In 2016, as many as 200 regulatory changes were recorded on an average in a day. That translated to over 70,000 changes that needed to be accounted for and complied with; and these were besides the regulations that were already in existence for financial institutions (you’ve probably seen some of them like GDPR, KYC and Basel-III norms). Unsurprisingly, the cost of compliance is high. Not just in the form of penalties to be paid if they fail to comply, but even the cost incurred to ensure compliance. Some of the largest banks in Britain spend £660 million a year on Anti-Money Laundering compliance alone. In spite of this, many banks have had to pay hefty fines to the regulatory bodies in the past. While such a sum is a huge burden for large institutions, it is a question of survival for the smaller ones. And this challenge of regulatory compliance is bound to become more taxing in the wake of the pandemic and the transition to the virtual world. The landscape is changing every day, the regulations are adapting to the unique issues presented by the digital world, and the financial institutions are caught in between.

Previously, the challenge of regulatory compliance for the financial services sector rose in 2008, when the world economy collapsed. Since then, financial institutions have faced an ever-changing and complex regulatory environment. Before taking any action, they need to take into account numerous compliance factors; failing which can lead to another major financial crisis. One of the most important regulations is concerning customer’s data. Financial institutions are privy to a load of sensitive information on their customers that needs to be safeguarded from falling into the wrong hands. There are a number of frameworks in place for this. With the increase in the use of credit cards, the Payment Card Industry – Data Security Standard (PCI-DSS) compliance was defined to set standards for protecting, and securely storing and transmitting cardholder data. This one compliance alone has 12 compliance requirements under it that need to be fulfilled by institutions. Similarly, there is the Home Mortgage Disclosure Act (HMDA) that was introduced to ensure that credit unions do not indulge in discriminatory lending practices in their neighbourhoods. Then there are regulatory compliances pertaining to consumer laws; reporting standards that in turn differ between two countries; and risk management, slight miscalculations in which, can bring the world to a halt. 

It is evident that the financial institutions have their work cut out in front of them. The challenge of regulatory compliance is about recognising the key regulatory pressures and ensuring that processes and operations are streamlined. One of the motives behind having innumerable such regulations is how they affect customer experience. Customers need to know that their banks are fully compliant and that they are safe in their hands. However, this often hinders growth as financial institutions face a trade-off between maintaining customer satisfaction and delivering on fast transactions. Nevertheless, regulatory compliance is part of the financial world and is necessary in order to ensure access to fair, affordable and dignified financial services. The scary part is that financial institutions are not equipped for adapting to regulatory changes. According to a survey by the Nasdaq and Aite Group (2016), only 16 percent of the organisations are completely prepared for regulatory changes and implementations. So, what now? How do financial institutions go about tackling this unpredictable challenge of regulatory compliance that will become more complex in the future?

Unlike the problem, the solution is a familiar one; technology. What’s interesting is that compliance and technology are positively correlated. So, as technology develops, so do the regulations governing it. While it can be argued that technology leads to more regulations and increased scrutiny of institutions, RegTech (short for Regulatory Technology) solutions have become must-have tools for addressing the challenge of regulatory compliance. By making use of advanced technologies like artificial intelligence, cloud computing and natural language processing, RegTech solutions ensure financial institutions stay up-to-date with their compliance requirements. They share the burden of tracking regulations, gathering data, recording, analysing and reporting that data to regulatory bodies. For instance, one such RegTech firm, CUBE, uses AI-driven digital platform to track regulatory changes across 2,000 global regulators and provide personalised alerts to incorporate those changes.

But RegTech need not be restricted to the streamlining of previously manual processes. If there’s one thing we’ve learnt from the 2008 crisis is that once financial turbulence starts, it spreads like wild-fire. Thus, real-time monitoring with AI can help financial institutions identify red flags early on. Similarly, behavioural analytics can aid in improving risk analysis by understanding how traders act in the real world. Moreover, having information beforehand can be used to model different situations based on changing market conditions; and make sure that institutions are equipped with numerous strategies ahead of time. With work-from-home becoming the norm, cloud computing will provide the flexibility needed for a scattered workforce, and also help cut down on the cost of infrastructure associated with the traditional centralised mainframes. RegTech, thus, makes the system more efficient and stable, and has the potential to allow financial institutions to innovate by freeing up capital that is currently being spent on compliances. 

This is not to say that RegTech is the silver bullet to crack the challenge of regulatory compliance. With increased digitalisation, the threats of cyberattacks, data breaches, money laundering and other fraudulent activities have also multiplied. Technology presents hackers with a new platform and newer ways of stealing sensitive information. But, I guess, that’s true for any innovation, and as long as the benefits of RegTech outweigh the added risks, it will prove its worth in the financial world. In fact, if the financial institutions wish to avoid draining their resources on penalties due to missed deadlines or miscalculations owing to fluctuating variables, and if they are planning to maintain their brand, they will need to back their operations with technology. Institutions need to fill any gaps in their present compliance systems and aim to stay ahead of the curve, if they wish to continue operations.


References – 

  1. Digital Transformation of Regulatory Compliance for Financial Institutions, GoMedici, May 27, 2020
  2. Top Regulatory Compliance in Financial Services, Tech Funnel, September 27, 2018
  3. Global Challenges for Regulatory Compliance, Trulioo, January 31, 2017

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