Can cognitive RegTech help banks meet growing regulatory burdens?
June 13th, 2017 / Innovate Finance / News
By Peter Collins, IBM Watson FSS
Today, financial institutions around the world face unprecedented regulatory challenges, with the costs of costs of compliance…and non-compliance…increasing with each passing day. While RegTech start-ups use agile, cloud-based technologies to help firms in many industries with compliance needs, in the financial sector the sheer scale of the regulatory challenge is of a magnitude that demands a different approach. Deloitte, in a recent report, noted that firms are beginning to turn to cognitive technology to deal with regulatory complexities that otherwise are too challenging to digest and assess.
This begs the question: How can cognitive-powered RegTech help banks meet their growing regulatory challenges?Increasing regulatory challenges
For financial institutions, the only certainty in today’s fast-changing regulatory environment is the increasing volume and complexity of regulatory change. A recent report on financial regulation estimates that 300 million pages of regulatory documents will be published by 2020 and over 600 legislative initiatives need to be catalogued by a medium sized sell-side institution.
The significant scale of this regulatory challenge is further complicated by jurisdictional overlap and regulatory fragmentation. Global firms must manage overlapping regulatory regimes across jurisdictions from a range of state, regional, national and international supervisory agencies. For example, just in terms of capital and liquidity rules, a global bank must consider the mandates of Basel III, Basel Committee on Banking Supervision (BCBS) revisions to the securitization framework, Capital Requirements Regulation and Directive (CRR/CRD IV), the Dodd-Frank Act and Collins Amendment, the Guidelines on Common Reporting (COREP) and Financial Reporting (FINREP), and IFRS 9. While the new Trump administration in the United States has stated it hopes to reduce or eliminate some of these U.S. regulations, for global firms this means only increasing complexity as it accelerates a trend toward regulatory fragmentation worldwide.
Growing costs of compliance…and non-compliance
The costs of regulatory compliance, and non-compliance, are significant. One report estimates the cost of new regulations for the six largest U.S. banks at an incredible $70 billion dollars. These costs are due, in large measure, to the highly-manual approach of most institutions to compliance. As such we now see many large banks having thousands of compliance staff across their organisation. This traditional, resource-intensive approach is not efficiently scalable. Also, increasing staff, consultants and lawyers across business lines and jurisdictions increases the likelihood of costly human error.
Today these potential costs of non-compliance are staggering. In the United Kingdom alone, in the five years following the global economic crisis of 2008, total fines levied by the Financial Services Authority increased from £26 million to over £474 million. Fines for large financial institutions are today routinely calculated in the hundreds of millions and even billions. For example, a study by the London School of Economics assesses total non-compliance fines and damages, imposed on 10 leading global banks by their regulators over a span of five years, at nearly £150 billion. The clear and present need for innovation in this space is undeniable.
Advantages of cognitive RegTech
For financial institutions, the advantages of cognitive-powered RegTech lie not only in its next-generation computing power, but also in its artificial intelligence (AI) capabilities such as machine learning. As IBM’s Marc Andrews observes on the application of IBM Watson for regulatory compliance:
With the ability to ingest new regulations as they are created, and to review up to 800 million pages of text per second, Watson can provide decision support on compliance issues as diverse as regulatory reporting requirements for derivatives to consumer protection for mortgages. And a cognitive system can learn to alert the proper department if a new regulation applies to its business or mission.
IBM has been at the forefront of innovating cognitive bank technologies for financial services, and are now extending the application of these new technologies to regulatory compliance.
Join this webinar — hosted by Innovate Finance and IBM — and learn more how banks can leverage cognitive-powered RegTech to successfully meet the regulatory challenges of today and tomorrow.