Compliance has always relied primarily on individuals. The regulatory burden on financial institutions over the past decade has continued to increase, resulting in a sharp rise in demand for compliance professionals.

To meet these challenges, companies have had no choice but to recruit more and more compliance personnel to deal with the growing regulatory constraints.

 

The use of new technologies is essential

However, this has not reduced the number of fines issued by supervisors. New records are broken with each new regulatory breach identified at a Financial Institution (FI). The limits of the human being are reached, so the help of technology is necessary.

Financial institutions and regulators have realized that by harnessing the power of technology, specifically artificial intelligence (AI) and machine learning, a significant portion of the compliance function can, in fact, be automated. As a result, this development has reduced the regulatory burden on institutions and compliance professionals.

 

The challenges of AI for the financial sector

The stakes of AI for the financial sector are vital. Above all, we must not fall behind. To respond to these, the ACPR launched a public consultation in 2018 (see consultation responses) with various stakeholders (banks, insurance companies, fintechs, foreign central banks...).

This consultation focused, among other things, on issues for supervisors such as governance and the "explicability" of algorithms or the advantages of artificial intelligence techniques for the exercise of their own missions through Suptechs (supervisory technology).

What communication between supervisors and financial institutions?

Within this framework, we can consider the relationship between supervisors and financial institutions (FIs) as critical to the stability of the financial system. The exploitation of AI in "Suptech" therefore represents a major element of this relationship.

It can help FIs to comply with their regulatory requirements by reducing reporting rules that depend on human interpretation and that can be sources of error.

 

The beginnings of an evolution: the English "Digital Regulatory Reporting

In concrete terms, a project of this type has already been carried out in the United Kingdom. It was led by the Financial Conduct Authority (FCA), in collaboration with the Bank of England and a number of financial organizations. The project is called "Digital Regulatory Reporting"(DRR).

This "pilot" program is designed to evaluate the benefits of machine-readable reporting and explore how technology (recurrent neural networks and the semantic web) can help financial institutions in their dealings with the regulator.

 

A complex context

In the UK, manual management of reporting is a very heavy and complex burden for the supervisor, with over 20,000 rules and 58,000 companies. This number is growing. Financial institutions also have to interpret the necessary rules and data on their own.

Thus, when the supervisor asks them for data, differences in interpretation often lead to confusion and inefficiency. This has costly consequences in terms of time and money.

 

What is the purpose?

The overall goal of this project is to reduce the time and cost of interpreting and implementing the new reporting requirements. The other targeted objective is to reduce the number of individual regulatory reports that companies must produce.

To do this, FCA has been investigating how a machine-readable regulatory framework can interact with a standardized language mapped to source data. It uses semantic web technologies to identify the most appropriate approach to data specification.

 

Automation in its infancy but functional

The FCA has already proven that the concept works. In fact, the regulator announced that it has successfully applied machine-reading technology to two different regulations. One is based on capital requirements and the other on mortgage criteria.

Looking ahead, CFA plans to expand the scope of the project in 2019 and apply the technology to more regulations. This is an exciting development for the industry.

 

What to remember?

Communication between supervisors and financial institutions is a complex issue. On the one hand, regulations are numerous, complex and sometimes subject to interpretation. On the other hand, reporting obligations are numerous and detailed.

It is observed that manual management is reaching its limits. Therefore, the need for RegTech/ LegalTech that use AI and machine learning based technologies becomes vital.

FCA's experience, however limited, proves that it can be done. Of course, human intervention is essential for validation. AI makes it possible to avoid all repetitive tasks that have no added value. It therefore allows humans to devote themselves to tasks with greater added value.