AI-Powered RegTechs – Helping the Finance Industry Better Navigate Compliance

09.21.23 By

In this blog, we dive into the world of how AI-enabled RegTechs are changing the face of financial regulatory compliance. Learn about real-world applications and how AI-enabled RegTechs will be positioned in the Finance industry’s future.

1. Introduction to RegTechs and AI-Enabled RegTechs

Organizations in the finance industry are increasingly using RegTech solutions to meet regulatory requirements and reduce compliance gaps ahead of deadlines. This increasingly dominant trend is set to revolutionize the Finance industry. But what exactly are RegTechs?
RegTechs refer to using technology to manage regulatory processes in the financial industry. RegTech firms are cloud/SaaS-based companies that assist businesses in complying with regulatory rules efficiently and cost-effectively. RegTechs’ primary functions are:

  • Regulatory monitoring
  • Reporting
  • Compliance
  • Implementing enhanced data management and risk assessments for compliance have been shown to increase operating expenses by up to 60% for banking entities.
  • Global compliance and regulatory spending are estimated to be $270 billion.
  • Regulatory compliance accounts for 10-15% of the workforce.

PwC

As seen in the stats above, while the financial industry is now embracing RegTechs, more than managing compliance with RegTechs is required. The industry needs an upgrade to support complex compliance requirements. What is the next phase in RegTech technology? AI-driven RegTech solutions.

1.1 The Need for AI-Enabled RegTechs

Here are a few of the demand drivers for AI-enabled RegTechs:

Ever-Changing Financial Regulations Compliance regulations are constantly evolving.

  • Whether there’s a new circular release or amendments to existing rules, AI-enabled RegTechs can help organizations keep up with all the regulatory changes.
High Overhead Expenses The implementation process to build and deploy regulatory-compliant solutions takes much work for financial institutions.

  • By deploying emerging technologies, AI-enabled RegTechs can save FIs from spending big bucks.
Operations Legacy systems affecting business productivity are primarily due to the following:

  • Lack of scalability
  • Slow speed
  • Erroneous regulatory reports delivery
  • ✔ AI-enabled RegTechs run on automated operations, delivering more accurate and faster insights.
Durability AI systems are vulnerable to emerging threats targeting data manipulation at various stages of the AI lifecycle.

AI-enabled RegTechs can:

  • Monitor suspicious activities.
  • Help FIs make informed decisions.
  • Rectify incorrect decisions that occurred due to data manipulation mishaps.
Trade Surveillance AI-enabled RegTechs can help FIs gain real-time alerts by:

  • Automatically analyzing trading data
  • Detecting suspicious patterns or market abuse
Reducing False Positives Leveraging advanced algorithms to refine anomaly detection provides more accurate identification of compliance breaches.
Validating Regulatory Data AI-enabled RegTechs help the finance industry achieve enhanced risk management and regulatory adherence by:

  • ✔ Automating regulatory data verification
  • ✔ Employing advanced algorithms to detect discrepancies
  • ✔ Expediting compliance automation with intricate financial regulations
Regulatory Change Management AI-enabled RegTechs can:

  • ✔ Continuously monitor regulatory updates
  • ✔ Swiftly identify their impact on existing processes
  • ✔ Automate necessary adjustments
  • ✔ Ensure timely compliance
  • ✔ Reduce compliance-related risks
Identity Management and Control AI-enabled RegTechs can help FIs get a handle on identity fraud by:

  • Employing biometric authentication and behavioral analysis to verify user identities
  • Bolstering security and reducing fraudulent activities through real-time monitoring and adaptive access controls
Fraud Prevention and AML with Anomaly Detection Continuously analyzing transaction data with advanced ML helps detect subtle anomalies and swiftly flag potential risks while ensuring strict compliance with AML regulations and minimizing financial fraud.

1.2 How are AI-Enabled RegTechs Delivering Efficient Regulatory Risk Management?

Maintaining public trust in an AI-powered financial system is the bedrock of financial stability, and financial firms looking to streamline compliance are investing in AI-enabled RegTechs. This fast AI adoption also demands solid AI governance to manage regulatory compliance. To ensure trust in a compliant AI-powered financial system, financial institutions need AI-enabled RegTechs.

AI-enabled RegTechs can resolve many constraints associated with traditional regulatory control systems. Here is how AI-enabled RegTechs assist in managing risks and compliance:

  • Building a Roadmap to Efficiency – AI-enabled RegTech applications involve mapping and updating regulatory requirements as they change. They can address compliance challenges quicker than traditional regulatory systems, reducing the time taken and lowering operational costs while enhancing automated regulatory compliance.
  • Ensuring Standards –AI-enabled RegTechs can also monitor sales calls by financial institution staff to ensure that regulatory standards are followed, and that financial product features and risks are appropriately disclosed.

    An end-to-end RegTech deployment ensures a 634% ROI achievable in three years.

  • Automating Critical Procedures – FIs can utilize AI-enabled RegTechs to streamline the collection, validation, and analysis of vast regulatory data for financial data quality management and compliance information. For example, RegTech can automate data management analysis with AI and ML for instances such as due diligence.
  • Supervising Compliance Communication – RegTech employs AI to reduce risk, automate KYC, manage compliance communications, and make surveillance more effective. By leveraging ML and NLP, AI systems can identify keywords, phrases, or patterns indicative of regulatory breaches or misconduct, ensuring that FIs can promptly address any issues. Additionally, AI-enabled RegTechs can provide context-aware insights, helping compliance teams prioritize high-risk communications and allocate resources more efficiently.
  • Delivering End-to-End Visibility – AI’s quick detection and containment of threats assist in attack investigation and gaining complete visibility of digital activities across the organization. By offering comprehensive monitoring and analysis of regulatory compliance processes through data aggregation, audit trails, and real-time analysis, AI-enabled RegTechs can optimize the entire compliance cycle.
  • Implementing Self-Learning Crisis Management – AI can also create self-learning crisis management to equip regulatory agencies better to manage unforeseen circumstances. AI-enabled RegTechs, through adaptive ML and data analytics, can enable data gathering, pattern recognition, scenario planning, etc., to assist FIs in anticipating compliance-related crises.

2. How AI-Enabled RegTechs are Enhancing Finance Operational Compliance?

Here is an example of how a leading bank reduced compliance-related expenses with the help of an AI-enabled RegTech solution:

Over the past decade, non-financial risks and failures such as money laundering and tax evasion have cost HSBC billions in penalties and settlements. Despite hiring thousands of risk and compliance professionals, HSBC was compelled to invest billions in legacy regulatory control systems. To handle non-financial risks, HSBC needed to choose between a standard regulatory control system and a new AI-enabled Regtech system. HSBC’s operations team conducted a pilot test of an AI-enabled Regtech solution, which assisted in anticipating problem areas at a far lower cost than standard methods. The AI-enabled RegTech solution, over time, enabled the institution to save a significant amount of money, resulting in a higher ROI.

Here are a few other ways AI-enabled Regtechs are enhancing operational compliance:

  • All-in-all AI-enabled RegTechs can improve prudential monitoring and provide central banks with new capabilities to achieve their monetary and macroprudential goals.
  • AI-enabled RegTechs enable businesses to negotiate complex regulations and anticipate regulatory shifts.
  • Moreover, AI’s capacity to process enormous amounts of data quickly and accurately can reduce lengthy and intricate compliance material into a brief, readable format that only includes the document’s most essential and critical parts.
  • AI systems can scan compliance requirements from regulator websites and notify businesses of regulation changes using deep learning and NLP.

3. Top 4 Reasons Why AI-Enabled RegTechs are Here to Stay!

Here are the top 4 reasons why AI-RegTechs are here to stay and will continue to influence the finance industry:

  • Client Awareness and Preferences: Financial industry leaders need AI-enabled RegTechs to keep up with clients’ preferences for constant information about their interactions with financial institutions.
  • Rising Macro Trends: The rising macro trends, like updating tax laws in response to escalating market demands, will also feed the need for AI-enabled RegTechs.
  • Gaining Insights from Big Data: Considering the rise of big data, there will be a growing focus on extracting clean and insightful data. AI-enabled RegTech companies will be a prime option for firms looking to deliver more accurate, smart data insights. Inaccurate reporting derived from unstructured data can cause risky decision-making, more errors, and manual reconciliations. This exposes financial organizations to regulatory and operational risks. However, AI-enabled Regtechs are critical in providing precise, clean, and well-measured data sets.
  • Emerging Trends in NLP, XAI, and Deep Learning: The boost in NLP, Explainable AI, and deep learning will also increase the use of AI-powered RegTech systems. As the need for enhanced data understanding, transparent decision-making, solid prediction, and reduced false positives grows, the need to implement AI-enabled RegTechs will grow.

4. Conclusion – AI-Enabled RegTechs are an Essential Ingredient in Finance Compliance

Financial institutions are seeing increased demand for straightforward and streamlined compliance procedures. Regtechs will undoubtedly be essential to cost-effective and efficient compliance in the future. AI-enabled RegTechs will gain momentum, becoming more and more integral to financial operations. TechFin companies are also emerging as RegTech providers with services such as transaction monitoring, regulatory reporting, risk management, and more.

Financial institutions looking to implement RegTechs into their operations need a trusted partner to get them up and running quickly.

5. How Bridgenext Can Help

Bridgenext (former Emtec Digital) is a trusted AI consulting and development partner to TechFin and FinTech firms, ensuring we safeguard our clients from risk infringement. Our team of experts has the domain and industry knowledge to help financial institutions make sense out of compliance chaos. Bridgenext can help RegTech providers – usually comprised of TechFin companies with AI-driven product development.

Are you looking to deploy AI-enabled RegTechs in your financial ecosystem to effectively manage your risks and regulatory compliance? Contact Bridgenext today.

References

www.ascentregtech.com/blog/the-not-so-hidden-costs-of-compliance/

fintechmagazine.com/venture-capital/how-ai-and-machine-learning-are-driving-regtech-innovation

www2.deloitte.com/lu/en/pages/technology/articles/regtech-companies-compliance.html/#tab1

www.thomsonreuters.com/en-us/posts/technology/ai-enabled-regtech-questions/

www.thomsonreuters.com/en-us/posts/technology/ai-enabled-regtech/

www.thomsonreuters.com/en-us/posts/corporates/ai-governance-risk-compliance-programs/

www.gao.gov/assets/gao-18-254.pdf

www.pwc.in/industries/financial-services/fintech/fintech-insights/regtech-a-new-disruption-in-the-financial-services-space.html


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Topics: AI and ML

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