Push for transparency and better governance structures
The year 2022 was a junction of geopolitical and economic challenges with the war in Ukraine, supply chain disruptions, growing inflation and an onset of a recession in many parts of the world. It comes as no surprise that the theme for 2023 will be around transparency and governance in the marketplace, as well as more regulation and requirements.
More focus will be put on governance and compliance framework as well as their support of effective decision-making and tracking against corporate and regulatory obligations.
Here are some of the key regulatory developments we’ll be watching in the new year.
Geopolitical risk, customer duty, and climate have characterized a lot of regulatory compliance for financial institutions in 2022.
- Financial institutions continue experiencing a growing compliance demand in areas such as digital security, ESG, and crypto-finance.
- There is a growing focus on achieving good customer outcomes with product, service, and client lifecycle as well as reducing financial crime.
Regulatory developments to watch
- The final rule for Section 1071 of the Dodd-Frank Act is due to be issued no later than March 31, 2023. It requires financial institutions to compile, maintain, and submit to the CFPB certain data on applications for credit for women-owned, minority-owned, and small businesses. The purpose is to enforce fair lending laws and identify the development needs of women-owned, minority-owned, and small businesses.
- The Consumer Financial Protection Bureau (CFPB) is in the process of writing regulations on Personal Financial Data Rights which will implement Section 1033 of the Dodd-Frank Act. A covered entity (i.e. a bank) must make available to consumers, upon request, transaction data and other information concerning a financial product or service allowing consumers to easily and safely walk away from companies (i.e. a bank) offering bad products and poor services.
- Overdraft fees will continue to be a key focus for regulators in 2023. Regulators will want to understand what financial institutions are doing to protect consumers from unnecessary overdraft fees. Financial institutions should make corrective actions for overdraft re-presentments before a compliance exam.
Sanctions on Russia
The goal of the February sanctions was to prevent Russia’s ability to raise funds for the continued invasion in Ukraine. (See Executive Order 14024 and revocation of General License No. 8 related to Energy for additional information.)
- In a press release dated February 28, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned the Central Bank of the Russian Federation by prohibiting transactions from the United States. This resulted in:
- Removal of Russian banks from SWIFT
- Visa and Mastercard denying Russian banks access
- Fraud exploiting the war in Ukraine, soliciting money under the guise of charitable foundations
- Cybersecurity and anti-money laundering (AML) alertness is at an all-time high.
Regulatory developments to watch
- U.S. banks face many challenges in identifying assets related to over 300 sanctioned oligarchs and companies associated with Russia due to chains of shell companies.
- Failure to freeze Russian assets targeted in U.S. sanctions could undermine global efforts, in addition to U.S. banks facing possible fines.
- Sanctioned countries may attempt to evade restrictions through non-sanctioned financial institutions in their home country or through entities in other countries.
- Bank officials could face potential civil and criminal penalties, including imprisonment for violating sanctions which may include doing business with sanctioned countries.
- Violations are typically caused by compliance breakdowns, screening deficiencies and human error.
Cannabis Banking Services
According to Fortune Business Insights, the global cannabis market is projected to grow from $28.266 billion in 2021 to $197.74 billion in 2028 at a CAGR of 32.04%. As such, cannabis banking services are a lucrative new venture for financial institutions to capitalize on, and some are already doing so.
American adults are accustomed to legal cannabis and their taste for “craft brands” has expanded. Similar to other categories of popular consumer products, consumer demand will most likely produce markets beyond cannabis mega-brands.
Like with many burgeoning new industries, the regulatory framework around cannabis remains unclear, leaving those providing services to the industry exposed to compliance risks.
- As of November 2022, recreational cannabis is now legal in 21 states.
- Financial institutions that service cannabis-related businesses must follow more stringent administrative guidelines and steps toward compliance under the Bank Secrecy Act (BSA) and AML regulations.
- Secure and Fair Enforcement (SAFE) Banking Act of 2021 generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis-related business.
- Financial institutions must file suspicious activity reports (SARs) for every cannabis-related transaction—even where operations are legal in that state. SARs not only create more scrutiny but also increase the costs for adequate due diligence and additional administrative burdens.
- Federal Trade Commission (FTC) Act (15 U.S.C. § 45) prohibits deceptive advertising and claims that a product can prevent, treat, or cure human disease (unless the claims are backed by competent scientific research).
Regulatory developments to watch
- Looking towards Canada’s Forward Regulatory Plan 2022-2024, we may see similar regulatory developments as cannabis becomes legal in the U.S. Health Canada is proposing amendments to the Cannabis Regulations to protect public health and safety, in particular, young persons from inducement to use inhaled cannabis extracts. The proposed amendments would restrict the production, sale, promotion, packaging, or labeling of inhaled cannabis extracts with certain flavors.
At the state level:
- Connecticut: Beginning July 1, 2023, all adults aged 21 and over will be permitted to grow 3 mature plants and 3 immature plants.
- Virginia: Legal cannabis possession and sales in the state are to start on January 1, 2024.
- New Mexico: Cannabis purchases will include a 12% excise tax on top of the state’s regular 8% sales tax. Beginning in 2025, the excise rate is permitted to climb by 1% each year until it reaches 18% in 2030.
The blockchain and digital assets have been recognized for the first time by the US government as a market that can no longer be ignored and must be regulated. This decision has been bolstered by the effects of this year’s crypto market crash.
- In an Executive Order dated March 9, 2022, President Biden acknowledged the rapid growth of digital assets and their use by the American public. The signed Order directs federal agencies to examine potential regulatory changes and addresses the risks and benefits of digital assets and technology.
- The announcement was followed by the crypto market cooling, aka “crypto winter,” which started with a drastic price drop of every major cryptocurrency.
- The Lummis-Gillibrand Responsible Financial Innovation Act (RFIA) introduced on June 7, 2022, establishes a comprehensive regulatory framework for digital assets in similar ways as commodities futures and swaps. RFIA would classify:
- Many cryptocurrencies (including Bitcoin and Ether) as commodities under the purview of the CFTC,
- Tokens that include equity rights under the purview of the SEC, and
- Stablecoins under the purview of banking regulators.
- By September, a new crypto regulatory framework proposal was introduced by the administration, outlining the ways in which the financial services industry should evolve to make borderless transactions easier, as well as how to crack down on fraud in the digital asset space.
- According to the White House fact sheet, “Digital assets and the mainstream financial system are becoming increasingly intertwined, creating channels for the turmoil to have spillover effects.”
- As of November, many crypto-handling companies face serious financial difficulties, including insolvency.
Regulatory developments to watch
Given the increase in crypto litigation and law enforcement activity related to fraud, we may see enhanced know-your-customer (KYC), customer due diligence (CDD), and AML regulations for businesses engaged in any type of crypto activity, including banks and credit unions. OFAC may enforce risk-based sanctions compliance programs on any business that interfaces with the crypto industry, instead of “encouraging” a risk-based tailored program.
In 2023, the Federal Reserve Banks will launch a new method to make payments more secure, reliable, affordable, and accessible to the general public called FedNow. FedNow is an initiative under the EO to ensure the digital economy is accessible to all Americans and to promote safe and affordable financial services, especially for the unbanked, and to alleviate the cost of non-bank services (i.e. check cashing, money orders, etc).
- More regulatory effort to curb over-speculation is anticipated.
- As the scale and complexity of the crypto market grow, the focus is shifting towards new risks in addition to the AML and Terrorist Financing protocols:
- Managing technology and cybersecurity
- Ensuring retail investor safeguards
- Business conduct requirements
- Conflict of interest and insider trading
- Market integrity measures
- Regulators will start to look at a risk-based approach to regulating the sector – calibrating to the specific risks posed by the type of crypto activity.
- There may be more prudential regulation (prescribing governance)
- Limits on exposure
- Margin requirements
- Proactive disclosure will be encouraged.
Environmental, Social and Governance (ESG)
As the government and industry demand for ESG rises, so does the need for more information for investors and company leaderships. Organizations are challenged with tracking regulatory guidance and data gathering due to lack of clarity on how and what to measure. It also creates learning opportunities for regulators around the objectives and compliance with the regulations.
- In March 2022, The Securities and Exchange Commission (SEC) proposed the climate disclosure rule proposal that opens the door for the broadest federally mandated corporate ESG data disclosure requirement in the US.
- There are now 868 policies and regulatory guidance and 300+ policy revisions that support, encourage, or require investors to consider all long-term value drivers, including ESG factors.
- Additional corporate disclosure requirements around human capital, political spending, and increased process disclosures for funds to label as sustainable or ESG are short-term areas of focus for the SEC.
Regulatory developments to watch
- The International Sustainability Standards Board (ISSB), which aims to develop a global baseline of sustainability disclosures for the capital markets, is currently working on the final standards for disclosure requirements around Scope 1, Scope 2 and Scope 3 greenhouse gas emissions reporting. The final standards are expected to be published in Q1 of 2023.
- The SEC’s final rule on corporate ESG data disclosure is expected to be published in early 2023.
- With the increase of regulation around data collection and management, global regulations and standards, and stakeholder communication, organizations need to prepare for transparency and accountability to deliver actions that match their commitments.
Gaming regulations are evolving fast, as advancing technology transforms the industry, changing both the games to be regulated and the tools available to regulators, suppliers, and operators.
- New legislation, such as the sports betting bills in Kansas, Ohio, Maine, Massachusetts, Nebraska, and Ontario (Canada), are putting extra pressure on the regulatory agencies to develop state regulations. The state of Kansas has already started taking bets as of July 1, and Ohio is close to their scheduled launch date of January 1, 2023. The state of Nebraska has already launched online sports betting, but in-person betting is still pending. Meanwhile, the states of Maine and Massachusetts are yet to schedule a launch date. Ontario was the first Canadian province to legalize online sports betting, with mobile sports betting launched on April 4, 2022.
- Operators and suppliers in these new jurisdictions must go through strict licensing requirements in order to be approved and these state gaming commissions must take the time to investigate each applicant thoroughly.
- New markets, like Ontario, are replacing the old prescriptive regulatory model with a new risk-based approach model that allows registrants to decide how they can be compliant with the guidelines set by the regulator, instead of telling them what they should do.
- Gaming customers now have different options available within the market to use crypto to pay for play, or they may request virtual currency instead of cash winnings.
- This new trend presents new risks for tracking anti-money laundering (AML) activity and the need for new or modified digital currency legislation.
- Money Transmitter laws currently in place are being updated and modified to include virtual or digital currency.
Regulatory developments to watch
District of Columbia: (B24-1063) – Sports Wagering and Fair Competition Amendment Act of 2022
- Bill Summary: “The measure would create a new Class C license for operators of online or mobile sports wagering applications, clarify that licenses are non-transferrable, impose a 15% tax on the gross gaming revenue of Class C operators, and require a competitive procurement for all future sports betting or lottery gaming services, among other things.
- Recent News: “Councilmember Elissa Silverman (I-At-Large) introduced legislation that would reboot the District’s troubled online sports wagering program by allowing mobile apps such as DraftKings and FanDuel to compete for business alongside D.C. Lottery’s poor performing GambetDC app. The bill would also prohibit the renewal of the city’s lottery contract with Intralot, which received a $215 million sole-source deal to run both the lottery and sports betting that was highly controversial…”
New York: (SB9605) – Bonuses in Mobile Sports Betting
- Bill Summary: “Directs the New York state gaming commission to promulgate rules and regulations regarding predatory sportsbook bonuses in mobile sports betting, including but not limited to, deposit matching, risk-free betting, free money, free bets, site credits and profit boosts.”
- Recent News: “Harckham’s bill repeatedly refers to the ‘luring’ of customers to bet, via targeted marketing campaigns, ‘free’ bets and ‘free money’. These are all practices that have come under scrutiny in Europe, and it’s no surprise that the same should be true in the U.S…”
Texas: (TX-SJR17) – Proposed Constitutional Amendment, scheduled to begin its session on January 10, 2023.
- Bill Summary: “Proposing a constitutional amendment to foster economic development and job growth and to provide tax relief and funding for education and public safety by creating the Texas Gaming Commission, authorizing and regulating casino gaming at a limited number of destination resorts and facilities licensed by the commission, authorizing sports wagering, requiring occupational licenses to conduct casino gaming, and requiring the imposition of a tax.”
- Recent News: “More than 300 lobbyists are now registered in Texas to work on gambling issues, according to state records, led by Las Vegas Sands, which added another just last week and now has 72 — the most lobbyists in Texas for any single group or business…”
If you would like to keep track of regulatory developments and updates in your industry in an automated manner, you can learn about our platform on this dedicated webpage or download our free brochure.