As technologically-driven solutions continue to firmly pierce the financial industry and how it runs, the need for firms to maintain compliance amongst a deluge of new regulations and expectations means that compliance firms must keep up. To do this, will compliance technology reign supreme in 2024?
Holly Sais Philippi, CEO of RegTech firm Alessa, believes there are a range of factors that will almost certainly contribute to continued growth in the adoption of new and expanded compliance technology by FIs.
She said, “The hesitation in stating that 2024 will be the year of compliance technology is that it will almost certainly have higher adoption rates than 2023, however, it is very likely that we will see increases in adoption rates year after year even after 2024. This results from various internal and external factors for FIs.”
According to Philippi, there are three external factors this year that are contributing the most to increases in the adoption and implementation of new and/or expanded compliance technologies.
These are geopolitical conflicts and changes, technological advancements of FI Internal systems, and use of technological advancements and artificial intelligence (AI) in financial crime. “Of course, internal pressure on budgets and do more with less will continue to be a driver for compliance teams to continue to look at how technology can allow them to do more with less,” she explained.
A less highlighted reason why such technologies have risen to greater prominence is due to geopolitical changes. “Over the past few years, we have seen an increase in global geopolitical conflicts in areas such as the Ukraine and the Middle East. These conflicts lead to changes to sanctioned individuals, companies, and regions.
“Given things can change overnight it is critical to ensure the updates to the various watchlists, sanctions lists, and politically exposed persons (PEP) lists are critical, and as we know penalties for noncompliance are high. Therefore, it is critical to ensure technology solutions can make changes in real-time, to support new client onboarding, monitor existing clients and manage transaction monitoring to ensure we stay in compliance with the changing landscape,” said Philippi.
The vast number of political elections in 2024 is also an important factor to consider on this topic, claims Philippi, with over 40 countries set to go to the polls this year.
“In election years, allegations of corruption and financial crime of political figures seeking election tend to increase. This may have a large impact on PEP lists, as politicians are removed and added as allegations come to the forefront. Therefore, having a solution that can help navigate the changes immediately and with added functionality such as scoring and AI/ML to help reduce false positives is critical,” the Alessa CEO underlined.
She added on this topic that in 2025, the industry will also most likely experience changes to sanctions, as newly elected officials may change their stances on certain sanctions or add sanctions to countries/individuals who are currently not sanctioned.
There has additionally been changes to payment processes and systems that have driven the rise of such technology. Philippi explained, “Technological advancements in payment processes and systems have added additional burdens to FIs’ transaction monitoring and screening processes.
“To address consumer demand, payments have become increasingly more digitised and complex. There are various new forms of payment rails, forms of payment, and digital currencies. New forms and payment methods make an already burdensome process more difficult. Consumer demand for quicker, digitized payment processes has led to increases in transactions.”
With increases in transaction volume and complexity, Philippi remarked that it has become vital for FIs to implement real-time transaction monitoring and screening solutions to meet compliance regulations and reduce fraud.
An area where the rise of compliance technology has been particularly prevalent and important is in the area of financial crime. Philippi remarked that criminals are starting to use advancements such as AI and new forms of cryptocurrencies to launder their profits and conduct fraud. Due to this, implementing fraud prevention and compliance technology is vital to detect and prevent new money laundering and fraud tactics.
Additionally, Philippi explained that implementing compliance technology to automate more tedious processes such as regulatory reporting, sanctions screening and transaction monitoring can free up compliance professionals to focus on these more challenging aspects of compliance and the advancements of fraudsters as it is critical to keep up and get ahead of these bad actors.
The continuing squeeze on compliance budgets also means the rise of compliance technology is that much more expected.
Philippi underlined, “Internal factors causing increased adoption rates lie in the fact that many organizations are lowering their compliance budgets and reducing compliance personnel.
“Less budget and fewer personnel, paired with increases in transactions, types of payments, and screening complexities means that compliance departments need to be as efficient as possible. At a minimum, these organizations (FI or Corporate) need to automate time-consuming repetitive tasks, newer scoring models, and advanced technologies can assist in doing just that.”
Using a technology solution that allows for consolidation of point solutions, implements real risk scoring and automation can play a key factor in doing more with less while maintaining strong compliance programs to mitigate risk to the organizations, states Philippi.
She added, “These various external and internal factors will most likely lead to 2024 having one of the highest adoption rates of new compliance technology to date. Will it be the year for compliance technology? While geopolitical conflicts can lessen soon, and we certainly hope this occurs, we do not envision transaction types and volumes lessening, nor do financial criminals stop innovation with advanced technology and tactics.”
Philippi summarised, “In our opinion, the year for compliance technology will always be next year, as we predict adoption rates to continue to grow year over year for the foreseeable future.”
Communications platforms
Stacey English, director of regulatory intelligence at Theta Lake, explained that 2024 is proving to be a pivotal year as the industry shifts towards widespread adoption of compliance technology that is compatible with their modern workplace, with in her view the Theta Lake’s recent announcement of Zoom Compliance Manager serving as a tangible example of this change.
She said, “Unified communications platforms like Zoom, Microsoft Team, Cisco Webex and RingCentral have become part of the fabric of organizations – bringing a move from purely voice calls and email to rich chat conversations, video, cloud-based calling, combined with collaboration tools like digital whiteboards.
“But firms are facing significant compliance pain because their existing compliance tools built for a different era aren’t compatible,” English remarked. “Typically the archive infrastructure in place is split across voice and text-based communication with little integration and even less coverage for mixed mediums and the mesh of tools – which impedes everything from capture and recording keeping to context, search, and risk detection.”
English highlighted research that found almost all of the 600 financial services firm surveyed were dissatisfied with their existing archives and voice recording tools. “Add to that the unrelenting regulatory focus on record keeping and oversight failures with fines in the U.S. exceeding $2.6bn and regulators warning of higher penalties because firms are on notice. So it’s no surprise that over three-quarters of firms have said they are revisiting their communications compliance this year with 48% investing in specific compliance communications solutions,” she commented.
In the opinion of the regulatory intelligence director English, keeping pace as new communication features and tools are added is a real struggle.
“The challenge for most organisations is that new tools have so many features and types of communications all meshed together – such as emojis mixed with text, chat comments on whiteboards, chat in a video meeting, images with text in them or files shared via a link in a chat or meeting,” she explained. “In practice, many firms turn those features off because their pre-existing tools can’t effectively capture them and/or make them searchable for detecting and reporting risks – which then has the unintended non-compliance consequences of driving staff to alternative unmonitored methods to communicate.”
She concluded, “Having the most comprehensive coverage compliance for unified communications and collaboration tools is critical for our regulated customers. We’re helping firms make sure they can capture all the different tools and channels like email, chat, video, whiteboards alongside all the contextual information like emojis and reactions, and then be able to search and retrieve those records.
“It’s clear that Unified Communications providers are feeling the need from customers too and making it a priority to help them by providing more ways to solve recording keeping and supervision needs.”
Since the 2008 crisis
Evgeny Likhoded, president at Corlytics, said that every year since the 2008 financial crisis has been recognised as the year of compliance technology due to advancements in both the market-developed solutions, the application of technologies, and the ever-increasing burden of regulations.
He stated, “There has been a noticeable change since the early years after the financial crisis, and investing in compliance tools is now also much more encouraged. The transformation and readiness are coming from within. Culture in financial services institutions is changing. Organisations are initiating pilots in compliance, they onboard heads of digital, heads of AI, heads of cloud strategy and so on. Areas such as environmental, social, and governance (ESG) compliance, digital transformation, and regulatory sandboxes are likely to shape the future of compliance technology in the coming years.”
Likhoded also emphasised that technological advancements, involving not only automation, AI and ML but also GenAI capabilities, boost the capabilities of compliance technology solutions.
He stated, “The amplification of human abilities by these innovations in the event AI is precise and accurate, makes compliance professionals super-efficient like never before, able to focus on value-adding work and plan proactively. This shift is evident, and there will be a much greater willingness to invest in compliance tools naturally.”
Meeting regulatory attention
In a time where the regulatory burden is increasing considerably across the financial industry, the ability to meet this challenge will be highly sought after by companies in the space. Allison Lagosh, head of compliance at Saifr, believes 2024 could be the year of industry adoption of compliance technology due to the ‘perfect storm of more regulatory attention, some clarity on AI regulations, and sophisticated AI technology being applied to help ease the increasing regulatory burden’.
She continued, “With heightened attention from regulators, upgrading compliance technology stands as a top priority for Chief Compliance Officers in 2024.
“CCOs remain focused on using advanced technologies such as artificial intelligence (AI), machine learning, and automation to streamline their compliance processes. And with more regulations likely, compliance departments are feeling pressure to figure out their technology strategy and spend to be more efficient with their limited resources while helping the firm remain compliant.”
Lagosh highlighted that thankfully, last year provided some greater clarity on how AI may be regulated and how firms can start to use it. This was shown through the EU AI Act, the US Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, and the SEC Proposed Rule on Predictive Data Analytics. “Together these regulations outline a road map of how to begin to carefully incorporate AI into your business practices,” she explained.
In addition, the Saifr compliance lead noted there seems to be more of an influx of RegTech firms offering robust AI technologies to help firms address complex regulations. “Industry conferences are flooded with panels, vendors, and tech providers offering some form of compliance tech solutions to manage ever growing needs. The benefits are becoming more clearly valued,” she said.”
Lagosh ended, “With an ever-growing need and demand, some guidelines toward implementation, and more robust options, 2024 may be the year.”
In a similar but slightly alternative vein, Remonda Kirketerp-Møller, CEO of Muinmos, remarked that as regulatory environments across the globe become increasingly complex and stringent, the adoption of RegTech is ‘undoubtedly’ on the rise.
“Despite these compelling reasons, the full massive adoption across the industry will likely continue to unfold over several years, influenced by factors such as organizational size, sector-specific regulations, and regional legal frameworks and investing in change management prior to such adoption to ensure its success,” she said.
Meanwhile, Corlytics’ Likhoded emphasised that in the financial industry, the pressure from regulations is not becoming any less. “Regulations like the EU’s GDPR and an increase in cybersecurity threats have led to a growing emphasis on data privacy and cybersecurity compliance in recent years. And now even more so since the EU’s AI Act was introduced,” he said.
Anna Shute, junior product manager at Qkvin, added, “Year on year companies are increasing their use of compliance technology for a number of reasons. Some due to the shortage of skilled compliance resources joining companies and others purely to ensure their offering remains competitive with the benefits RegTech brings over solely manual methods.
“A RegTech article published recently found only 4% of financial institutions are ‘very confident and need no further clarification’ on AML regulations and compliance measures. This indicates something must change imminently to bridge this gap.”
Digitisation benefits
Anthony Quinn, CEO and founder at Arctic Intelligence, highlighted that the rise of compliance technology can help some businesses move away from using ‘antiquated spreadsheets.
He said, “At Arctic Intelligence we provide solutions for regulated entities to conduct business-wide financial crime risk assessments and whilst we have had success with early adopters this is a very long way from becoming mainstream as most organisations we come across are still using antiquated spreadsheets that are no longer fit for purpose and whilst we are seeing more companies willing to adopt RegTech in this area it could be years before solutions like ours are the default standard.”
In the mind of Quinn, there are ‘inumerable’ benefits of digitising spreadsheet-based approaches to business-wife financial crime risk assessments – not least, in his view, a full audit trail, approval workflow, real-time dashboards and reports and analytics.
He added, “It seems inconceivable in 2024 major banks use spreadsheets to manage financial crime risks where the penalties for non-compliance can stretch into the billions.
“It really should be an easy decision to make and the return they achieve for a modest investment in strengthening their defences against financial crime as well as the time and cost savings of conducting these manually would payback within the first 12-months anyway, so organisations should at least be considering digitising and automating these practices,” he concluded.
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