The Global FSR Outlook, published by Herbert Smith Freehills’ global financial services regulatory team, shows that regulators in the UK, Australia, Hong Kong and Singapore are likely to increase the regulatory burden on firms in 2023 to proactively prevent harms from happening.

In terms of the current cost-of-living crisis, the report notes that financial institutions can expect regulators to use a range of new powers and legislation to protect customers from scams and threats to cyber security. It also suggests that, as financial institutions grapple with new technology and commitments to energy transition, tension will increase as they seek to comply with developing expectations.

According to the report, as operational resilience frameworks mature, regulators are increasingly exploring ways to oversee third-party technology suppliers and wrestling with managing the risks from the financial sector’s dependence on them.

In Australia, however, new standards are being proposed for service provider management, said Karen Anderson, partner in Herbert Smith Freehills’ global financial services regulatory practice.

“There is no longer much doubt that we are living in turbulent times and it is precisely when consumers face economic uncertainty that we are more likely to see enforcement actions designed to protect them from frauds, failures and fads,” she said.  

“Yet this isn’t really about regulators taking a more muscular approach; it’s about using the full breadth of their powers and impending legislation to provide a safety harness for consumers in a way that protects them and yet still encourages innovation in financial service offerings.”

There are a number of key issues likely to impact financial institutions over the next year, including crypto, data, sustainability, energy and digitalisation.

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In terms of crypto concerns, a consultation on regulating virtual-asset custodians and service providers stalled with the change in the Australian government, with the Treasury announcing that it would instead conduct a “token mapping” exercise to identify how crypto assets and related services should be regulated.

According to the report, “a consultation paper will be issued by the end of 2022, with the work to continue in 2023”.

“Treasury also plans to progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third-party custodians of digital assets and provide additional consumer safeguards. Currently, crypto-asset exchanges are regulated only in relation to anti-money laundering and, additionally, where there are certain retail products that have crypto as an underlying. The Reserve Bank of Australia is also piloting a wholesale CBDC and exploring the use cases for a retail CBDC,” the report stated.

The report also discusses the state of ESG — and notes there has been a shift from ensuring transparency through disclosures to integrating ESG in firms’ investment decision-making processes.

Regulators are also becoming increasingly concerned with big tech firms’ ability to “use their online distribution advantage to crowd out competitors” — and regulators’ operations are therefore modernising to match the firms they supervise.

“As firms’ operations have digitised and become more complex, so too have the demands on their supervisory bodies. Regulators have begun to staff data science teams to enable them to ingest and analyse a higher volume of data from firms and turn that information into actionable insight,” the report stated.

“This is likely to involve changes to the way that firms report regulatory data — the UK’s regulators are working on a joint program to ‘transform’ data collection and regulatory reporting, targeted for implementation to begin in June 2023. Likewise, Australia’s financial services regulator is increasing its experimentation with and operationalisation of new datasets, technologies and analytic techniques to enhance its supervisory activities.”

And moving forward, Ms Anderson concluded, an increasingly “protectionist” approach will be needed for individual economies to thrive and remain intact.

“National and global regulators are carefully monitoring the impact of geopolitical tensions, energy shocks and high inflation, meaning that firms can expect to see more policy decisions aimed at building resilience. Co-ordination of these efforts is essential to tackling the current risks in global markets effectively,” she said.

“Yet whilst a collective approach is necessary to stave off those headwinds, evidence suggests a more protectionist approach is emerging as individual governments drive central banks and regulators to batten down the hatches and protect [or prioritise] their own economies.”