Recent global disruptions have accelerated the digitization of financial services (FS). Many financial institutions globally, including loan and mortgage organizations, had to demonstrate resiliency and adapt fast to meet evolving customer expectations and a rapidly shifting economic landscape. According to a recent regulatory and risk management survey1, 71% of all respondents across the US financial industry reported varying degrees of progress in terms of digitization of their lending portfolio
Meanwhile, from a more global perspective2, investments made towards technology in financial services reached a staggering $98 billion within the first half of 2021 alone, while the numbers for the entirety of 2020 were just $121.5 billion. Undoubtedly, this surge in digital transformation is an attempt to expand the reach and scale new growth while lowering costs by leveraging emerging technologies.
The Specter of Rising Compliance Risks
However, the spiraling growth of digitization has also compounded security risks for a critical data-sensitive sectors, like financial services. The regulatory and risk management survey showed that almost two-thirds of all respondents (63%) consider ransomware attacks to be a top enterprise risk consideration. Naturally, this complicates data privacy and security regulations and their compliance across the industry. The industry prioritization of the top four risks- cybersecurity, credit risk, compliance, and operational risk has shifted slightly towards compliance, with a 3% growth reported between 2020 and 2021.
The Global Financial Regulations report3 showed that cyberattack prevention, sensitive data protection, and staying aligned with industry regulations and consumer privacy law changes are the top compliance-related challenges for financial services organizations. Furthermore, in a rush towards digitization, there is a risk of adopting digital processes such as e-closing and e-notes, which may introduce new vulnerabilities in data security and privacy concerns. This is taking a toll on digital ambitions, which is crucial for the success of any financial services organization looking to thrive in an increasingly digital world. The same report further points out that close to 50% of financial institutions cite regulatory compliance as a factor that slows down digital adoption.
The writing is on the wall for financial services, particularly lending and mortgage businesses. They must manage compliance risks effectively to confidently make their foray into the digital landscape. And there are a few industry imperatives they should be aware of.
The writing is on the wall for financial services, particularly lending and mortgage businesses. They must manage compliance risks effectively to confidently make their foray into the digital landscape.
Holistic Compliance for Digital Lending Operations
For lending and mortgage services providers as a part of the financial services industry, there are a couple of factors to account for in a bid to stay compliant. The two key approaches are:
- Collaboration to Counter Outdated and Reactive Regulations
Financial technology is growing exponentially, and regulations are struggling to keep pace with this growth. Policymakers across most markets usually have a much larger gestation cycle while drafting public policies, legislation, and rulemaking. For example, the PSD2 or the European Commission Payment Services Directive 2, which aims to simplify online banking and electronic payments for customers, was framed seven to eight years before its implementation4. This creates a massive gap in terms of the state of the digital landscape, especially with innovations that are growing at a breakneck speed.
Since the framed regulations are primarily prescriptive or centered around a specific technology, they risk getting obsolete fast. The process needs a complete rehaul to allow for dynamic and agile regulations and support the idea of a pivot from regulation to supervision. With this, not only do technology-neutral and principle-based regulations incorporate a renewed focus on guidelines and supervision, but they can also be stable enough to be relevant across a period.
Countering these challenges requires a collaborative approach between regulators and financial services organizations, which has traditionally been lacking. This lack of a collaborative approach has led to misinterpretation of regulations and even blanket regulatory silence in certain circumstances. This can seriously impede an organization’s capacity to make strategic and long-term transformational decisions as its internal compliance, legal, and risk functions remain conservative and limited in its approach.
On the other hand, proactive engagement with regulators can help them avoid unwarranted risks. An example of this is allowing financial incumbents to extend access to sandbox initiatives. And there is already a precedence for success. In 2018, the Monetary Authority of Singapore (MAS)5 launched the API Exchange Platform in conjunction with the ASEAN Financial Innovation Network and the ASEAN Bankers Association. The API Exchange Platform is based on an open architecture that allows lending and mortgage service providers to collaborate, design experiments, and deploy innovative digital solutions that significantly fast-track deployments, launches, and solutions.
- Developing a Holistic Compliance Management System
Another aspect of balancing the need to drive exceptional customer experience and greater profitability with digitization and the growing regulatory complexities is through an end-to-end and comprehensive compliance management system (CMS). This helps combine digital aspects like advanced analytics, process engineering, and automation with skilled resources that are experts in the domain of lending and mortgage. There are three ways of achieving this:
- Leveraging workflow automation
Intelligent workflow technologies simplify tasks, user authority verification and validation of business rules to ensure compliance with routine and repetitive tasks. They also identify gaps and alert in case of remediation. Moreover, associated technologies such as RPA, OCR and ICR can ensure accuracy and consistency. RPA-based solutions also remove the need for secondary reviews with control checkpoints and inbuilt auditability.
- Restructuring compliance processes
A robust CMS warrants a radical rethinking of the structuring and management of compliance processes. This includes extensive process documentation, specialized process creation as per requirement, process optimization and process gap identification with analysis.
- Automated monitoring with data
Finally, potential compliance issues can be identified and addressed proactively with data-driven automated monitoring. Data analytics mitigates risks and assures compliance with the evaluation of larger samples, the creation of risk models to drive precise decision-making, compliant data reporting, and remediation deployment to systemic factors for risks.
- Leveraging workflow automation
With increasing threats and vulnerabilities, the scrutiny of the financial sector can only get tighter. However, businesses need not necessarily see regulatory compliance as an impediment. Often, they can be the harbinger of innovation that unlocks future growth and newer avenues of doing business. What organizations need is to ensure a clear and distinct thought process behind achieving regulatory compliance.
Fostering frank conversations with regulatory authorities and framing organization-specific compliance management plans are imperative. This can steer the muddy waters of rapidly changing regulations toward a thriving and profitable future.
As a fully licensed and compliant organization within the SAFE ACT and other US-based regulations, HCLTech’s Lending Solutions is authorized to perform multiple operations across the US. Schedule a demo now to know how we can help you adapt to any changes and disruptions that tomorrow may hold.