From Hindsight to Foresight: What Regulators Now Expect from Boards of Financial Services Businesses

Regulators are tasked with maintaining public confidence in financial markets and the key participants in those markets. When adverse events occur that impact markets generally or specific sectors within those markets, boards of financial services businesses must work twice as hard to rebuild that trust.

However, regulators’ approach is shifting. Instead of taking a ‘wait and see’ approach before penalising misconduct, regulators want financial services boards to actively anticipate risks. They are now prioritising proactive risk management over reactive enforcement.

This pushes early accountability back to boards. Here’s what you need to know. 

The Mandate: Create a Foundation of Trust in Financial Services

The risk environment for Australian financial services businesses is changing. Risks no longer fit neatly into traditional categories. At the same time, emerging potential threats, from cyber breaches and climate incidents to toxic culture, can significantly damage trust. 

These external influences and broader shifts are directing regulatory focus. Regulators are focusing on principles-based rather than rules-based regulation. The financial services sector needs to start thinking about how to systematically imbue a foundation of trust, which starts in the boardroom. 

The Shift From Rules-Based to Principle-Based Directives

As financial services organisations adapt to the change in regulatory approach, they must consider the following three points: 

1. Rules-based regulation does have its place: These are well-suited to situations and scenarios where they are instrumental in preventing harm. 
2. Context is increasingly important: Depending on the context, principles-based regulations are becoming more relevant. Examples include regulations to prevent psychological harm at work, cybersecurity measures, conflict management or ensuring mergers and acquisitions don’t create monopolies.
3. Regulation and compliance need to account for new tools and processes: While litigation remains a blunt (and often used) tool by financial services regulators, some regulators are shifting from pure enforcement to strategic engagement. They provide education and guidance, but also apply sharper tools when necessary and engage in litigation to send strong messages where they deem necessary. 

Defining the New Relationship Between Boards and Compliance 

More rules, tighter cycles and rising expectations can overwhelm traditional compliance systems — which is why boards must adapt. Compliance is not something that happens in a stand-alone team and reported on “after the event”. Rather, compliance is something to be embraced by boards and the broader business and be reported on in real time. 

To address emerging risks, regulation is becoming more agile, meaning ‘tech-savvy’ governance is no longer optional. For example, the Australian Government’s Voluntary AI Safety Standards provide boards with a practical framework to act now and get ahead of the AI phenomenon and what it means for your business.

What Boards Should Action Now

• Review board reporting: Move beyond hindsight-based learning (e.g., analysing what went wrong) and start focusing on foresight, indicators and emerging hotspots. Monitoring regulatory changes and embedding risk management and analysis in your board reports is essential. 
• Stress-test culture: Evaluate culture from the bottom up. Do employees genuinely experience the desired organisational conduct? Are they aware of broader enterprise risk and specific risks to their roles, and do they actively monitor and report on these matters?
• Adopt agile governance: Integrate frameworks (like the Voluntary AI Safety Standards) into existing risk profiles early, rather than waiting for them to become mandatory. Stay ahead of the curve as best you can and adapt quickly to changing technology, regulation and emerging risks.

Financial Services Businesses Can Take Decisive Action Today

Governance reform is less about ticking boxes and more about future-proofing trust. Boards that stand still risk being left behind, while those that adapt can strengthen both resilience and reputation and avoid stoushes with regulators.

For comprehensive and accessible legal guidance about how your financial services business can stay ahead amidst changing regulatory expectations, and how to embed governance, risk and compliance processes within your business, get in touch with PMC Legal.

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