The resilience of the financial markets was truly put to the test in 2022 as many of the risks outlined at the outset of the year were realised. Inflation fears were validated – expected to reach 8.8% by the end of 2022. The crypto market sustained huge blows after the collapse of one of its leading players. The UK Government saw three different prime ministers. The devastation of the Russia-Ukraine war rippled through Europe, triggering widespread supply chain issues, and driving up energy prices.

In the finance industry, Wall Street was hit with fines amounting to $2 billion for use of off-channel communications channels, in a regulatory clampdown by the SEC that is set to continue. The industry faces mounting market and commercial pressure – which can in turn put undue pressure on the compliance function, so here, CEO and Co-Founder of compliance technology and data analytics firm SteelEye, Matt Smith, sets out his predictions for the year ahead, and offers advice to firms on how to handle these impending challenges.

Prediction 1: Regulators pile on the pressure

Regulators worldwide were notably more assertive in 2022. FCA fines for the year so far have reached £59,574,925 and, in the United States, the SEC filed 760 enforcement actions, up 9% from 2021. This amounts to an eye-watering $6.4 billion – an all-time record – far surpassing 2021’s $3.9 billion in fines.

While Gurbir S. Grewal, Director of the Division of Enforcement at the SEC, said that they “don’t expect to break these records and set new ones each year because we expect behaviours to change,” we anticipate that 2023 will be another enforcement-focused year both in the UK and the US.

At a recent conference, a senior rules maker from the FCA said, “fines are very powerful agents of change and a key focus” and “no stone will be left unturned.” This combined with the SEC’s powerful stance on enforcement action, signals a clear drive on both sides of the pond to crack down on financial misconduct and market manipulation.

With regulators using powerful data analytics tools to identify malpractice more accurately among the companies they regulate, more firms are at risk of scrutiny. Investing in technology is key for firms to ensure they can identify risks before the regulator comes knocking. As such, we expect many players will up-skill and up-tool in 2023.

Those that think that this is a concern for the future must remember that regulators have the power to act on historic breaches. Just this year, Citi was fined £12.5 million for failures that took place between 2016 and 2018. Not moving now could lead to fines in years to come.

Another area we expect more regulatory action around is market manipulation on social media. With numerous examples of what we call ‘modern’ market manipulation using digital platforms, such as Elon Musk’s numerous share price influencing Twitter updates, we expect stricter regulatory attention around social media in 2023.

Prediction 2: The communications crackdown will continue

In 2022, Wall Street giants were fined billions of dollars for failures to control and monitor communications taking place on unauthorised communications channels. WhatsApp and other digital platforms have dominated headlines over the last 12 months as regulators have cracked down on communications compliance.

We expect this reckoning will continue into 2023, as data from earlier in the year indicates that just 15% of firms are currently monitoring WhatsApp. In fact, it is likely that the attention will trickle down and that smaller firms will come into the spotlight, as evidenced by SEC’s warning to broker-dealers and asset managers that they would be “well-served to self-report and self-remediate any deficiencies.”

Banning platforms like WhatsApp is clearly not the solution. We need industry-wide change whereby financial services firms of all sizes understand the severe risk of leaving communications unmonitored. It is reassuring that many firms are already investing in or starting projects to capture more eComms channels. In fact, in the last 6 months, inquiries have skyrocketed among communications capture and archiving providers for WhatsApp and iMessage compliance solutions.

Regulators are making it clear that firms can no longer put their heads in the sand. So, in 2023, it is highly likely we will see the proportion of firms monitoring channels like WhatsApp grow and that adoption of eComms monitoring technology will increase across the board. At the same time, some argue that challenges in balancing data capture and privacy will prompt the death of “Bring Your Own Device” (BYOD) policies, and that carrying two devices, a personal and a business phone, will become the norm again.

Prediction 3: Voice comes into the spotlight

Voice capture is not a regulatory requirement in the United States today as it is in Europe, but it is clear it will play an increasingly important part in communications surveillance, with so many virtual meetings happening in place of in-person interactions and the rise of sharing voice notes at work. Analysing voice data is fundamental to detecting conduct risk and market manipulation like insider trading.

Regulators will eventually embed voice in surveillance and archiving requirements. To get ahead, many US firms are proactively self-regulating and investing in voice supervision and transcription to improve their surveillance. In 2023, we expect this to continue, and for voice monitoring to accelerate.

Prediction 4: A catalyst for crypto regulation

While there has been rapidly increasing acceptance of cryptocurrency in recent years, the industry has been shaken up by the recent FTX collapse, highlighting once again how volatile the space is. It is a fragile market and represents a considerable systemic risk, particularly as the fall of one token significantly impacts the whole market.

Crypto regulation is a responsibility that needs to be taken seriously by regulators worldwide and we welcome debate around the future of the market. However, leaving crypto unregulated would be a grave mistake. With the uptake of crypto among retail investors and financial institutions (particularly in asset management), the ripple effects of simply letting “crypto burn” as some have argued, would have far-reaching consequences.

We believe we will see a regulatory reckoning in the next 12 months. We envisage a world where regulation is sufficiently sophisticated to protect retail investors and make crypto a more stable investment for financial institutions.

Prediction 5: Holistic solutions and market consolidation

As the regulatory landscape becomes increasingly complex, the market is gradually shifting towards holistic compliance practices. The benefits of covering more areas of risk and overlaying multidimensional data to increase intelligence, speed up processes, and reduce false positives are simply undeniable.

The move towards a holistic approach is evident in the industry partnerships that have emerged over the last few years, where two vendors offering complementary solutions have come together – as we have seen with many communications and trade surveillance providers.

We expect this kind of market consolidation to continue in 2023 as financial firms themselves start to demand holistic data management. However, it is important to remember that a commercial partnership does not necessarily mean that processes are holistic. The key is to look for compliance solutions that natively bring together trading activity, communications, market data, and other important data sources.

Prediction 6: Fintech funding outlook – B2B comes into focus

After a decade of growth and record fundraising in fintech, with fintech companies accounting for 21 of the UK’s 44 unicorns today, we predict that in 2023 we will see this slow down to a much more modest pace. Data from investment manager Finch Capital shows funding reached $6 billion in 2020 and $19 billion in 2021, but we have witnessed a 25% drop in 2022 so far. The number of new fintech firms founded is down 85% since 2020. Market consolidation continues, and fintech M&A spiked in the first half of 2022, with 591 recorded deals. So, it is possible that we are now on the other side of the fintech sector ‘boom.’

Of course, the UK’s rich fintech ecosystem still presents exciting investment opportunities, and there is no shortage of available capital. But in the current economic environment, investors will be much more cautious about where, when, and how much they invest. The higher cost of capital coupled with a tougher business environment in general will force some fintech firms out of the market, as we have already seen, and create a smaller sector. Those who do make it through will emerge stronger and more resilient.

Before the pandemic, neo-banks and consumer-centric fintech businesses dominated the conversation. Now, amid recession fears and following a period in which fintech valuations fell faster than any other tech vertical, technology that powers back office and control functions is coming into focus. Tightening budgets and scrutiny of performance are driving this trend, and the financial services industry is under pressure to improve operational efficiencies while proving it has learned from past mistakes.

However, as the financial landscape becomes increasingly digital, so too does the risk of fraud, cybercrime, money laundering, data breaches, and market manipulation. In response, the RegTech market will continue to grow and evolve to meet the challenges of an ever-more tech-driven economy. SteelEye’s 2022 State of Financial Services Compliance report showed that almost half of firms (44%) are planning to invest more in RegTech solutions in the next year.