23.03.2021

Why RegTech is Becoming More and More Important for Compliance in Banks

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A number of banks have breached Anti Money Laundering regulations in the past and are now on the radar of financial regulators. Fines, threats to reputation and career brakes are often among the consequences.

Financial Crime on the Rise – COVID-19 Being One of the Reasons

Banks and regulators are facing an uphill battle to combat financial crime – and the gradient has increased throughout COVID-19. The pandemic has led to a significant increase in fraud, money laundering and terrorist financing as cybercriminals seek to exploit heightened security risks – all while financial institutions face operational challenges resulting from social distancing measures, limited services, staff shortages, and suspension of conventional servicing channels such as branches.

Suspicious Activity Reports Related to Money Laundering Flood the Financial Authorities

In a number of countries, such as Germany and Switzerland, suspicious activity records related to money laundering are at record levels. In the UK, the UK Financial Intelligence Unit (UKFIU) saw another record number of suspicious activity reports (SARs) during 2019/20, receiving and processing 573,085 (a 20% increase on the previous period). The most significant growth in SARs was seen from financial technology (fintech) companies. They submitted 83,609 SARs in 2019-20 – up 263.94% from 2018-19 (22,973). Fintech thus accounted for 64% of the total increase in overall SARs.

Often Compliance Is Not Sufficiently Automated

As regulators demand more and more transparency, financial institutions need to produce and manage an increasing amount of data. To do so – that is, to gather, analyse, and compute all the necessary data – firms make use of various technology systems and applications. In truth, however, much of this data gathering and analysis still includes manual processes – a huge cost-driver for firms.

To Make a Long Story Short: Concentrate all Resources on Compliance Risk Management

In the face of increasing regulatory demands and increasing cost pressure, financial institutions are struggling to manage their compliance obligations. The result is significant compliance risk and the looming threat of regulatory fines – as well as an increased internal focus on administrative tasks as opposed to risk management.

Financial Institutions Must Embrace RegTech Solutions

After more than a decade of global regulatory reforms defined by the 2008 financial crisis,  deep-cutting changes have reshaped the regulatory environment for financial institutions. They have seen a flood of new laws and regulations come pouring in. Though understandable, the sheer volume of these new rules and standards have created reams of red tape to cut through – making the work of risk and compliance functions more complex and time-consuming, and leaving financial service providers focussing on compliance rather than innovation.

The answer lies in digitalization. Financial firms need a sustainable, scalable and cost-effective solution to analyse enormous amounts of data more efficiently, identify suspicious activity more easily, and improve and accelerate risk detection and remediation.

The Rise of RegTech as Beacon of Hope for Compliance

RegTech solutions use cutting edge technology like machine learning to help financial firms solve regulatory and compliance issues quickly and at scale. Combining data with the knowledge and expertise of compliance officers, machine learning RegTech solutions quickly and accurately detect complex cases of money laundering and terrorist financing.

Demand for digital compliance RegTech solutions has skyrocketed in recent years as organisations struggle to cope with increasing regulatory pressures. Indeed, the global RegTech market is expected to grow from USD 6.3 billion in 2020 to USD 22.2 billion by 2027, at an impressive Compound Annual Growth Rate (CAGR) of 20.1 % over the forecast period, according to a recent analysis from Research and Markets. 

Machine Learning in Compliance Represents the Brains of RegTech

Given the increasing complexity of threats and the growing volume of data to analyse, current compliance processes that rely largely on high levels of manual, repetitive and data-intensive tasks are simply inefficient and yield a relatively low impact in terms of detecting risk and fraudulent activity.

The time is now for financial firms to explore the capabilities of AI-powered and purpose-built automated compliance and risk management systems. New RegTech solutions allow banks and financial institutions to analyse huge volumes of data from numerous sources at exceptionally high speed – automatically flagging up security risks or breaches of the law. Combining data with the knowledge and expertise of compliance officers, machine learning RegTech solutions quickly and accurately detect complex cases of money laundering and terrorist financing.

RegTech systems slash the time required to carry out complex analyses and checks, resulting in huge productivity and efficiency gains, while improving accuracy, data quality, and cutting costs – the much-needed solution to scale and adapt to the modern threat and regulatory landscapes.

To learn more about how digitalization and machine learning work in the compliance function, download the free whitepaper “Why Successful Banks and Insurance Companies Now Rely on Machine Learning in Compliance”.

Providing an overview of the latest SAR figures, new regulations, and key steps towards automation in compliance, the paper also includes 10 lessons learned that should be considered when implementing machine learning into compliance systems.

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