After the Lehman Brothers debacle, the search for new business models and new technologies to avoid such disasters started. This resulted in an increase in the disruptive use of technology within the financial sector. Several advanced technologies surfaced within the industry, which raised concerns among regulators, calling for the creation of more regulatory laws. The introduction of various changes and regulations and added complexities led to the emergence of RegTech. Over the years, RegTech has evolved considerably, and several new technologies have been introduced to make reporting and compliance easier. One of the technologies is Artificial Intelligence. But many fear that the introduction of AI in RegTech will do more harm than good. So let us try to analyze both the negatives and positives associated with AI in RegTech.
What is RegTech?
RegTech or Regulatory Technology enables smooth management of regulatory processes within the finance industry with the help of technology. Its main functions include:
- Regulatory monitoring
- Regulatory reporting
- Ensuring compliance.
RegTech providers use cloud computing technology through software-as-a-service (SaaS) to perform all the above functions efficiently.
How Artificial Intelligence enhances RegTech
RegTech ensures seamless regulatory compliance in financial institutions. Technology plays a crucial role in digitizing and simplifying the compliance process and reducing heavy penalties. They usually cater to the needs of risk management, regulatory reporting, identity management, compliance, and monitoring transactions. Both finance companies and regulators use RegTech to deal with complex compliance processes. AI is one of the prime technologies, enhancing RegTech and increasing the productivity of finance institutions. AI enhances Regulatory technology in the following ways:
- AI can screen through massive amounts of data and establish connections in unrelated or unstructured data sets.
- AML & KYC processes pose several challenges for finance organizations. AI enhances the productivity of human workers by handling repetitive and time-consuming tasks.
Several big companies today are integrating AI with RegTech to make surveillance more effective. For example, ‘Shield,’ a Tel Aviv company, uses AI to automate the compliance lifecycle. Another company Darktrace uses proprietary Autonomous Response Technology that helps businesses comply with regulations like GDPR, HIPAA, and others.
Besides monitoring and compliance, AI also has a major role in the customer service space. It also helps prepare regulatory firms for uncertain events, like natural disasters, financial frauds, and cyber crises by teaching them crisis management strategies.
Using AI and machine learning capabilities on the transactions, money laundering and frauds can not just be uncovered but also avoided.
Perils of AI in RegTech
While there’s no denying that AI is a boon for several industries, including RegTech, there are still some disadvantages that businesses need to be aware of. Some of them are:
- Herding behavior
- Out-of-sample extrapolation
- Spurious correlations
- AI can lead to discrimination against a particular gender, race, or social class as it learns from historical data.
- Automating decisions based on known conditions increases the distance of the compliance professional from the actual decision-making process.
Other than these perils, many people speculate that AI will sooner or later replace the human workforce.
Possible solutions for the AI-related challenges
Many organizations are keen to experience AI and machine learning solutions and leverage the rich data that is being collected, but as discussed, there are several perils involved. An organized approach can help avert the risks and maximize the benefits.
- Lawyers and risk professionals should be included in the team during the development and integration.
- Every organization needs to contemplate what they need to solve with AI before they embark on technology choices.
- Next, they need to be mindful of the risks that an AI solution can bring.
- A phased approach should be adopted during this or any new technology adoption.
- As new regulations and changes occur, the suite of tests should be updated, and algorithms should be adapted to reflect the latest changes.
Future of RegTech
Going by the latest studies, the global RegTech market is expected to hit the $53.2 billion mark by the end of 2026, at a CAGR of 42%. AI and other technological solutions will have a major to play in this growth.
Another report points out a similar trend and states that Regulatory Technology will modify the regulatory scenario positively in the coming years. With the growing research and interest in the field of RegTech, some of the trends that can we can expect are:
- Increase in demand for genuine, holistic, flexible, and future-proof RegTech platforms.
- Increased demand for cloud-based platforms.
- Increased focus on reporting accuracy.
- Increased focus on data quality.
As 2021 nears its end, we can already see the RegTech market focusing on technology, data quality, and efficiency. However, there will also be an increased need for human guidance and assistance to understand and learn the regulatory language. So despite major disruption by AI and other technologies, people will be working longer and harder than ever before to make compliance departments function better and apply the highest quality data to various modern tools.