Regulatory change management is an ongoing challenge for financial institutions in North America.
As widespread vaccination continues to roll-out and the world bounces back from COVID-19, the pace of regulatory change is accelerating across all regions.
In the wake of the FinCEN Files, regulators in North America are increasingly focused on AML reform and implementing a more holistic, risk-based approach to combat financial crime. Data privacy is also growing in importance with proposed privacy bills in 26 states to date, while ESG and sustainable finance is also proving to be very topical amongst US regulators and supervisors.
1. US AML Regulatory Reform – AML and Corporate Transparency Acts
The Bank Secrecy Act (BSA) and AML/CTF (Anti-Money Laundering and Counter Terrorist Financing) regulatory landscape in the US is set to change dramatically over the next year with the introduction of the new Anti-Money Laundering Act of 2020 (Act) and Corporate Transparency Act.
The new legislation lays the foundations for a more holistic, risk-based approach to combat financial crime. It actively encourages technological innovation and the adoption of new technology by financial institutions (FIs) to more effectively counter money laundering and the financing of terrorism.
Furthermore, the Act requires millions of business entities to disclose beneficial ownership information to the federal government in the form of the Corporate Transparency Act. This is intended to close a gap in the current regulatory regime, whereby individuals can form corporations and shell companies to obscure sources of wealth.
It also mandates the creation of a government-maintained registry of beneficial owners of certain entities formed or registered to do business in the US. FinCEN is obliged to promulgate these regulations by December 26th, 2021.
2. Data Privacy – The Patchwork Paradox
Privacy has been a simmering issue in the United States recently. With little federal action, thus far, states have really begun to turn up the heat with their legislative activity. To date, 26 states have proposed privacy bills, with bills in Connecticut, New Jersey, and Nevada actively working through their legislative processes.
This is not an ideal scenario from an industry compliance perspective – ultimately, we do not want to have 52 laws, each with different obligations for banks and financial institutions to comply with. There does, however, appear to be significant political will on both sides of the house at a federal level to see privacy legislation progress, though what it will contain remains a matter of intense debate.
Certainly, there is huge potential over the coming year for a major shift in the US data privacy landscape. For the moment, the three certainties we have are:
- The Virginia Consumer Data Protection Act (VCDPA);
- The California Privacy Rights Act (CPRA) and;
- Colorado with the Colorado Privacy Act (CPA)
All three acts are set to be operative from 2023, specifically January 2023 in Virginia and California and July 2023 in Colorado. The CPRA will then be enforced from July 2023. It is important to note that the CPRA will apply to data gathered or collected from January 2022. Financial institutions should bear this in mind when putting their controls in place to comply with the new requirements.
3. ESG and Sustainable Finance
Sustainable investing has exploded in recent years in the US. According to a recent biennial survey of sustainable investing in the US, the total US-domiciled assets under management using sustainable-investing strategies grew 42 percent from $12 trillion at the start of 2018 to $17.1 trillion at the start of 2020.
At present, there is legislation on the horizon in the US, which has yet to be implemented. However, ESG and sustainable finance is proving to be hugely topical amongst US regulators and supervisors.
The Securities Exchange Commission (SEC), in a recent statement, signaled their intention to create an effective ESG disclosure system so companies can provide investors with information they need in a cost-effective manner. Meanwhile, the New York Department of Financial Services (NYDFS), set forth climate-related expectations for New York-regulated financial institutions in late 2020.
These actions reflect a renewed focus by regulators on climate risk-related regulations and supervisory guidance, as well as rising expectations from clients, investors, and other stakeholders. With the Biden administration re-signing up to the Paris agreement, this demonstrates a massive step forward for the US in joining the ‘green global alignment’ on addressing climate change.
As we move into the second half of 2021 and look ahead to 2024, it is clear that financial institutions are operating in an uncertain and volatile environment with significant regulatory change on the horizon. In fact, nearly one in five FIs (19%) say compliance remains the biggest risk to the business.
Financial firms need to stay abreast of these developments and lay the groundwork for effective regulatory change management with the right combination of skills, quality data and innovative technology.
To learn more about what lies ahead on the regulatory roadmap for US and Canadian financial services firms, download our North American Regulatory Outlook whitepaper to read the full report.