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September 15, 2022

Are you still doing compliance with paper and spreadsheets?

Anastasia Dokuchaeva
Head of Products at Clausematch

Klaus Shwab, founder and executive chairman of the World Economic Forum said as early as 2016 that "We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before."

The compliance sector, plagued for years by painfully manual processes is one such area where technology has started to play a
transformative role.

Both regulators and financial institutions have realised that the compliance function can be re-conceptualised, offering tremendous cost
savings for financial institutions while providing regulators an opportunity for real-time enhanced oversight.

In 2020 we are going to witness that the financial services regulators have not only heard the voice of the industry. We will witness that regulation in the digital era is, in fact, becoming machine-readable.

However, if you are still using the "good old" Word, spreadsheets, SharePoint and email to manage compliance, you are inevitably going to miss out on the opportunities to harness the power of technology and turn your data into an asset.

In 2020, digitalisation of regulation will be a reality

In an increasingly interconnected world financial services are rapidly blurring boundaries. They need to constantly keep track of changing regulatory obligations in different jurisdictions, fragmented and differing rules written in different languages and using different taxonomy. For financial firms manually managing compliance with outdated tools and processes is now not only a burden, it is
becoming mission impossible.

2020 is shaping up to be a big year for those in SupTech (supervisory technology) too. The most forward-thinking regulators have long spoken about digital regulations. In the United Kingdom, the Financial Conduct Authority (FCA) is a pioneer in the regulatory technology RegTech) space. Back in 2018 in collaboration with the Bank of England, the UK regulator began its Digital Regulatory Reporting (DRR) project, a pilot programme designed to evaluate the benefits of machine-readable reporting.

Through its Innovation Outreach Initiative, FINRA in the United States has been engaging with key stakeholders to learn more about available tools for building a machine-readable regulatory rulebook to provide the foundation for the later development of machine- executable rules with related links to firms' compliance policies, procedures, and transaction databases.

The MAS in Singapore and Hong Kong's HKMA have pioneered similar initiatives in Asia. Applying technology to automate the bank's interpretations of regulatory requirements and examine revisions to compliance processes and reporting arrangements reduces manual efforts and also lowers the risk of errors.

In the Middle East, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market has also taken steps to establish
itself as a technology inclusive regulator. These include creating the Digital Lab - a new model of regulatory sandbox comprising a cloud-hosted digital environment where RegTechs can deploy their products, and financial institutions can then connect directly to these products testing and integrating with them through an open API architecture.

"In its current analogue form, regulations are not flexible or dynamic enough to keep up with this fast-changing landscape. Digitalising regulation and guidance is, therefore, an important step towards enabling us to safely regulate ever more digitally focused financial services. Central to this strategy is the ADGM Digital Lab, which enables us to source for cutting-edge RegTech solutions", said Wai Lum
Kwok, senior executive director, FSRA.

AI is making a huge impact on compliance

One area of technology that has the ability to make a huge impact on compliance is AI, a series of underlying forms of technology such as natural language processing, computer vision and ML, that can be brought together within a cloud-based environment to store and process huge amounts of data so that machines can perform sophisticated tasks, assisting humans.

AI is not a new area of technology however it has advanced significantly in recent years. Innovative application of emerging technologies, including AI, automation, blockchain, smart contracts, cloud, big data have the potential to offer advanced solutions to regulators. These may include robo-handbooks, machine-readable regulatory texts.

Newer algorithms are now applied to process vast amounts of data and closely imitate human thought processes. Among the most
used NLP tasks for compliance automation are semantic similarity, contradiction and inconsistencies detection, question answering,
paraphrase detection, named entity recognition.
However, if your documents are in an unstructured format, the AI tools will not be applicable to them.

In 2020 all your documentation better be digital and structured

The development and the use of RegTech by financial institutions to achieve regulatory compliance and automate risk management has grown in recent years. As the decade ends, many things that were considered nice to have in the beginning will become the must- haves at the end.

Data collection has grown sharply since regulators failed to spot a global financial crisis in the making a decade ago. The Monetary
Authority of Singapore has been applying automated data collection since 2018. The FCA in the UK has recently overhauled its data strategy to use data and advanced analytics smarter.

As Matt Smith, CEO at SteelEye, said: "It is no longer an option for firms not to prioritise their data quality.
"Poor data management practices also mean that compliance not only becomes time-consuming and extremely costly but an ever-
increasing business risk."

Financial institutions evidence compliance with regulatory obligations by embedding them into their policies, procedures, standards,

The practical advice: in 2020 all your documentation needs to be digital and structured as this what will give you the competitive edge.
The pressure is on to do things less expensive, fast, and without an army of compliance officers.

By using structured data that applies AI-based algorithms, efficiency could increase significantly. As industry participants, we should be working together
Stephane Malrait, managing director of market structure and innovation in financial markets at ING, said: "We don't see RegTech as
competitive, we see it as essential for the industry to continue to exist."

All the breakthrough technological advancements are coming to life due to the efforts of regulators as well as financial institutions.
Cooperation between financial institutions, regulators and regtech providers is critical. This way, in the new decade, technological
advances can take compliance to a completely new level.

Get involved and be part of the movement, wherever you are, by speaking out, contributing feedback, joining working groups — do not
miss out.

This article was original published at Thompson Reuters.