Risky Business? | Traditional Banks & FinTechs | Expanding Role of General Counsel | What the Future Holds for General Counsel
Banking on Disruption:
How the Financial Sector Is Keeping Pace with Change
Today, banking and investing are anything but traditional, according to a recent Forbes Insights and K&L Gates survey of 200 U.S.-based business and legal executives within the broad financial services industry. Faced with stringent regulations, new competitors, and emerging technologies permeating the marketplace, the financial sector is evolving at a fast and furious rate, with no letup in sight. In fact, change is the only constant in the days and years ahead for the financial services sector.
Risky Business?
Organizations are seemingly shifting from managing systemic risk to ensuring the highest levels of consumer protection. The numbers back it up, as 45% of respondents cite today’s increasingly stringent regulatory environment as the most important trend over the next three years. Yet there is good news — for the first time in history, traditional banks and startups are working alongside regulatory authorities to better balance the competing goals of greater innovation and increased consumer protection.
Powerful technologies such as artificial intelligence (AI), blockchain, robotic process automation, cloud, and mobile are driving financial institutions to new processes and innovative business models. Cryptocurrencies, however, gave 69% of respondents cause for concern as they were most commonly cited as the new technology presenting the highest legal risks.
Big data is also gaining a great deal of attention as online and mobile banking generate a wealth of data that can be used by financial services firms or their strategic partners. This treasure trove of information is also subject to an ever-expanding array of privacy and data security regulations, which must be analyzed and understood, in addition to the ever-present risk of data breaches.
So, it is no surprise that big data raises big red flags. In fact, 69% of respondents cite data as an area that presents the most potential for legal risks. This regulatory concern dwarfs even the 47% who consider cybersecurity a concern, despite cybercrimes costing financial services companies $18 million in 2017, according to Accenture.
FinTechs have not gone unnoticed, as new tech companies seem to be appearing on the financial scene almost daily. With a goal of overturning the traditional financial services business model, these startups are revolutionizing the industry, albeit at a price. While offering new loan platforms that provide same-day quotes, or peer-to-peer money transfer solutions that eliminate the middleman, they are challenging traditional financial establishments to either get on board or fall behind.
And get on board they are, as our consumer-centric culture today demands fast and convenient access to accounts, personalized communications, targeted products, and round-the-clock service. Many FinTech companies deliver on that promise, offering advanced software solutions such as mobile payment applications and investment platforms. Seventy-two percent of respondents believe that collaboration can help them compete with large technology players' financial or payment services. Nearly half count FinTech firms as partners, while just 20% are developing their own technologies in-house.
Collaboration is key for established firms to compete with cutting-edge financial services delivered by technology companies. In the past, there was reticence on the part of banks to work with FinTech firms due to risk. Conversely, traditional banks now want to learn from these FinTech firms and potentially leverage the technology themselves in the long term.
Traditional Banks & FinTechs — A Mutually Beneficial Relationship
With stringent regulations, data, emerging technology, FinTech — and continual change — as the new normal in the financial services industry, new “rules” have emerged for general counsel. It is quite possibly a whole new ballgame for legal experts, especially over the next three years, according to 92% of survey respondents who expect to face many issues that are new to them. Much broader and more demanding, the job has gained in significance due to the intense regulatory environment. Even top management sat up and took notice with growing concerns about legal issues, according to 85% of respondents.
Expanding Role of General Counsel — Weathering the Transformation
How has your role changed over the last three years?
As the industry has changed, so has general counsel’s place at the table. He or she has become an essential player in virtually every aspect of the organization. In addition to legal issues, general counsel must now be well versed in industry knowledge, predictive thinking and the disruptive forces affecting the financial services industry, such as the strict regulatory environment. One catalyst for that change is the legal risks factored into decisions about growth strategies, according to 89% of respondents. Digital initiatives and expansion into non-banking areas top the list of growth strategies that companies are currently pursuing. Both were also among strategies that respondents perceive as legal risks.
What growth strategies have high legal risk?
61%
75%
Expanding digital initiatives
Expanding into non-banking areas
Now, technology plays a big part in the day-to-day of general counsel. Tech savviness is a “must” as utilization of technology is high among the legal department — with more than three-quarters of respondents saying their legal function uses digital technologies to a significant or very significant degree. RegTech solutions likely top the list of these digital tools as regulatory compliance ranks high in digital usage at a whopping 88%.
If the last three years are any indication of where the financial sector is heading, the next three will be a whirlwind of innovation and competition. The role of general counsel will continue to evolve and be all-encompassing, as the numbers bear out. Nearly all respondents — 93% — expect to have to deal with issues that will be new to them. More than half see their role changing as the legal environment only makes it more difficult to stay on the cutting edge. Most believe that knowledge of regulatory compliance, data protection, and privacy expertise will be the most valued skill needed over the next three years, with knowledge of payment systems ranking alongside more traditional areas, such as consumer class actions and fraud prevention.
Bottom line — “old school” isn’t going to cut it as the financial industry continues to move forward into a brave new world. Thriving in this new world requires that financial and legal executives broaden their skill set to meet current market demands — becoming more adaptable, consumer-centric, tech-savvy, and compliance-committed. An executive who is tech-savvy, steeped in industry knowledge, and willing to partner with competitors will not only keep pace with change, but also be an enviable disruptor in an ever-evolving financial sector.
What the Future Holds for General Counsel
For deeper insight on this topic, access the complete K&L Gates/Forbes Insights whitepaper, Financial Services at the Crossroads of Digital Transformation.
Most important trend over the next three years
45%
of respondents cite today's increasingly stringent regulatory environment
45%
Virtual and Cryptocurrencies
57%
Robo-advisors
50%
Blockchain
48%
RPA
46%
APIs
New technology presenting the highest legal risks
What best describes your organization's relationship with FinTechs?
We currently partner/collaborate with FinTechs.
48%
We develop our own technologies in-house/do not work with FinTech.
20%
We are planning to collaborate with FinTechs.
25%
My role is much more important due to the regulatory environment.
48%
I am covering more areas of law.
43%
My role involves tackling more technology-related legal issues.
19%
New technology presenting the highest legal risks
What best describes your organization's relationship with FinTechs?
We currently partner/ collaborate with FinTechs
48%
We develop our own technologies in-house/
do not work with FinTechs
20%
We are planning to collaborate with FinTechs
25%
8%
We make strategic investments in FinTechs
