Each year we set out to uncover how financial institutions deal with constant regulatory changes and challenges through our Cross-border Compliance Survey.
This time our survey saw participants from wealth management, asset management, retail and corporate banking—from both front-office and legal and compliance roles—give insight into the landscape and any obstacles they may face in their daily tasks.
The results of our 2023 survey are found in our Cross-border Compliance Black Book 2024, which is summarised in the article below.
Understanding cross-border compliance challenges
Offering banking and investment services to clients on a cross-border basis has become inevitable for many financial institutions, however, this global interconnectivity also means navigating complex compliance requirements. The very nature of this business makes it difficult to ensure regulatory compliance, as it is constantly evolving and fragmented across different jurisdictions.
Cross-border challenges that financial institutions still face include several key ones such as:
- Difficult-to-understand regulatory requirements in a foreign market
- Keeping pace with rapidly changing regulatory landscape across multiple countries
- Resource constraints and technological hurdles
The Cross-border Compliance Black Book 2024 offers a more detailed analysis of these challenges and others, and in the next sections of this publication we will take a look at the specific challenges faced by different stakeholders in the financial industry.
Cross-border approaches across financial industries
The following sections will delve deeper into the specific challenges faced by different sectors within the financial services industry, such as wealth management, asset management and corporate and investment banking. Each business line has its own distinctive products and services they offer to clients which means they each navigate different compliance requirements and challenges.
Wealth management
Clients of a wealth management firm often entail high-net-worth individuals and families with investment assets across multiple jurisdictions. Therefore, wealth managers are often confronted with navigating restrictions for various markets in addition to assessing tax implications of their clients’ investments.
In the survey, 23% of wealth management legal and compliance teams said one of their main challenges when supporting their front-office colleagues was keeping up with restrictions in all the different markets. Similarly, 50% of front office respondents said their main challenge is that regulatory restrictions are often difficult to understand, and hence require support from legal and compliance.
When asked what tools would support their day to day activities, 75% of wealth management legal and compliance roles said that smart cross-border overviews would support their daily operations. Equipping legal and compliance teams with a smart tool that provides instant access to the information needed across jurisdictions would significantly reduce the time spent researching, interpreting and visualising complex legal text.
23% of legal and compliance teams also said they would like monitoring reports of cross-border activities conducted by client-facing employees. Automated reports that track and monitor cross-border activities can be a valuable tool for identifying potential compliance risks. These reports can not only increase an organisation’s cross-border control framework, it can also significantly reduce the resources wealth managers are investing into compliance training (read more about the requirements on cross-border training in this EY article).
Asset management
Asset management firms face a unique set of challenges in navigating cross-border compliance, particularly for their sales and distribution teams. Even when dealing with sophisticated institutional investors, sales and distribution teams must comply with a complex web of regulatory requirements that vary by jurisdiction.
For instance, in ensuring that their discretionary portfolios contain only permissible and tax-efficient products, asset managers must navigate product and tax requirements specific to each country. In our cross-border compliance survey, 38% of the participants said that tax ratings on investment product levels are embedded in their portfolio management systems.
By embedding tax ratings directly within their portfolio management systems, sales and distribution teams as well as portfolio managers can quickly identify tax-efficient investment products that are compliant with regulations in the client or investor’s jurisdiction. This reduces the risk of offering products that could trigger unexpected tax liabilities for clients. In addition, the integration into their systems streamlines workflows and saves time for asset managers.
When asked about the tools and tech solutions they use to obtain cross-border guidance and advice in their daily operations, 20% of legal and compliance teams in asset management said they use heat-maps or similar executive overviews to strategically monitor cross-border fund distribution restrictions.
Corporate and investment banking
While corporate and investment banks may seem less affected by increasing regulatory scrutiny around consumer protection—compared to their other counterparts in the financial industry—new customer behaviour and the need to stay competitive against FinTechs and non-financial organisations requires them to invest heavily in innovative technologies.
A key trend within the corporate and investment banking industry is the shift by clients to online channels for their borrowing and investment needs. Also, clients are increasingly utilising video conferencing and other digital platforms to access financial services, rather than traditional in-person banking methods. While these non-travel cross-border activities come with similar regulatory risks, they are much more difficult to detect by control functions compared to travel-related cross-border activities.
The 2023 survey highlights this hurdle, as 28% of legal and compliance teams from this sector stated that keeping up with regulatory updates in the different markets is still a significant challenge for them. This emphasises the critical need for the implementation of automated solutions within financial institutions, to stay constantly updated about evolving regulations across jurisdictions where they offer digital and/or physical financial services.
Measuring regulatory complexity in cross-border scenarios
Over the years, being able to easily understand regulatory complexity for a given jurisdiction remains a challenge. Various approaches often rely on parameters such as the volume of legal text, the number of rules for a given regulation, or the number of regulatory updates in a given year.
These metrics offer some insight, but they do not necessarily reflect the true complexity of specific business activities of financial institutions. Introducing the Apiax Regulatory Complexity Index (RCI), a tool that uncovers the regulatory complexity of financial services activities across 150+ jurisdictions.
The RCI calculates an absolute number and score that is based on two crucial factors that directly impact the ease or difficulty of doing business: 1) the country in question, and 2) the service activity. By considering both factors, the RCI provides a better sense of a country’s regulatory environment for specific services, which allows financial institutions to compare various countries and various service offerings.
Read more about Apiax’s Regulatory Complexity Index in the Cross-border Black Book 2024 or join the waiting list to be one of the first to test the tool when it becomes publicly available on our website.
Smart cross-border compliance solutions
A recurring theme noted across respondents from the various financial sectors in our survey was the yearning for smart automated compliance solutions to navigate cross-border restrictions. Manually reading through pages of legal text and staying aware of ever-changing regulations across jurisdictions is simply inefficient and unsustainable.
In response to this growing need, Apiax offers Embedded Compliance to financial institutions, equipping them with access to cross-border rules for over 190 countries. This eliminates the need for manual research and ensures financial institutions have the latest compliance rules in an easy-to-understand format right in the tools they already use.
Additionally, the Embedded Compliance solutions offer a range of features designed to simplify cross-border compliance, such as an AI powered ChatBot that provides a user friendly interface to have a dynamic conversation, making it easy to clarify even the most complex offering scenarios.
By embracing innovative solutions like Apiax, financial institutions can confidently and efficiently navigate cross-border regulations and the complexities of the global marketplace.
Conclusion
The challenges faced by the financial services industry in offering its services on a cross-border basis has been a persistent challenge to navigate, as highlighted in our Cross-border Compliance Black Book 2024.
While each sector—wealth management, asset management, corporate and investment banking—operates with distinct service offerings, the core issues share a common theme. From keeping up with constant regulatory changes to ensuring adherence across different jurisdictions, the burden on both front-office legal and compliance teams is significant.
The survey revealed that these teams yearn for new compliance solutions and many are eager for the implementation of innovative tools such as smart cross-border overviews that provide instant access to restrictions across jurisdictions.
If you’d like to learn more about Apiax cross-border compliance solutions, feel free to reach out to us.