The Rise of RegTech and A.I. in Financial Services Compliance

From retail to agriculture to health care, technology is having a profound and long-lasting impact on the way we do business. The financial services industry is no exception to trying to leverage current, new-generation technologies that are changing the way business is conducted. While many FinTech startups deal in the arena of consumer-facing services, there are a variety of these new-age solutions and technologies that can be leveraged behind the scenes. These new-generation technologies include artificial intelligence (A.I.), blockchain technology, cloud computing and big data analytics. Regulatory technology, or “RegTech”, is the implementation and use of these new-generation technologies to transform financial regulation and compliance for both financial institutions and regulators. Particularly, RegTech is prevalent in the areas of risk management, KYC, transaction monitoring and regulatory reporting.

Concurrently, the migration of core systems and applications onto the cloud is in full swing for the financial services industry. There is an argument to be made that the coupling of RegTech technologies with cloud computing can improve operational efficiencies and open the door for more automation in the compliance space. Ultimately, cloud computing has the potential to revolutionize entire regulatory infrastructures to ease the burden of compliance.

The global financial crisis of 2008 was both the end, and the beginning, of an era in financial services. Post-2008, the aftermath of the financial crisis gave way to a significant increase in both the volume and severity of regulations, as well as major advancements in the financial technology space, also known as “FinTech.” As FinTech advancements exploded and regulations increased significantly, regulators struggled to come up with new, effective methods to monitor firms and their activities. As regulators adapted to the new technologies and became skilled at using them to their advantage, firms realized they needed to do the same. 

When it comes to implementing RegTech and cloud-based computing, there is greater promise of evolution rather than revolution. In order for the industry to fully take advantage of this “new era” of compliance in RegTech, it is imperative that many parts of the compliance infrastructure change in order to meet the needs of both clients and regulators. 

At the center of a significant number of organizational technology strategies is the integration of A.I. to augment a variety of business processes such as compliance. In today’s environment, it is essential for firms to maximize both the value and operational efficiency of their compliance programs in order to reduce costs, while satisfying all applicable regulatory requirements. Through the use of RegTech technologies such as A.I. coupled with cloud-based platforms, the efficiency and effectiveness of current compliance processes can be significantly improved. 

Similarly to technological advances in the financial services industry, compliance and regulations are constantly being revised and appealed. In order to effectively comply with regulations as they are put into place, compliance departments need a well-informed understanding of regulations and how they impact all lines of business within an organization. To mitigate the risks associated with rapidly evolving regulations across the several jurisdictions that a firm operates in, it may be both valuable and imperative to implement robotic process automation (RPA) and A.I. tools to remain compliant.

One example of the usefulness of A.I.’s integration to improve compliance processes involves the interpretation and adoption of new regulations as they are instituted. The Second Payment Services Directive (PSD2), a European regulation for electronic payment services, was passed in late 2015 by the countries of the European Union. This directive seeks to make payments more secure in Europe, boost innovation, and help banking services adapt to new technologies. PSD2 is evidence of the increasing importance Application Program Interfaces (APIs) are acquiring in different financial sectors [2].  This is an example of a regulation that was handed down via extremely large and dense documentation. Previously, a regulation of this magnitude would have required a significant amount of human interpretation in order to identify appropriate actions that must be taken in order to remain compliant. However, through the use of A.I. and cloud-based RegTech platforms, the workload involved in interpreting regulations of this type can be reduced. Now, regulatory research that may have taken a team of individuals hours to comb through and analyze can be completed in minutes through the use of A.I.-powered RegTech solutions.

A.I.’s use in RegTech can also be found in the Anti-Money Laundering (AML) and sanctions space. In most use cases, RegTech solutions are implemented to increase efficiency and reduce costs. However, when it comes to AML and sanctions compliance, the issue for banks is not only cost, but also reputational, regulatory and legal risk. The use of A.I. in AML and sanctions-related compliance programs can identify patterns and connections in large datasets that a human would not be able to. Through consistent, long-term use, the A.I. system could also learn and improve pattern detection which would ultimately improve efficiency and accuracy.
 

Additionally, these new technologies have allowed for the reduction, and even the removal, of humans in the investment advice process. These tools, often referred to as “robo advisers”, can be used by financial professionals and their clients for digital investment advice, including functions such as: The automation of developing investor profiles, preparing proposals and developing an ideal asset allocation. With this level of automation and direct customer contact, there are a variety of new issues that must be considered from a regulatory perspective. Particularly, the SEC and FINRA have done work in the last few years to better understand how the underlying algorithms of these “robos” work. While current guidance is still in its infancy, the growing popularity of these automated investment advice tools will certainly leave the door open for additional regulatory oversight.

Sia Partners has professionals with expertise in the compliance space, as well as with A.I. We offer a wide array of services in these areas.

The increasing cost of compliance as well as the growing number of fines for infractions prove that financial institutions are struggling to implement new regulations correctly and within the given timeframe. That is why financial institutions are welcoming RegTech solutions with open arms.

Regulators will also need to reflect on and determine how they will position themselves in light of these innovations, because banks have already started utilizing RegTech in their operations.  Here at Sia Partners, we offer a variety of RPA, A.I. and blockchain-related technology solutions for our clients that have a proven track record of streamlining compliance processes and improving overall operational efficiencies.

Zoya Ashirov

Senior Manager
+1 (917) 330-5526
zoya.ashirov@sia-partners.com

Stephen Dimarco

Consultant
+1 (718) 213-0422
stephen.dimarco@sia-partners.com

Sources 

[1] “RegTech Market by Component, Application, Vertical, Deployment Type, Organization Size, and Region - Global Forecast to 2025.” Market Research Firm, May 2020. 
[2] “Everything you need to know about PSD2” BBVA.com, BBVA