• Shilpa Doreswamy, Retail Banking Sector Director at GFT


• 26.11.2024 08:30 am
#FinancialCompliance #RegTech

Compliance teams in financial services firms are facing a myriad of challenges compounded by the ever-increasing number of regulations that their organisations are required to follow such as General Data Protection Regulations (GDPR), or Anti-Money Laundering (AML). As the financial sector undergoes rapid digital transformation, these challenges are amplified by the emergence of new technologies, evolving customer expectations, and the growing sophistication of financial crimes.

This convergence of regulatory complexity and technological change presents both unprecedented challenges and opportunities for financial institutions as they navigate today’s compliance landscape.

The modern compliance challenge

One of the major challenges is the operational effectiveness of control processes across various disjointed systems with limited analytical capabilities that are usually not user friendly. Monitoring is mostly done manually, consuming the valuable time of key personnel and driving up compliance costs by throwing more bodies to the problem. Compliance digitalisation is only fractionally done.

At the same time, operational risks are increasing through the prevalence of fraud and cybercrime. Keeping client data secure is paramount but the risk that something could go wrong is exacerbated by the inclusion of multiple external third-party vendor solutions within key processes. Compliance teams therefore struggle to control the end-to-end value chains of their firms, which can lead to major disruptions that may negatively impact client satisfaction and incur major economic costs.

Lastly, compliance teams need to figure out how to remain independent. Often, the distinction between compliance (second line of defence) and client operations teams (first line) is blurred, significantly increasing the workload for compliance and hindering progress towards making compliance a more proactive monitoring and control function. Providing the right technological solutions to the first line of defence can positively impact compliance teams and allow them to focus on more emerging risks and horizon scanning.

Regulators have also imposed major fines to financial services institutions for non-compliance. These fines that often come with multi-year remediation plans are a strong motive for business to shape up. Tough penalties are a strong deterrent against non-compliance and a motivational force to drive modernisation and unlock investments for the compliance teams.

Leveraging technology for compliance success

Due to the wide spectrum of regulatory requirements, there are several solutions that can help financial institutions stay compliant. In broad terms, there are four major categories of solutions. 

The first focuses on managing and mitigating any operational risks and providing assurance around cybersecurity and resiliency requirements. The second category of solutions are aimed at ensuring that the financial organisation has the right processes in place which ensure end-users’ protection. The third category centres on complying with regulations that prohibit money laundering and terrorism financing. Finally, the last category of solutions relates to Asset Liability Management (liquidity/funding risk management). Of course, there are auxiliary products that can support an array of further regulatory requirements such as managing gifts and entertainment, policy management, whistleblowing and more.

The AI opportunity

Currently there is also good momentum with AI adoption within compliance teams. Typical use cases focus on driving efficiency mainly around the areas of transaction monitoring, trading surveillance and client due diligence. Compliance teams have also started becoming more autonomous in terms of carrying out tasks that they traditionally relied on IT teams for, such as the generation of analytical reports and complex data queries. In some organisations, AI is also being used to enhance and expedite some of the processes of the first line of defence. 

It doesn’t end there. There are still huge opportunities and further efficiencies to be gained. However, AI is also capable of imposing certain risks including the potential for bias and discrimination, security and intellectual property (IP) risks, social engineering risks, accountability and governance risks, which need to be considered ahead of deployment of the new technology. While compliance teams are striving to embrace AI, they are also actively working on developing strong frameworks and foundations to support AI adoption within their organisations.

Risk orchestration as the future of compliance management

Risk orchestration is an emerging solution pattern that integrates all aspects of compliance into a unified, end-to-end platform. It addresses one of the major challenges facing compliance teams: the need to execute compliance control processes across various disjointed solutions with limited and non-user-friendly analytical capabilities.

When properly developed, risk orchestration platforms can significantly enhance the productivity of compliance teams while also improving the end customer experience, and therefore accelerating an organisation's growth. Adopting such solutions frees up valuable time, allowing compliance teams to be more proactive and agile as well as focus on other emerging risks.

As financial institutions navigate an increasingly complex regulatory landscape, the role of technology in compliance will continue to evolve from a nice-to-have to a strategic imperative. While there are challenges to implementing new technologies, the cost of maintaining traditional manual processes is becoming unsustainable. 

Forward-thinking organisations that embrace technological innovation while developing robust frameworks to manage associated risks will be best positioned to thrive. The future of compliance lies not in throwing more resources at growing challenges, but in leveraging intelligent solutions that enable compliance teams to shift from reactive monitoring to proactive risk management.