Over the past few years, a major trend in banking has been the introduction of banking in the cloud, as more and more financial processes happen online. This digitalization brings new issues and challenges, as companies need higher levels of cybersecurity and more safeguards for their customers’ personal information.
These combine to force onerous compliance needs on companies. Governments routinely pass in-depth data protection bills that mandate businesses to implement new and improved controls to protect and use data transparently. With the U.S. lacking federal data privacy and protection standards, financial organizations big and small face the complicated issue of how to satisfy different state regulations. The scale and consequences of that problems are multiplied exponentially for international companies faced with different regulations in different countries.
Financial institutions have always had heavy regulations, but data regulatory compliance adds another dimension to the matter in 2022. Here’s a full exploration of the financial regulatory compliance landscape in 2022.
What is financial regulatory compliance?
Financial regulatory compliance is an all-encapsulating term for financial services and banks adhering to any and all local laws and regulations wherever they operate. While data protection regulations are not the entirety of the full scope of compliance in the financial services industry, they are a key part.
Different countries have different regulations regarding the data of their citizens/the data non governmental organizations process and store, which leads to various requirements for financial institutions, particularly those with an international presence.
If a bank operates in, for example, Turkey and China, among other places, a one-size-fits-all approach to data protection would not work, as Turkey and China define data compliance differently. That means that financial regulatory compliance is a living, breathing entity that companies need to constantly keep track of.
The entire scope of financial regulatory compliance is not simply logistics either, as there are often real stakes. In 2014, for example, banks worldwide paid an estimated $65 billion in regulatory fines and penalties, per an Infosys report. While regulations cover a wide range of financial-related issues and not just data protection, managing any individual aspect of regulation sets standards that reverberate throughout an entire organization, particularly for a legal issue that has come to the forefront in recent years.
While this article is dealing more with the overall sphere of regulatory compliance for financial institutions, you can find more information about country specific laws and breakdowns in our free research here.
Laws that regulate financial compliance
Laws that regulate financial technology compliance are not as numerous as general PII-related laws, but countries trying to stay ahead of the curve have adopted industry-specific regulations. This is particularly true in the MENA market and outlier countries like India and Switzerland.
Achieving financial information technology regulatory compliance often rests not only in focusing on general regulations that cover data protection across sectors, but also in industry-specific ones. Laws for regulatory financial technology compliance include China’s Announcement of the People’s Bank of China No. 7, India’s RBI Regulation 2017-18/153, Russia’s Federal Law No, 161-FZ On the National Payment System, and Turkey’s Code on Payment and Security Settlement Systems, Payment Services and Electronic Money Institutions numbered 6493.
These four laws, possibly the most influential in the financial sphere, take a strong stance on defining compliance in financial services. Each, at the least, requires data localization, and Turkey, China, and India have all had quarrels with companies over violations of respective legislation. Mastercard is in the midst of trying to resume operations within India, and China has taken a long-term approach to asserting more control of its FinTech firms in light of the company passing its overarching data protection law, PIPL.
The lesson is the same no matter where financial institutions operate: comply or else. That mandate means international companies often need an outside party like InCountry to help maintain compliance, because the task itself is often too laborious and costly for companies to do themselves. Luckily, InCountry has amassed certifications for globally recognized safety standards as well as country-specific data protection legislation, making it a great option for complying with any and all data laws.
What do financial companies need to know about regulatory compliance?
Compliance takes many shapes, and laws are constantly evolving. The California Consumer Protection Act, for example, was originally passed in 2018, but has already been amended twice. The battle for data happens daily, so even if governments can’t maintain the same pace, change does happen often.
Whether it’s regulatory compliance for financial institutions dealing with Personal Identifiable Information (PII) or compliance risk management in banks trying to transfer customer data abroad, organizations need to know a few key components of local data protection laws. Those are: cross-border data transfers, the client consent process, data localization, and possible penalties.
Cross-border data transfers dictate if sensitive data is ever allowed to be transferred abroad. If data transfers abroad are prohibited, then regulated data–usually corresponding to that country’s citizens–must be stored and processed locally.
The client consent process, which was first laid out meaningfully in the EU’S GDPR, indicates how companies must obtain permission from customers to use their personal data. This includes the transparency of how personal data will be used and the mechanisms customers have for requesting the deletion of their data from a company’s system.
Data localization is the need for companies to store regulated data within the country of origin’s borders. While data localization has some overlap with cross-border data transfers, a country can require a copy of regulated data be localized, without completely banning cross-border data flows. This is largely how Russia governs PII, for example.
Penalties for violating a country’s data regulations usually come with two downsides: financial compensation and a black mark on a company’s reputation. While laws that regulate financial technology compliance differ in amounts, the general range will be at least $100,000 per violation and up, with the possibility of a single fine reaching millions of dollars.
How has regulatory compliance changed over time?
Regulatory compliance for financial institutions has always been at the forefront of data residency, as the sheer amount of money in the sector requires a high level of cybersecurity. However, with the overwhelming digital shift of retail, compliance standards have been heightened dramatically over the past half-decade.
This digital shift has also coincided with the merging of risk and compliance departments, which frequently operated as separate entities until compliance penalties began to outpace losses from traditional risk factors. The ease with which hackers and cybercriminals can pluck sensitive information from an underdefended system has led governments to step into the void to mandate cybersecurity minimums, which have redefined not only compliance, but risk management.
As far as security minimums go, the watershed PCI DSS compliance standards were drawn up almost 20 years ago, but it has become an absolute must for companies to work with PCI DSS-compliant payment services over the past few years as financial services have shifted more online. With stolen credit card data often holding more value than actual money, the security, compliance and regulatory requirements for financial services now start with PCI DSS as a minimum baseline.
When combined with new laws popping up every month that also require financial organizations to protect customer PII, the onus on companies has grown recently, and the stakes have as well. No company is exempt from this responsibility either, as governments want their citizens’ data protected and companies held in line. This is best exemplified by Turkey banning PayPal from operating in the country after the latter failed to meet compliance standards with a banking-specific data regulation.
Regulatory checklist for financial institutions
The easiest way for financial institutions and banks to manage compliance is to follow the precedent of other organizations that have been successful in expanding to new markets and keeping the lights on. That brings us to a regulatory checklist for complying with data protection regulations, which can be used as a gatekeeper against companies due to the nebulous nature of data usage today.
Don’t let that happen to you by ensuring you satisfy the following requirements:
–Become PCI DSS compliant. This is the starting point, and manages multiple things at once, including the setup of a proper firewall, the automatic denial of unauthorized access, and a base level of storage encryption.
–Use encryption or tokenization to limit the number of people that can access regulated information, for both storage and transmit.
–Achieve data redundancy: Whether you or a company you use to store your data, both regulated and unregulated, must have redundancy so data will not be lost if something happens to a data server or silo.
-When in doubt, play it safe: Are you unsure just how stringest a country’s de factor data protection is? Don’t risk anything by needlessly transferring data abroad or messing with data storage looking for the cheapest or most available servers. Store data locally to avoid massive fines, or at the very least, consult with a local law firm to fully understand the local regulations.
–Appoint capable compliance officers.
These are data protection specific, but otherwise, any financial organization should be using best industry-standard practices. That means extensive logging, intrusion detection, robust oversight, and defined vendor management, and clear hierarchies or who in your organization is responsible for which components of the compliance structure.
Understanding compliance risk in finance and banking
Banks are conservative institutions by nature, which is why they should do everything in their power to achieve and maintain compliance with any law that applies to the financial industry. Compliance risk management in banks is very much a thing, or these gigantic organizations wouldn’t be appointing compliance officers to keep track of this sort of thing.
In fact, as FinTech and cryptocurrency has risen up to present a more formidable challenge to the banking industry, banks must rely on their long and friendly history with governments to keep their presence justified deeper into the 21st century. By ensuring staying up to date with laws that regulate financial technology compliance and investing in compliance risk management in banks, the industry can project itself as the steadfast force that should drive the market, rather than the more combustible FinTech industry.
We see the opposite side of the equation for compliance in the financial services industry. Startups, crypto retailers, and tech geniuses can’t afford to run afoul of government laws because they are already fighting an uphill battle against banks and traditionalism. FinTech has gained a foothold with consumers because it brings innovation and convenience into people’s lives, but if the industry cannot comply with data regulations, they risk losing consumer trust and government tolerance for their experiments.
How to manage overlapping regulatory oversight
Laws that regulate financial technology compliance will often overlap partially with more expansive data protection laws, which is something companies simply have to deal with. The key to staying abreast of multiple regulations is often to play it safe when it comes to things like cross-border data transfers and data localization. Simply by keeping at least a copy of sensitive information within the country of origin and blocking people abroad from freely accessing customer information is a good starting point for managing financial regulatory compliance in the majority of countries.
Issues like client consent are not industry-specific and have been hot topics within the realm of data governance since the GDPR was passed in 2016, so should not be a deal-breaker when it comes to companies staying compliant. More financial matters like PCI DSS compliance will often overlap with how a company is able to process PII, but again, serves as just a minimum baseline for cybersecurity.
How InCountry helps you manage data compliance in the financial industry
Managing compliance is a hassle full of complex stack set up and never-ending massive responsibility, which is why many international businesses choose to partner with proven compliance companies like InCountry.
InCountry enables data compliance in over 90 countries worldwide with little to no impact on your organization’s current SaaS instances or overall structure, meaning the solution is virtually plug-and-play. We’ll track and manage all the relevant regulations and you’ll be free to do business in more markets without the threat of penalties looming over your every move.
With PCI DSS certification, multiple points of presence in every country in which we operate, and the ability to regulate your customers’ personal information in major markets that have strict data residency requirements like China, Russia, and Turkey, financial institutions need not worry about the monetary and reputational risks connected with compliance if they choose to work with InCountry.