Automating compliance management can help firms offset rising costs

The cost for financial services firms to maintain compliance in today’s dynamic regulatory environment is expected to increase amid widespread digital transformation as companies continue to innovate how they interact with customers and deliver their products and services to market.

Some metrics indicate these concerns are widespread; in June 2021 Thomson Reuters Regulatory Intelligence released its annual survey of compliance management professionals across financial services and found that 62% of respondents saw operating expenses rising in the next 12 months. Those respondents cited a lack of skilled resources and pressure to keep pace with regulatory changes as two major hurdles for the industry.

The key to overcoming these obstacles lies in regulatory technology, or regtech, which is more than a catchy label for a suite of technology-based solutions and tools companies can use to manage their compliance systems. Advancements in regtech have led to increased efficiencies that can offset or even result in a net reduction in costs while addressing some of the challenges facing companies today

How can emerging technologies help?

Developments in technology-based solutions and tools offer many options for financial services companies to streamline their regulatory compliance and risk management programs. Here are a few examples:

• Know your customer (KYC) procedures and artificial intelligence (AI)—One of the objectives of KYC guidelines is to prevent businesses from being used by criminal elements for money laundering. Various data analytic solutions, as well as solutions that rely on machine learning and AI, are available to help identify suspicious elements early in the client relationship. An automated solution can allow for such analysis and identification during onboarding and throughout the customer life cycle by reviewing and flagging individual transactions. Early identification minimizes the risk of loss to the company, while ongoing monitoring supports a robust anti-money laundering compliance system, as required by regulatory agencies.
• Blockchain-powered solutions—The foundation of blockchain technologies to record immutable transactions intrinsically builds a stronger compliance management system. In addition to making processes more efficient and lessening the potential for human error, such technologies promote automated compliance pre-transaction. Blockchain-powered smart contracts linked to coded logic and rules help avoid execution of offending transactions, thereby reducing reliance on post-transaction monitoring. Pre-transaction compliance management is more efficient in mitigating risk.
• Organizational risk management—Advanced technologies, including cognitive computing, are making it easier for organizations to identify potential risks. For example, AI can be used to detect everything from data and cybersecurity breaches to vendor and portfolio credit risks.

What advantages does automation bring?

The value of streamlining a company’s compliance and risk management program shouldn’t be underestimated. Consider these benefits:

1. Increased transparency—Through the integration of technology solutions, risk monitoring and management become embedded within an organization, allowing for a real-time view of its compliance status. Timely identifying risks reduces a company’s susceptibility to major unidentified issues that could result in costly remediation and regulatory fines and penalties.
2. More consistency—Enterprise-wide technologies help prevent functional responsibilities from becoming siloed or so dispersed that there is no consistency in the application of policies and procedures. The consistent application of technologies across an organization helps foster a compliance-focused corporate culture.
3. Greater cost-efficiency—As stated earlier, the cost of compliance is significant and expected to increase as regulatory requirements evolve and become more complex. Automating certain compliance and risk functions allows for significant savings in personnel costs and avoids the need to source specialized skill sets in compliance and risk management. Moreover, a technology solution can be more easily and efficiently adapted to ongoing regulatory changes.

Regtech plays a key role in the future of risk and compliance management for financial services. Companies that embrace emerging technologies will gain a competitive advantage through their ability to mitigate risk more efficiently and effectively.