Compliance doesn’t refresh each day as the example suggests, but the changes in regulations are copious and labor-intensive.
Since the financial crisis of 2008, the U.S. financial services industry has been under intense scrutiny. Compliance officers have been hit with an onslaught of new regulatory rules each year, and coporate officers have assumed a new level of liability — including the well-known Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which contributed 2,300 pages of provisions alone.
And just when Financial Institutions (FIs) were getting a handle on all those pages of regulation, Congress passed a new Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, in effect repealing Dodd-Frank.
That same year, a new compliance hurdle came into effect that put a padlock on data privacy: the General Data Protection Regulation (GDPR).
According to a Thomson Reuters survey of compliance professionals from 800 financial services firms worldwide, regulatory updates are coming in at an average rate of more than 200 per day — about one alert every seven minutes.
Of course, the financial crisis isn’t the only cause behind regulatory updates. A growing global market and consumer-friendly services such as mobile banking are also significant drivers of compliance and regulatory risk.
Regardless, the surge of regulatory compliance requirements has left many FIs and compliance practitioners feeling spent.
“It is estimated that some firms could spend up to 10% of their revenues on compliance within the next few years. This is by no means an insignificant amount,” said Muhammad bin Ibrahim, governor of the Central Bank of Malaysia (Bank Negara Malaysia) during a keynote address at the 9th International Conference on Financial Crime and Terrorism Financing (IFCTF) in 2017 and recorded in Thomson Reuters’ Cost of Compliance 2018 report.
In 2018, 61% of firms anticipated their budget for compliance teams to increase, with 14% expecting a significant increase, according to the same report.
Financial technology, or fintech, continues to disrupt the financial services industry with technology solutions to improve efficiencies, enhance user experiences and reduce costs. And, although fintech aimed at improving regulation isn’t new, the applications of next-generation technologies is evolving in exciting ways.
Like fintech, regulation technology (regtech) draws upon current or emerging technologies tailored to meet specific challenges — in this case, regulatory or compliance-related needs. Regtech is rising as a viable means to offset the increasing costs and manpower required by FIs in order to keep up with changing regulatory compliance rules.
Artificial Intelligence (AI) and machine learning, in particular, are making the greatest impact on easing the pains of keeping up with compliance and negating compliance and regulatory risk.
Here are five ways AI can improve regulatory and compliance processes:
Still early in its adoption and deployment, AI-based regtech possibilities are vast. FIs are already forming meaningful partnerships with third-party technology solution providers to develop innovative solutions that will help them reduce costs, increase efficiencies and mitigate risks.
Speaking of risk — due to the sensitive nature of the industry, FIs must enter these agreements with caution. Whether engaging with a startup tech firm or a global enterprise, FIs must examine the company’s internal security control and ensure proper Service-Level Agreements (SLAs) and governance.