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Adapting to a changing regulatory environment

Marsh helps financial institutions navigate evolving regulations in AI, digital assets and sustainability with agile compliance, governance and risk management.

The regulatory environment is expanding in both scope and complexity. In areas such as AI, sustainability, and digital asset oversight, financial institutions must navigate a wide range of regulations that govern their operations, provide customer protections, and influence risk management practices. A changing geoeconomic landscape, evolving societal expectations, and political changes are influencing the regulatory environment, and may require financial institutions to shift focus from prescriptive compliance to building flexible, agile, and proactive risk management capabilities.

As regulations evolve, the financial industry is navigating a complex web of compliance requirements that can significantly impact companies’ operational and strategic decisions. This potentially widespread impact underscores the importance of keeping up to date with changing regulatory requirements, understanding their implications for the organization, and updating processes or operations to remain compliant.

Understanding evolving regulatory expectations

Global financial challenges, technological advancements, and heightened concerns about customer privacy and data security have triggered changes in the regulatory landscape. As regulations evolve, financial institutions can face a number of complexities, including:

US regulatory recalibration: Recent shifts are intended to ease regulatory burdens and promote innovation, with an approach to supervision that emphasizes collaboration and risk-based oversight, signaling early signs of US regulatory recalibration. Capital, liquidity, and digital asset policies are in flux; however, there is continued scrutiny on specific areas, such as anti-money laundering violations, cybersecurity vulnerabilities, and discriminatory lending practices. Rather than a broad increase in regulatory scrutiny in the US, it is more accurate to characterize the current environment as one of regulatory recalibration, balancing a rollback of some stringent rules with ongoing vigilance in critical risk areas. For financial institutions, it will be important to monitor whether this promotes innovation and/or exposes new vulnerabilities.
Global regulatory fragmentation: Organizations that operate in multiple jurisdictions may need to contend with varying, and sometimes conflicting, regulatory standards. This fragmentation may lead to compliance challenges and organizations may seek sophisticated regulatory intelligence, flexible compliance frameworks, and active engagement with regulators worldwide, which can be especially pertinent for institutions seeking to expand operations internationally. Emerging areas with fragmented approaches include digital assets, AI, sustainability, and data privacy and sharing. For example, differing data privacy laws in the US and Europe may complicate cross-border data flows and compliance.
Emerging regulations on digital assets: The increased popularity of digital assets and cryptocurrencies has led to the reversal of policies that restricted US financial institutions from engaging in crypto-related activities and the introduction of key pieces of legislation that have altered the regulatory landscape for digital assets. Though there is jurisdictional divergence, a key regulatory focus emerging globally is regulating activities and associated risks rather than the underlying technology. This is narrowing the regulatory gap between digital asset risk and traditional financial sector standards, particularly in terms of custody, auditability, operational resilience, and governance. Financial institutions engaging in digital asset services should proactively manage these evolving regulations and adapt their operational frameworks accordingly. It is important to keep in mind that the regulatory and operational risks of third-party providers may impact your organization, underscoring the importance of comprehensive counterparty risk due diligence and ongoing vendor management.
Ongoing focus on governance: Despite some regulatory recalibration, US regulators continue to emphasize the need for financial institutions to have strong governance frameworks. This includes expectations for board oversight, risk management practices, and transparent decision-making processes, including the development and implementation of new technologies. Further, there is a growing regulatory focus on the connectivity between bank and non-bank financial institutions and potential contagion risk in the private credit market. Strategic collaboration models between financial institutions may prove a key area of innovation, but should also be contemplated in the context of risk governance.

Balancing compliance costs and operational efficiency

In today’s evolving regulatory environment, financial institutions face the dual challenge of meeting regulatory requirements while maintaining operational efficiency and fueling innovation. Rather than viewing compliance as a cost or constraint, forward-looking risk leaders recognize it as a strategic investment that, when optimized, can become a competitive advantage.

This requires a deliberate approach to balancing compliance investments — such as personnel, training, and technology — with scalable processes. Consider processes that balance regulatory compliance with operational efficiency. This may involve streamlining compliance processes, leveraging technology to enhance reporting capabilities, and foster a culture of risk awareness throughout the organization. Embedding risk management into the strategic planning process can allow institutions to identify and pursue growth initiatives with a clearer understanding of compliance implications and risk appetite.

By monitoring regulatory developments, implementing adaptive processes, and fostering cross-functional collaboration, you can help safeguard operations while leaving space for innovation and differentiation in an increasingly dynamic landscape.

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Article

Adapting to a changing regulatory environment

Understanding evolving regulatory expectations

Balancing compliance costs and operational efficiency

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Adapting to a changing regulatory environment

Understanding evolving regulatory expectations

Balancing compliance costs and operational efficiency

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Navigating a new operating architecture: How financial institutions can manage interconnected risks

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