Written by Donna Bales in her capacity as strategic advisor for Compliance AI
In the last few years, we have seen the acceleration of RegTech. RegTech being the use of emerging technology to improve the effectiveness and efficiency of compliance. We have witnessed technologies such as robotic process automation (RPA), machine learning and artificial intelligence (AI/ML) and blockchain be incorporated into the compliance workflow to reduce the burden and cost of compliance. AI/ML in particular has been used for point solutions and software applications to assist with making better predictions for routine tasks in areas such as fraud prevention and market surveillance. Yet, the use of AI/ML to make decisions is still relatively nascent but that is about to change.
The use of emerging technologies for more complex compliance workflows has been held back by legacy architecture and outdated processes which has prevented system wide changes. I believe we are now at an inflection point which will change the shape of regulatory compliance. Circling back to five years ago, the way I would differentiate FinTech and RegTech is that Fintech is a strategic enabler while RegTech is about improving productivity and cost reduction; however, now the lines are blurred. RegTech is now graduating from a task-based function to an end-to-end system-wide approach. There are a number of reasons for this transition.
Firstly, the demographic and expectations of the customer is changing. Over the next decade there will be an estimated 30 trillion asset shift from baby boomers to millennials and Gen Z. This demographic expects a seamless digital experience, but I would argue, after Covid, so does everyone else! It's no longer the young who want seamless online experience and customer frustration is mounting to a point where previously ‘sticky’ clients will start seeking alternatives. Traditional ‘look-back’, check lists and procedural based compliance is not dynamic enough for the current business environment. This means a seismic change in how compliance is performed and executed.
Secondly, financial service organizations are now in a more mature state having familiarized themselves with AI/ML point solutions and software applications and improved data readiness over the last few years. They have matured their in-house risk and modelling capabilities and strengthened governance practices. In essence, more organizations are prepared to take the next step to system-wide implementations.
Finally, there is strategic advantage and new revenue potential for those that adopt digital compliance. Consider for a moment the adoption rate of Spotify or Netflix. These are examples of systems where the customer has command over the workflow and the system seamlessly supports customer workflow. Customers support the product because its easy to use and they are in control. We have talked for many years about the threat of non-financial institutions capturing market share and it has not yet happened in a sizeable way. We have seen early signs of erosion in wealth management to new players such as Wealthsimple and Questrade. These examples show the possibility and are paving the way towards the new normal. Going back to my early point of RegTech and Fintech lines blurring. Future innovation needs them both to work in tandem driving digital transformation., but easier said than done. Technologies needed to support digital compliance will be subject to regulatory guidance. For example, Bill C-27, Artificial Intelligence and Data Act (AIDA) in Canada, the EU Artificial Intelligence Act and the National AI Initiative Act in the U.S.
Embedding compliance by transferring decisions to the customer requires careful thinking and an overhaul of technical and oversight processes. In some ways, the use of digital decision-making rules makes it clearer and with accountability resting with the customer, the need for layers of oversight is reduced. Although to implement effectively, it requires careful design to ensure transparency and auditability as well as a new mindset and openness for change. The customer is ready – now it's up for the industry to deliver.