 billion Euros over the past 5 years. In 2022 companies were fined 376 million Euros for having insufficient technological and organizational measures to ensure information security and 1.2 billion Euros for non-compliance with general data processing principles. The costs for violations are high, and they are not just limited to financial penalties – reputational and legal risks are just as onerous.
In this blog we will look at the biggest risks related to collecting and maintaining financial data, as well as challenges faced by companies on the road to financial data security and compliance.
Compliance Risks for Financial Data
The risks to companies for violating financial compliance laws and regulations are not limited to just financial penalties. They include regulatory, reputational, and legal risks.
Regulatory risks refer to the possibility of penalties and fines issued by regulatory bodies or government agencies for failing to comply with financial data laws. As we have seen, these violations can result in hefty fines, but they can also include other serious consequences such as loss of license or sanctions.
A famous example of this was the Cambridge Analytica scandal of 2018 when a well-known political consulting firm was found to have lifted personal data from millions of Facebook users without their consent. They subsequently used this information for targeted political advertising. As a result of their actions Cambridge Analytica lost its license from the UK’s Information Commissioner’s Office (ICO) and was forced to shut down.
Reputational risks are related to the potential damage that occurs to a company or brand’s reputation as a result of violations of financial regulations. This can lead to a loss of customer and investor confidence, and can even affect the price of shares and market value of the company. Reputational damage can take years to recover from. For example, while Facebook obviously didn’t have to shut down because of the Cambridge Analytica scandal, its reputation was severely damaged. This event heralded in a somewhat hostile relationship between Facebook and its users who have an ongoing sense of mistrust in the platform and even Mark Zuckerberg himself.
Legal risks refer to the potential for legal action taken by customers, investors, and regulatory bodies for breaches of financial compliance.
One of the largest legal actions taken against a company for a data breach were the numerous lawsuits from customers and regulators against Equifax following a severe data breach in 2017. The breach, which was caused by a vulnerability in their web application, exposed the personal information of 147 million customers. Equifax finally agreed to a settlement with all parties totaling an amount of $700 million – $300 million in compensation to affected customers, as well as an additional $175 million to states and territories. The company was also required to spend $1 billion over five years to enhance its data security practices and implement additional measures to protect customer data.
Challenges in Maintaining Financial Data Compliance
What are some of the major challenges that organizations are facing in the battle to comply with financial data regulations?
- Keeping up with the changes in regulations: As already mentioned, the regulatory landscape has changed considerably since 2008, and more changes are anticipated. Companies need to ensure that they stay updated on new requirements and adjust their policies and procedures accordingly.
- Combating cyber attacks: Financial data is particularly sensitive and has great potential value, making it a prime target of cyber attacks. Ensuring cybersecurity methods keep up with the changing strategies of cyber villains is critical for compliance in financial services
- Safeguarding sensitive data: Protecting the privacy of financial data extends beyond cybersecurity. From how data is collected, to how it is shared and stored, there are an abundance of regulatory frameworks for companies to adhere to.
- Finding the right technology: While technology is a company’s greatest strength, it can also be its greatest weakness. Organizations managing financial data have to make sure their technology platforms can address all the issues – risk management, security, consumer protection, and profitability.
- Controlling compliance costs: Managing financial data compliance, particularly bank compliance requirements, requires investment in staff, technology, and time, and these costs are rising dramatically.
Strategies for Effective Financial Data Compliance
What can organizations do to make sure they meet these challenges?
It starts with conducting a comprehensive risk assessment and audit of financial data processes. While regulatory standards for financial data compliance are well-defined and businesses have undoubtedly been trying to ensure they are doing things right, there are always hidden risk factors and it is important to identify these and other threats so a plan can be put in place to mitigate them. These audits need to be done regularly in order to keep up with the changing regulatory and threat landscape.
It is critical that companies establish formal policies and procedures to ensure compliance with all the regulatory frameworks that affect them, and that responsibility for the understanding and implementation of these are owned not just by the compliance team but by everyone in the organization – particularly leaders. Getting buy-in to the highest standards of compliance from everyone in the company is half the battle.
Ensuring that roles and responsibilities for financial data compliance accountability are clear is the next critical step for effective data compliance. Each department, team, and individual in the organization needs to know what is expected of them, how they are being monitored, and what can happen if these rules are violated.
Communicating requirements and ensuring clear lines of accountability are critical, but so is providing the appropriate training. It is not enough for employees to know what is expected of them if they don’t know how to do it. Investing in ongoing training of all employees is an important part of meeting compliance challenges.
Finally, make sure you have invested in the right software to best help you manage compliance issues. Manually managing every risk factor and potential error is an impossibility, and there is no room for mistakes. Your compliance management software should be customizable to your organization’s obligations, should allow you to manage compliance across multiple locations and platforms, and should easily generate real-time reports from a unified dashboard to allow for proper monitoring.
Financial Data Compliance: The Risk That Cannot Be Ignored
There is a lot at stake in the world of financial data compliance – companies rise and fall based on the way in which they collect and manage sensitive data. In this era of hypervigilance and strict enforcement, it is critical that businesses recognize the challenges they face in meeting all the regulatory requirements.
Undoubtedly the technology used to manage compliance processes is critical to the success of meeting banking compliance regulations and financial data responsibilities. LeapXpert offers a fully integrated platform that helps you monitor professional communication between employees and customers across personal and work devices and different messaging applications. Ensure regulatory compliance and protect your data across communication channels – book a demo today.
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