Compliance is a critical aspect of financial services and fintech. Financial service providers and fintech companies must adhere to a range of compliance standards to protect their customers’ data and transactions.
Financial institutions can take the necessary steps to meet regulatory requirements and maintain customer trust by understanding the top compliance standards.
Importance of Compliance for FSPs and Fintech Companies
As the financial services industry continues to evolve, regulatory compliance has become more critical than ever. Financial institutions and fintech companies are subject to an ever-increasing array of regulations that they need to follow to ensure that they operate within the legal framework and industry best practices.
Fintech companies, in particular, are known for their innovative and agile approach to financial services. However, with innovation comes responsibility, and fintech companies must ensure they meet compliance standards to maintain customer trust and regulatory compliance.
Compliance helps in ensuring that the organization’s operations are ethical, transparent, and fair to all stakeholders, including customers, investors, and employees. In the financial services industry, non-compliance can result in hefty fines, legal battles, reputational damage, and loss of business.
Top Compliance Standards for Financial Service Providers
SOC 1 (Service Organization Control 1) is an auditing standard that ensures that the financial service provider’s internal controls to protect customer financial data are effective. SOC 1 audits cover financial reporting controls including the accuracy and completeness of financial transactions.
By undergoing SOC 1 audits and maintaining compliance, organizations can demonstrate their commitment to security and compliance and provide assurance to their customers that their financial data is being handled securely and reliably. SOC 1 reports can be used as a marketing tool to attract new customers and retain existing customers by demonstrating the service provider’s commitment to security and compliance.
Also, SOC 1 compliance is often required by regulatory bodies such as the Security Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC) for financial service providers that handle sensitive financial data.
SOC 2 is an audit report that evaluates the effectiveness of an organization’s information security controls. It is a critical compliance standard for fintech companies that handle sensitive customer data.
Financial service providers and fintech companies may be subject to SOC 2 audits if they provide cloud computing, data hosting, or payment processing services. The audits are performed by independent auditors who evaluate the effectiveness of the service provider’s controls related to security, availability, processing integrity, confidentiality, and privacy.
SOC 2 audits and compliance also might be required by regulatory bodies such as the SEC and the FDIC.
ISO 27001 provides a systematic approach to managing sensitive information, including financial data. It is designed to help financial service providers establish and maintain an effective information security management system (ISMS).
ISO 27001, in itself, is a comprehensive standard that covers all aspects of information security. However, it can also help financial service providers and fintech companies comply with various regulatory requirements and standards related to information security. For example, compliance with PCI DSS (covered next) becomes easier when ISO 27001 controls are implemented in an organization.
ISO 27001 is not mandatory in most countries, but it helps in creating a strong information security management system. It is recommended that financial entities that do not want to go for the certification should also implement the controls as laid down by ISO 27001 to strengthen their cybersecurity.
Related article: Changes Introduced by ISO 27001 2022.
The Payment Card Industry Data Security Standard is a compliance standard to protect cardholders’ sensitive information, making it very relevant to the financial industry. The security standards of PCI DSS protect data and prevent credit card fraud and legal risks.
PCI DSS requires companies to implement a range of security controls to protect credit card data. These controls include network security measures such as firewalls and intrusion detection systems, access controls to limit access to cardholder data, and encryption to protect cardholder data during transmission and storage.
Failure to comply with PCI DSS can attract fines ranging from $5,000 to $10,000 every month until the company is able to demonstrate compliance.
The Gramm-Leach-Biley Act (GLBA) is a US federal law that requires financial institutions to protect their customers’ personal information. GLBA compliance is important for financial service providers that collect, store, or use customers’ personal information.
Under GLBA, financial service providers and fintech companies must develop and implement an information security program that includes administrative, technical, and physical safeguards to protect customer information. The program must be appropriate to the size and complexity of the organization and must be regularly reviewed and updated to ensure its effectiveness.
GLBA compliance also requires financial entities to provide customers with notices about their privacy practices and allow them to opt out of certain information-sharing practices.
GLBA compliance is enforced by several federal regulatory agencies, including the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the Federal Reserve System. Failure to comply with GLBA can result in significant fines and other penalties.
Related article: More about the GLBA Audits and Compliance.
Health Information Trust Alliance Risk-Based 2-year Certification (HITRUST r2) is a security framework designed for healthcare organizations. Even though primarily seen as a compliance for the healthcare sector, HITRUST compliance also covers security and privacy controls that are important for financial service providers that deal with healthcare data.
HITRUST is a comprehensive and widely adopted security framework that provides a standardized approach for managing and protecting sensitive data in the healthcare industry. It helps healthcare organizations comply with various other regulations and standards such as HIPAA, HITECH, and PCI DSS.
Related article: How HITRUST Supports Companies In All Industries.
The U.S. Congress passed the Sarbanes-Oxley (SOX) act in 2002 with the aim of safeguarding investors from financial fraud. The act provides a framework of the best security practices to prevent deceitful financial transactions through internal checks.
In recent times, the scope of SOX has expanded beyond ensuring accuracy in financial records to encompass cybersecurity measures that guard against prevalent cybersecurity risks that could compromise financial activities. For instance, phishing attacks, where hackers often impersonate CEOs and CFOs to lure employees into initiating fraudulent transactions, pose a considerable threat, as evidenced by the security breach suffered by Ubiquiti.
To this end, SOX compliance now entails implementing security controls across resources and IT infrastructure that store financial data to prevent such incidents. SOX compliance is mandatory for all public companies in the U.S. including those from the financial industry.
Related article: What Is a SOX Audit? Who Do They Apply To?
The Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (BSA), primarily aims to prevent financial institutions from engaging in money laundering, whether intentionally or through coercion during a cyber-attack.
The BSA requires financial institutions to collaborate with the U.S. government to combat financial crimes. Compliance with the BSA is overseen by the Office of the Comptroller of the Currency (OCC) which conducts regular audits to ensure banks verify the legitimacy of all currency transactions.
National banks are expected to establish controls that detect and deter money laundering activities, detect terrorist financing, and facilitate timely reporting of money laundering activities to law enforcement agencies. Banks must clearly outline data breach remediation workflows in their Incident Response Plan to prevent internal financial activities from being compromised.
BSA compliance is mandatory for financial institutions that accept money from customers, including national banks, federal branches, agencies of foreign banks, and federal savings associations. All transactions exceeding $10,000 must be reported by submitting form 8300 no later than the 15th day after the event.
The European Union’s General Data Protection Regulation (EU-GDPR) aims to protect EU citizens’ personal data by setting security guidelines for data protection through manual and automated processes. The GDPR mandates compliance for all businesses that collect or process personal data from EU residents, making it important for financial entities that deal with EU customers to comply with it.
GDPR compliance is mandatory even for all organizations that deal with the personal data of EU customers, regardless of the business location. Failure to comply can attract fines of up to €20 million or 4% of the company’s annual turnover.
Related article: Everything You Need to Know about GDPR.
Why Compliance Is So Valuable to the Financial Services Industry
Regulatory compliance is critically important for financial service providers for several reasons. For starters, financial service providers are required by law to comply with various regulations and standards set by government agencies and regulatory bodies. If they don’t, they could face legal consequences like fines, penalties, and losing their license to operate.
Adhering to regulations is also important because they exist to protect people from being deceived, taken advantage of, and hurt through unjust behavior. By following these rules, we can ensure that everyone is given a level playing field and that their money and private details are safeguarded.
But compliance also plays a key role in protecting the integrity of the company. Internally, it guides the company in identifying, assessing, and managing risks associated with its operations. This includes risks related to money laundering, terrorist financing, fraud, and data breaches. Financial institutions can prevent financial losses and reputational damage by managing these risks effectively. And externally, compliance helps ensure financial service providers operate transparently and ethically, promoting trust and confidence among investors, customers, and other stakeholders.
Compliance is not just a legal requirement but also a business imperative for financial institutions. Failure to comply with regulations can result in severe penalties, fines, and reputational damage. This can ultimately result in the loss of customers and investors. Therefore, it is important for financial service providers and fintech companies to choose which standards and regulations are relevant to them and implement the necessary controls to achieve compliance.