Will AI take over regulation and compliance in the future?


AI has long been touted as the future for many industries, and the recent explosion of GenAI platform ChatGPT may have revealed that that future is now here.

A key area ripe for disruption and innovation is that of regulation and compliance. As a market, it has long been seen to involve cumbersome and slow processes that impact both efficiency and the bottom line. A key question many in the RegTech industry have been asking is: will AI take over regulation and compliance in the future?

“In terms of whether we can expect AI to take over regulation and compliance, the answer is no,” said Susannah Hammond, senior regulatory intelligence expert at Theta Lake. That said, while she believes it is unlikely to be a takeover, she said it is likely AI-enabled solutions will increasingly be used as a tool to enhance the next strategic iteration of regulation and compliance.

She exclaimed, “Given the ever-evolving nature of risk management in financial services there will always be a need for not only a human-in-the-loop but also a human directing the AI as to where to look, on what basis and with what assumptions,”

There is a belief on Hammond’s part that the next iteration of regulation will be driven – at least in part – by SupTech as financial services regulators globally invest in tech and revamp their data strategies.

She said, “SupTech solutions will likely result in efficiency gains for firms as well as their regulators. However, that benefit can only begin to materialize if firms have the capability for complete, accurate and native context records retention, preservation and retrieval.”

One of the key industry developments in recent years has been the explosion of data and the increasing need for its use. Hammond stressed that for regulators and compliance functions alike, the sheer magnitude of the data currently being generated outstrips the capacity of individuals to review manually.

“This has particularly been seen with the now near ubiquitous use of dynamic unified collaboration tools such as RingCentral, Zoom, Cisco Webex, Slack, and Microsoft Teams. UC tools are an essential part of the modern business environment and due to the scale and complexity of actively and comprehensively detecting unique and growing risks within communications, organizations are turning to technology including AI to help,” she said.

Hammond went on to say that it is a well-trained AI’s ability to understand specific risks in context that reduces both the number of false positives or alerts, as well as risks that would be otherwise missed due to unclear audio or transcripts.

“The selection of the high quality expert sources and domain expertise needed for a well-trained AI model requires the human touch. Organizations simply cannot rely on generative AI such as ChapGPT for the judgment call and experience needed to train a financial services or other specialist AI model,” Hammond stated.

She concluded, “AI is unlikely to takeover but with a well-trained solution, the use of AI will enable firms and regulators to find risks and potential risks at speed as well as benefiting from significant efficiencies and cost savings.”

Similar to the thoughts of Hammond was the opinion of Vall Herard, CEO of RegTech firm Saifr. He commented, “In my opinion, AI is a long way from being able to replace humans in regulatory compliance roles. There are important characteristics requiring human judgement that even the current state-of-the-art AI tools cannot automate.”

He stated that the ability to interpret regulatory rules, make judgements around social perceptiveness and negotiate effective are a few examples of where AI currently falls short.

He continued, “More concretely, the tone of communication, a social perception cue that is subject to human interpretation/reasoning, can lead to violations of regulatory rules around public communications in most jurisdictions globally. Such characteristics are not found in the family of auto-regressive (AR) systems that dominate the AI landscape today. Such systems even include the most advanced large language models (LLM) that drive a lot of the discussions in the press.

“Clearly there are routine tasks within regulatory compliance that AI can help automate. However, until AI gets much closer to artificial general intelligence (AGI), which is a possibility, there is a crucial balance between human and AI that must be maintained to have an effective regulatory framework in regulated industries.”

A great leap forward?

While much has been made of the potential risks and challenges that AI could pose humans going forward, there has also been a loud crowd extolling the potential virtues of artificial intelligence.

Vladimir Ershov – head of data science and machine learning at Clausematch – said, “On the one side of the equation, the promise of AI presents an extraordinary leap forward in workforce productivity,”

He cited recent research by McKinsey that found AI could generate an economic surplus of around $3.1trn per year, effectively adding an economy the size of the UK to the global ledger.

“This transformative effect is expected to revolutionize not just general finance, but also the field of compliance. We are already witnessing the automation of numerous processes, from drafting policies to gap analysis, contradiction detection, and others,” exclaimed Ershov.

With these huge upsides, however, Ershov said that there was another side to this story, ‘one that unfolds silently, often unnoticed but with potentially far reaching consequences,”.

He explained, “AI’s influence isn’t confined to the apparent, visible alterations it brings to our workflows. It’s also about the subtle, almost imperceptible ways it reshapes our actions and decisions, nudging us towards specific outcomes.

“From politicians penning speeches with the aid of generative AI to regulators drafting regulations, decision-makers and lawyers conducting reviews, and companies interpreting laws, the tendrils of AI have woven themselves into the fabric of these processes. All across the board, generative AI models are quietly guiding our attention toward topics that their algorithms deem pertinent, thereby framing our discourse and deliberations.”

He said that while the change may not be apparent at first glance, it is subtle, ‘like a gentle breeze’ and is almost imperceptible but is capable of steering a ship off course over vast distances.

Consumer outcomes

One key area where AI is being found to be able to make strong positive strides is in the area of consumer outcomes.

Aveni CEO Joseph Twigg said, “The need to demonstrate good consumer outcomes changes everything. Consumer Duty is transitioning the role of assurance and monitoring functions within an organisation, and they’re set to become key drivers of business decisions. Existing assurance processing is not equipped to scale to the level required to demonstrate that a customer has realised good outcomes.

“Human teams will not have the capacity to assess more cases at a materially deeper level and this is where technology, and particularly AI, will play an integral role. Consumer Duty requires machine and human assessment to work in harmony to provide both the breadth and depth of assurance required to demonstrate compliance.”

In what areas can technology help? According to Twigg, technology can provide scalable, data-driven assurance that combines human and machine assessment in order to create scalable automated assurance that powers business decision making and automates compliance reporting direct from the customer voice.

It can also offer greater Consumer Duty alignment which will reorient assurance and monitoring processes toward Consumer Duty outcomes. Finally, it can deliver a material reduction in ongoing cost to optimise the balance between machine and human assessment, increasing quality, scalability whilst reducing cost and removing cumbersome manual process.

Increasing role

In the view of Keith Berry, general manager of KYC solutions at Moody’s Analytics, AI is likely to play an increasingly significant role in KYC and AML compliance in the future.

“AI systems can efficiently analyse vast amounts of data, identify patterns, and flag risks within profiles that need someone’s attention. This makes AI a valuable tool in achieving compliance and efficiency goals.”

He said that while AI is still developing – and changing at pace – human judgement continues to be essential in risk monitoring and due diligence.

“The technology can assist with compliance processes, using natural language processing (NLP) and machine learning (ML) to review screening matches and generate reports that summarize compliance data and highlight areas of concern,” said Berry. “It can also accelerate the process from data query to decision for compliance professionals, helping them quickly identify and communicate serious risk alerts to senior management and other stakeholders.”

Despite this, Berry underlined that this tech is not intended to replace them, more to augment the job expert compliance professionals do. “Human insight and accountability will continue to be necessary to ensure fair and well-judged practices are applied to KYC and AML frameworks,” he concluded. “

Also offering his viewpoint with Cognitive View CEO Dilip Mohopatra, who stated, “With the pace AI technology advances it is a bit hard to predict everything. Looking at the evolving patterns we see AI will only strengthen compliance monitoring with automation. Many of regulations is built on the assumption that we have manual processes.

“As many of the company’s processes get automated, it is expected to have less human intervention which means a lesser number of compliance breaches. At the same time, regulators will launch new set of regulations to ensure there is human in the loop for the AI driven processes to ensure governance.”

Joseph Ibitola – growth manager at Flagright – also remarked, “AI is unlikely to fully take over regulation and compliance in the future. While AI can enhance these processes by analyzing data and identifying patterns, human oversight and judgment will remain crucial. Regulation and compliance involve interpretation, understanding complex frameworks, and applying them in real-world contexts.

“Human regulators and compliance officers provide nuanced decision-making, assess ethical considerations, and adapt to evolving requirements. Additionally, aspects like stakeholder engagement, risk assessments, and policy formulation require human skills that AI cannot fully replicate. Therefore, AI will play a supportive role, but human involvement will remain essential in regulation and compliance.”

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