“…building and structuring a multi-faceted or multi-jurisdictional compliance program is no mean feat. This is especially true given that compliance systems have historically necessitated complex or clunky manual processes. However, the last 10 years have seen a seismic regulatory shift due to the pace of technological advances.”
Susan Schroeder, Vice-Chair of the Securities Department at WilmerHale
“Arguably the greatest advantage of RegTech is efficiency and the ability to take complex, manual processes and effectively streamline them, thereby freeing up resources.”
Digital Transformation of Regulatory Compliance for Financial Institutions
Digital transformation through artificial intelligence is revolutionizing regulatory compliance. In some areas, its deployment bears significant risk, including security and privacy concerns, and the threat of violating new AI regulations. For instance, the EU AI Act applies to any bank or nonbank lender that uses innovative technology as a key part of its business. It also applies to any third-party institution (including those outside the EU) that provide services to a financial services entity.
It’s the world’s first comprehensive law designed to ensure the safety of AI systems and their respect for individual rights—and it’s safe to say it won’t be the last. Note, however, that the legislation aims at the areas and uses of AI that are most fraught right now—the intersection of AI and rights, biases, and fairness.
It’s helpful to look at AI as a bifurcated environment. On the one side are the machine learning (ML), natural language processing (NLP), and source-specific generative AI (GenAI) capabilities that are tested and proven in everything from the digital assistant in your phone to pattern recognition used to identify public health threats. These functions represent AI at its current best—well established, extremely accurate, and well accepted for just those reasons.
Fortunately, there are RegTech regulatory compliance solutions that utilize this best of current AI, without running afoul of its more contentious aspects.
“AI empowers financial institutions to monitor regulatory changes in real time, facilitating prompt adaptation to new mandates and mitigating the risk of non-compliance penalties.”
From Data to Compliance: The Role of AI/ML in Optimizing Regulatory Reporting Processes
AI’s ability to aid in identifying applicable regulations, reviewing identified regulations for new obligations with which you must comply, or highlighting changes compared to previous regulations, fall directly within the AI sweet spot of accuracy and reliability. Through bespoke combinations of ML, NLP, and GenAI, compliance tools leverage the best of modern technology, while avoiding the traps that most expansive uses of these technologies can open.
Machine learning is the most widely adopted of these AI technologies. It’s basically highly sophisticated pattern recognition. It’s the technology that drives chatbots and fuels streaming app recommendations. A great deal of what’s called AI is more accurately defined as machine learning.
ML reliability is directly influenced by the data from which it pulls
ML uses statistical algorithms to identify patterns within datasets. It learns from that data to predict outcomes and classify information without additional programming. This is invaluable in regulatory compliance, with its emphasis on identifying and classifying regulations.
ML in RegTech avoids the pitfalls of inaccuracy and ‘hallucinations’ due to the strength and specificity of the data from which it pulls. An algorithm that pulls from a huge body of written material ranging from social posts to conspiracists theorizing is going to gobble a lot of misinformation, lies, and questionable assumptions. RegTech algorithms pull only from material published by national, state, and local regulatory governing authorities. There is no flotsam in that data set.
NLP and GenAI complete the compliance RegTech circle
The act of identifying new regulations or regulatory changes is one thing, but determining which of those rules applies to your business—and how—is more complex. In the past, this required manual work, but algorithms specific to financial regulatory compliance can automate this task via the most trusted and proven aspects of AI.
NLP plays at the intersection of computers and human language, enabling the quick scanning and analysis of written information. NLP enables ML’s identification and classification of published regulatory documents.
Generative AI is usually defined as technology that creates text, images, or other content from user prompts, based on patterns learned from large amounts of training data. However, again, this use can present issues. You’ve seen the AI-generated humans with six fingers and heads on backwards.
In compliance, however, GenAI is best used to summarize new regulatory text or regulatory updates, making it easier to understand how changes impact your business. Once again, this use of GenAI pulls from very specific and indisputably accurate sources, avoiding the dangers that arise when AI ingests broad, unvetted data sets.
Of course, it’s rarely a good idea to remove the human element. Consistently ensuring that technology tools are functioning optimally while providing for the specificity and nuance appropriate to individual organizations demands human oversight. This can be a significant differentiator between various RegTech compliance vendors who utilize AI. Some will simply let the machine run wild, come what may. Others realize that you and your business deserve better than a one-size-fits-all machine-based solution.
AI provides enormous opportunities to simplify, streamline, and optimize compliance operations. It can remove costly and time-consuming manual processes and provide a single source of enterprise-wide regulatory truth, ensuring that the right people get the right information at the right time. While some AI use cases remain fraught with issues of accuracy and fairness, consider what AI tools are used and how they are used as you vet solutions. Make sure that your compliance solution uses the various components of AI at their proven best. Only then will you gain the benefits of digital transformation, plus the peace of mind that comes from confidence in the health of your regulatory processes.
Next steps:
- Download AscentAI’s Best of AI Knowledge Brief for more information
- Access AscentAI’s RegTech Guide or download the What is RegTech? whitepaper
- Learn how AscentAI combines best practices and cutting edge AI to transform compliance operations.
- Contact AscentAI to learn more.
