In the rapidly evolving landscape of financial services, compliance is undergoing significant transformations. Compliance in financial services in 2024 already looks very different than it did two years ago. Five years from now, it will be a whole different ball game.
Technology, and in particular AI, is driving the sea change both in terms of new risks companies face and how compliance is managed. Technology, in other words, is both the problem and the solution. AI and machine learning promise increased efficiencies, better accuracy and more comprehensive data analysis. But these very same technologies also drive the growing and increasingly elusive threats of fraud, cybercrime, money laundering and the like.
What will the future hold in terms of compliance in the financial industry? Here are some trends to watch for.
1. Increased Risks Because of AI
As artificial intelligence (AI) becomes more prevalent, so do the risks associated with it. Tools like ChatGPT can easily generate and disseminate erroneous information, leading to increased fraud. Schemes are becoming more sophisticated and harder to detect, posing a significant challenge to financial institutions. Deep fake and AI-generated content, when spread pervasively on social media, can also impact markets even if they don’t seem directly related to the financial industry. Consider the example of the fake image of the Pentagon exploding, and how it temporarily jolted the stock markets.
2. AI-Driven Compliance Management
Despite the risks posed by AI, the benefits of the technology are countless when it comes to compliance. AI-based technology is quickly becoming a must-have tool for compliance teams in financial services companies; there is simply no more efficient or effective way to manage compliance on a large scale in today’s hyper-regulated and rapidly changing climate. AI-driven compliance monitoring tools understand human intent, and identify and prioritize risks in real-time. Effective in any language, Natural language processing (NLP) and machine learning can flag even subtle signs of fraud that may go unnoticed by human analysts. Furthermore, companies are increasingly using AI-powered AML systems because of their precision.
Lookout for technology that:
- Uses highly advanced data analytics to detect risks by performing behavioral analyses.
- Helps companies adhere to rapidly changing regulations by automatically staying up to date on the latest requirements and regulations, while taking geography into account.
- Creates customized reports and risk assessments.
3. One Source Data
In the coming years, siloed data will become obsolete. To reduce risk and ensure compliance, banks and financial institutions will need to consolidate their data sources so it can best be analyzed and monitored for compliance.
4. Increase in Risks Due to Working from Home
Far more people are working from home and hybrid is the new norm. Despite all the benefits (and the debates) the way we work in the post-Covid era presents serious compliance risks. With boundaries between work and home life increasingly blurred, employees are more likely to use private messaging programs and personal devices. Financial institutions will need to develop and implement strategies to monitor and prevent misconduct. This issue applies to any sector, but the stakes are higher for financial services companies who deal with sensitive financial and client information.
5. Reduction in Onboarding Costs
Today, 25% of the market still relies on manual compliance operations and onboarding costs have risen by 28%. Here, too, technology will be a game changer. Automation through regtech solutions can help reduce these onboarding costs while maintaining compliance standards particularly as a company is scaling rapidly.
6. Stricter Regulations
Because of the increased risks presented by AI (see item #1), we anticipate stricter regulations across all financial industries in the coming years. Regulatory bodies are likely to issue more sanctions in response to geopolitical events. As an example, we’re already seeing increased regulations related to cryptocurrency. This change means that compliance programs will need to be increasingly data-driven and AI-powered to ensure they are compliant.
7. Compliance Costs Will Decline
Sounds counterintuitive, we know. If compliance risks are growing and becoming increasingly complex, how will costs go down? Because while today many financial institutions spend a significant portion of their revenue on compliance, tomorrow much of what is done manually will be done with the help of AI. This means that even as a company grows, the costs will remain stable. Importantly, tech-based solutions will lower compliance costs while also decreasing exposure to risk.
In addition to making it easier for companies to grow and enter new markets, lower compliance costs will also level the playing field for smaller companies. While the high cost of compliance has traditionally been a limiting factor for entry into the market, digital solutions make it easier for startups, small companies and new businesses to get started, without exposing their businesses (and staff members) to enormous risks.
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The future of compliance in financial services will be shaped by technological advancements, regulatory changes, and evolving risks. Financial institutions that embrace AI and data-driven compliance strategies will be better equipped to navigate these challenges and seize new opportunities.
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