Future of Finance: preparing for the future of financial services

Artificial intelligence represents a huge opportunity for financial services firms, including to become more efficient, to deliver better returns and to identify the most suitable and appropriate products for individual customers. At the same time, AI represents an existential risk. Firms that fail to adapt to the new world of AI-enabled financial services and regulators are likely to be quickly left behind.

The regulatory and supervisory response to AI is still a work in progress and is bound to develop and mature over the coming years. Rules-based regulation may struggle to keep up with technological development, whereas principles-based regulation will require firms to exercise judgement. It is clear, however, that regulators are already requiring firms to demonstrate appropriate governance over, and executive accountability for, all stages of the AI lifecycle - from design to deployment, and into business as usual running. Read more 

Blockchain technology has been increasingly adopted in recent years by market entrants and established institutions. In 2023, 130 central banks had already begun researching, testing, or deploying their own digital currencies, and many financial institutions have begun researching the tokenisation of previously untapped assets, such as copyrights, databases, and even the computer chips that power AI systems.

However, these new offerings also bring a new set of risk, compliance, and AML issues, which blockchain technology is both the source of and the cure to. Firms and regulators looking to navigate this new frontier will need to do so with care and expertise.

The derivatives market is constantly evolving and at the foreofront of this is the launch of the ISDA Digital Asset Derivatives Definitions. The enormous growth in digital assets in recent years has led to an increase in market activity and, as a result, the need for contractual standards in relation to digital asset derivatives.  The Definitions are a welcome step to provide clarity to this nascent asset class. However, market participants should carefully consider their digital asset derivatives requirements before rushing to adopt the Definitions in their current form.

The reform of post-crisis and post-Brexit derivatives regulation is well under way and is expected to continue to have a signifiant impact on cross-border trades. Read more

Operational resilience has been elevated to on par with financial stabability. We are seeinga cultural shift towards viewing operational resilience as a strategic business imperative rather than just a regulatory compliance requirement.

The rapid development of big teach and AI presents opportunities to improve supply chain resilience.  These same developments potentially increase unknown risks to operational resilience from a single firm across global markets, which will stress the regulatory framework as it tries to adapt to keep pace.  Read more.

Material outsourcing arrangements are rapidy evolving to keep pace with technology and regulatory changes.  AI, in particular, offers some interesting opportunities for deployment in financial services businesses operations, including streamlining internal processes relating to appointment of, and oversight over, third parties, and for third parties themselves to use AI to improve service delivery. With these opportunities comes a number of challenges, particularly from a regulator perspective, that will need to be considered by firms and regulators alike.

The upcoming critical third parties regime will bring third parties into the regulatory perimeter for the first time.  We will be closely watching the impact of this regime on third party service provision and how contactal terms evolve to reflect this new regulatory status.  We expect that this regime will support regulated firms in both their due diligence over ctritical third parties and their negotation of certain terms of the otusourcing agreement. Read more.

Embedded finance is going through a susbtantial growth period, with providers leveraging tehcnology and pushing towards digitalisation to deliver their propositions in a more attractive and seamless manner to customers. By reducing friction in accessing captial, embedded finance providers are increasingly competitive with, and in many cases overtaking,  traditional providers.

Given the regulators's reviews of the lending and payment regimes and increased expectations around customer outcomes, embedded finance providers that proactively establish strong compliance controls and review their customer impact and engagement are likely to be the best adapted to the future.

It's an exciting time to be involved in the insurance sector, which is impacted by two global buzzwords: climate and AI. When it comes to climate change, insurers are viewed as part of the solution - whether through innovative products, actuarial expertise, or the unleashing of capital for green projects. As regards AI, the opportunities presented by this technoogy are not lost on the sector, which is set to see the biggest uptick in the use of machine learning tools within financial services over the next three years. Against this backdrop the general regulatory environment for insurance market participants is constantly evolving. This may of itself present insurers and brokers with new opportunities, but it does of course bring with it a new set of risks to manage.  Read more.

With a raft of ESG regulation being introduced to improve transparency and avoid greenwashing in the financial services sector, it is clear that the ESG landscape is rapidly evolving across the globe and presents a significant opprotunity for firms who are well positioned to evolve in line with regulatory developments. However, with regulatory intervention being at such an early stage, there are significant compliance challenges for firms centered around the availability of data and interoperability of standards across jurisdictions. As more and more corporates and financial services firms fall within scope of regualtory requirements, the hope is that data availability and standardisation will follow suit, improving reporting and transparency in the market.

The fund management industry is constantly looking for ways to innovate and improve. For example, the UK Fund Regime Working Group has developed its innovative Direct2Fund initiative, and fund managers are leveraging data to create new efficiences, whether that is using AI models to better interpret maket data or tokenising their funds. At the same time, the creation of a competitive UK regime remains firmly on the UK Government's agenda, the shape of which is beginning to emerge through proposals such as Reserved Investor Funds and the UK's new Overseas Fund Regime.

Consultations are underway on proposed changes to the rgulatory regime to advance the regulator's D&I agenda with a view to embedding healthier firm cultures, reducing 'groupthink', unlocking new talent and developing a greater understanding of diverse consumer needs. Setting a D&I strategy and aspects of D&I reporting and target-setting will become mandatory for many firms who will be able to benchmark their progress against these peers. Firms will need to be on top of these issues so that they can meet the enhanced regulatory requirements and remain at the forefront of developments in this important area.

Consultations are underway on proposed changes to the rgulatory regime to advance the regulator's D&I agenda with a view to embedding healthier firm cultures, reducing 'groupthink', unlocking new talent and developing a greater understanding of diverse consumer needs. Setting a D&I strategy and aspects of D&I reporting and target-setting will become mandatory for many firms who will be able to benchmark their progress against these peers. Firms will need to be on top of these issues so that they can meet the enhanced regulatory requirements and remain at the forefront of developments in this important area.