AI Adoption, Benefits, and Challenges in Regtech

In Regtech, artificial intelligence (AI) is gaining an increasingly large foothold as the technology that is changing how compliance issues are managed. It has been adopted broadly in financial crime risk management (FRCM), financial risk (FR), and governance, risk, and compliance (GRC).

Accelerating adoption of AI in Regtech is not surprising. Accenture’s 2019 Compliance Risk Study found that almost three quarters of compliance departments are experience budget cuts – two-thirds of these slashed by between 10% and 20%.

AI enables many time-consuming and repetitive tasks to be automated, thus reducing the human effort needed and eliminating costly errors – big factors that enable the desired budget cuts to be fulfilled without damaging compliance operations.

In this article, we examine the three areas in which AI is making a real difference, and the challenges that the compliance industry faces with its use of AI.

AI in Financial Crime Risk Management

The main areas in which AI is used in FCRM are anti-money laundering and anti-fraud. It is especially useful in:

  • Fraud detection
  • Transaction analysis
  • Risk analysis

AI is used to inform decision-making, though the complexity of this role means that AI is not (yet) able to execute decision-making itself. Using AI in FCRM has several benefits, including:

  • Reducing costs and time
  • Enabling accurate analysis
  • Discovering information that would be unavailable otherwise

However, using AI in FCRM does not come without its challenges. These include the availability of data to fuel AI algorithms, insufficient quality of staff and training capabilities, and the cost of technology to run AI processes.

In addition, the use of AI tools must be accepted by regulatory bodies, and this includes not only how the algorithms work, but how they fit into the compliance landscape within the firm. There is a shortage of people with the knowledge and experience that encompasses this spectrum.

AI in Financial Risk

As in FRCM, adoption of AI in FR has been relatively broad. AI enables faster analysis of statistical information, but AI is more than a statistical tool. AI combined with machine learning (ML) is overtaking other tools used in FR.

Increasingly, AI is being used to:

  • Manage market risk
  • Manage credit risk
  • Manage asset liability
  • Manage liquidity risk

In applications using ML, AI is being adopted to generate scenarios for all the above uses, crunching reams of data in real time, stress testing, and validation of risk models.

However, despite the benefits of AI in FR – broadly the same as AI in FRCM – it is rarely used in core modeling. This may be because third-party data that has already been modeled by AI is often used. Further, a big challenge is sourcing qualified and knowledgeable employees, as well as gaining regulatory approvals.

AI in Governance, Risk, and Compliance

In this broad area, AI is gaining traction across functions that include:

  • Operational risk
  • Internal audits
  • Third-party risk
  • Regulatory change management
  • IT risk

AI is especially used in processes and applications that employ data validation. It speeds up these processes, and automation is seen as key to eliminate time-consuming and tedious tasks that negatively affect job satisfaction.

AI’s uses include:

  • Preparation and validation of data
  • Data analysis
  • Regulatory change management

Time and cost savings, accuracy of analysis, and discovery of previously unavailable data are key benefits to GRC operations.

Once more, scarcity of suitable employees is a major challenge to successful adoption in this area, as are data availability, technology costs, and regulatory approval.

Skills Are Key to Overcome Challenges

The benefits of using AI in Regtech are consistent across all areas. It:

  • Saves time and reduces costs
  • Eliminates tedious tasks
  • Improves accuracy of analysis
  • Reduces costly (and potentially damaging) errors

However, the challenges faced to unlock these benefits are also consistent. These include availability of data and cost of technology. Though the biggest challenge that firms face is the scarcity of employees with the knowledge, experience, and expertise needed to successfully adopt AI into Regtech.

Firms are hiring aggressively to get the staff they need. Most in demand are professionals who have the rare mix of:

  • Technical and soft skills to embed AI into Regtech and explain to less-technically minded staff
  • Business acumen to understand how AI can improve regulatory operations
  • The regulatory experience needed to gain regulatory sign-offs

Do you have the in-demand skills to help firms successfully deploy AI in their compliance operations? If you do, we want to hear from you. Register with ACG Resources to learn more.