Understanding Risks in the Financial Industry

April 1, 2025

As the financial industry adjusts to a rapidly changing world in 2025, institutions face a perfect storm of technological disruption, third- and fourth-party risk exposure, and sweeping regulatory reform. With the new presidential administration introducing policy shifts aimed at increasing transparency, consumer protection, and financial system resilience, firms must stay agile to adapt — or risk falling behind.

In this article, we explore emerging banking risks in 2025, then present details on managing those risks effectively. To learn more about insurance solutions for the financial sector, visit our Financial Services page.

Technology, Vendors, and Regulation: Evaluating Potential Risks

From rapid technological innovation to growing reliance on third-party vendors and evolving regulatory priorities, financial institutions face a new wave of complex and interconnected risks. Here are three of the most critical challenges reshaping the industry today.

Technology Risks

• AI and Machine Learning: Financial institutions are embracing AI for everything from customer service to risk modeling. But as these systems become more autonomous, so do the potential liabilities. Misjudgments in lending, biased algorithms, and flawed investment decisions can lead to regulatory scrutiny and reputational damage.
• Quantum Computing on the Horizon: While still emerging, quantum computing poses a serious long-term threat to encryption standards that protect financial data. Institutions that don’t begin preparing for a post-quantum future could find their cybersecurity defenses obsolete.
• Digital Assets and Blockchain Tech: The adoption of cryptocurrency and blockchain infrastructure continues, but with high volatility and fragmented regulations. Compliance frameworks struggle to keep pace with DeFi innovations, increasing legal and operational risk.

Vendor Risks

Financial firms often rely on a complex web of external vendors — cloud service providers, fintech platforms, and outsourced IT or analytics firms. But with this interconnectedness comes heightened exposure:

• Data breaches and cyberattacks targeting smaller vendors often serve as backdoors into larger institutions.
• Fourth-party risks (vendors of your vendors) are notoriously hard to monitor but can still impact your firm’s operations and compliance status.
• Due diligence failures in vendor management could lead to regulatory penalties if services are mishandled or compliance gaps emerge.

Regulators are increasingly holding institutions accountable for their entire vendor ecosystems — not just direct partnerships.

Regulatory Shifts

The Trump Administration has signaled a pivot toward relaxed financial oversight and consumer protections along with reinforcement of critical risk management strategies. Early moves suggest:

• Enhanced cybersecurity mandates for financial services firms, especially considering rising nation-state cyber threats.
• Tighter ESG reporting requirements, forcing firms to verify environmental and social claims in portfolios.
• Stricter scrutiny of AI use, particularly regarding fairness in lending, underwriting, and investment advice.
• Expanded enforcement of privacy laws, particularly around biometric and behavioral data collected through digital banking.

These changes will likely come with shorter compliance windows, more severe penalties for lapses, and increased audit activity.

Keys to Managing Financial Industry Risks

Liability insurance forms the foundation upon which a solid risk management strategy is built. This critical instrument – in the form of policies and programs – typically offers protection against legal claims, cybercrimes, and fiduciary claims.

With insurance coverage established, additional key steps for the tech, vendor, and regulatory risk management include:

1. Enhance Third- and Fourth-Party Risk Oversight

• Map the full vendor ecosystem to identify not just direct vendors, but also the downstream partners they rely on.
• Establish rigorous onboarding and monitoring protocols, including cybersecurity audits, service-level agreements, and continuous risk assessments.
• Automate vendor risk management where possible to detect threats in real time.

2. Adopt a Proactive Cybersecurity Framework

• Implement a zero-trust architecture to secure sensitive data, especially in cloud-based and remote environments.
• Use real-time threat intelligence tools and participate in information-sharing networks to stay ahead of emerging attacks.
• Conduct regular penetration testing and incident response drills to ensure operational resilience.

3. Integrate Compliance Into Strategic Planning

• Stay ahead of changing laws by creating cross-functional teams that include legal, compliance, IT, and business unit leaders.
• Shift from static compliance checklists to dynamic governance models that adapt to regulatory updates in real time.
• Prioritize documentation and audit readiness to avoid fines and reputational damage during regulatory reviews.

4. Invest in AI Governance and Model Risk Management

• Establish policies for AI and algorithm transparency, especially for customer-facing tools like credit scoring or robo-advisors.
• Monitor models for bias, drift, and fairness, and ensure human oversight remains in critical decision-making processes.
• Align with evolving standards for explainable AI and regulatory guidelines on automated decision-making.

By embedding these strategies into day-to-day operations, financial institutions can not only minimize exposure but also strengthen trust with regulators, customers, and investors. In an industry where the only constant is change, a resilient, forward-thinking risk posture is the ultimate competitive advantage. Working with a qualified insurance underwriter can help match institutions with the insurance coverages needed to protect against expected and emerging risks. ◼