As we head into 2024, there's much discussion about what will happen in the financial services sector. From my vantage point, 2024 will continue the financial services sector’s ongoing effort to protect consumers. Whether because of the economy or because it’s the “right thing,” people will be the top priority. The Securities and Exchange Commission in particular has clearly demonstrated that it will act aggressively on their behalf. As such, financial services firms would be wise to ensure the right tools and practices are in place to help safeguard their own businesses from greater scrutiny.
In 2023, we saw significant fines for financial services organizations that stepped outside the lines. Fines reached the second highest amount of penalties ever. In its latest fiscal year, the SEC filed 784 enforcement actions – a 3% increase over the prior year and an 8% increase over the 2021 fiscal year. Additionally, it obtained orders for nearly $5 billion in financial remedies and distributed nearly $1 billion to harmed investors. These fines are only going to increase in 2024 – if companies and their employees don’t fully embrace changes that bring their practices in line with expectations.
But investment firms aren’t the only ones to feel the SEC’s wrath. The agency fined two ratings agencies for engaging in off-channel communications, and also charged social media influencers who falsely presented themselves as successful traders. With these moves, the SEC demonstrated that it's not afraid to take on a more active role in consumer protection outside of its normal remit than it has in the past. Expect to see an even more far-reaching and fervent pursuit of violators in the coming year – particularly with the tight deadlines for implementation of a slew of new rules.
So what are those rules? Commissioner Mark Uyeda outlined the proposed and final rules when speaking at the National Society of Compliance Professionals conference in October. In that speech, Uyeda noted, “The volume and breadth of these rules is staggering, but there are more proposed rules in the pipeline affecting asset managers and financial advisors.”
This will make 2024 a busy year for compliance professionals. Not only will they be responsible for understanding new rules, but they will also have to explain those rules to their teams and ensure that everyone follows them. This will place increasing stress on compliance leaders, who will have to continue stretching their teams, or argue for more budget to decrease turnover or increase staff. Additionally, we will see an increasing reliance on compliance software and AI deployed to detect potential compliance violations.
There will be no real surprises on the examination front — just a continuation of the regulatory focus on marketing practices and record keeping. For example, the OCC has stated that it will be taking a more proactive approach toward compliance related to the Telephone Consumer Protection Act. And the Marketing Rule and Reg BI have been cited as priorities for the SEC’s 2024 examinations.
Big questions continue to swirl around AI. With the massive surge in AI-based applications and use cases over the past 12 months, it remains to be seen how financial services and their governing bodies will adapt. If the past is any indication, it will be a long, slow boil. Yet visionary firms see AI’s potential and are trying to forge ahead. This is a tension that likely will not be resolved in 2024.
Here’s what we do know. The Biden Administration’s executive order on AI set the tone for increased regulation. That followed the SEC’s proposed rule on predictive analytics, which has been viewed as overly conservative and in some ways impossible to adhere to as written.
Taken together, this does not mean there are no positive, productive use cases for AI. It just means AI systems that leverage consumer information could face challenges in the future. Vendors serving financial services must be mindful of this, offering responsible AI-based solutions that fit a market need while protecting consumer data and interactions at all costs. This can be done. It just requires the right expertise in both financial services regulations and AI – plus some forethought. Those firms that pick the right partners and make wise bets on AI will ultimately differentiate themselves.
With all of this in mind, you may be starting to panic. But it’s not too late. Excellent tools are already on the market that can help address new and existing regulations, as well as the challenges posed by AI. 2024 is shaping up to be the most strenuous year yet, and the question is: Will you take advantage of those solutions?
Bill Simpson is director of compliance at Hearsay Systems.
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