Regtech, risk, and the FS sector



To bring positive disruption to stale markets, risk is usually necessary. 

Here, we explore the technological risks the financial services sector needs to undertake to stay ahead of increasing regulatory requirements.


Balancing risk with reward

There are always risks when implementing new inventions and technologies. And for highly regulated or particularly sensitive markets, this is especially true.

The Financial Conduct Authority (FCA) has an overall objective to ensure that financial markets work well. Some of its most integral underlying goals are to maintain consumer protection and overall market integrity.

However, the FCA is also eager to promote competition in the interest of consumers. And this is something that many new financial technology — or fintech — innovations can provide.


Compliance headaches

Traditional financial organisations can be hesitant to embrace new technology. However, it is important that the industry understands how this innovation brings positive market disruption by forcing adaptive thinking and processes.

Fintech is already making significant changes to efficiency in the financial sector. And there is a long-standing industry view that increasing regulation will hinder growth.

Financial services could be described as one of the most complex, highly regulated industries on the planet. In any industry, regulatory and compliance issues are important, convoluted and resource-consuming.

Enter regtech.


Introducing regtech

Regulatory technology, or regtech as it has become known, may provide a better solution for the financial services sector to meet these increasing regulatory demands.

The collaboration of regulatory standards and technology has existed for some time. However, increasing penalties for non-compliance — as well as a greater focus on data and reporting in the industry — has added more pressure for innovation and investments in the regtech market. 

Recent years have seen a significant change in technologies used in regtech solutions. Now, for example, innovators are embracing technologies such as big data analytics and artificial intelligence.


Artifical intelligence in regtech

Artificial intelligence may be one of the biggest sources of opportunity for the regtech industry.

By nature, artificial intelligence modelling — and to some extent, machine learning — is ideal for tasks that need to be handled accurately and logically. (Such as reporting and document archiving.)

The strict regulatory fashion of the finance industry makes it an ideal sector to invest in AI. Logically, the technology can automate tasks that are based on specific systems, set rules and procedures.


An increasing AI presence

We are likely to see an increasing presence of artificial intelligence in the financial services sector in the next few years.

Tasks such as providing soliciting or financial advice could easily be provided through a bot interface, using existing artificial intelligence and automation technologies.

Indeed, some companies are already using more advanced AI applications. (Think IBM’s Watson.)

However, most of these companies are using the technology in an experimental fashion. They are not yet overhauling their existing procedures in favour of artificial intelligence.


Early AI days

Despite its potential, artificial intelligence is still in its infancy. (Something that is often overlooked or poorly understood in these kinds of discussions.)

And this has a sizeable impact on AI adoption. Until it is more fully developed, there will still be arguments about the accuracy and ability of AI over a well-trained human representative.


Using big data to manage risk

Alongside artificial intelligence, any sector that is dealing with large amounts of valuable data has the potential to use this information to make intelligent predictions.

In the financial services sector, one application of big data analytics is to identify potential instances of fraud.

Predictive analytics technology can use pattern recognition to assess data from across the globe.  Naturally, manually assessing this data is a time-consuming process.

However, using artificial intelligence allows for automatic scanning and categorisation of potential fraud areas according to the amount of risk. These fraud detection insights can then be passed on for human review.

As new types of fraud are identified, incidences could be flagged and integrated into the machine learning logic. Using this method, automation could detect similar activity in the future and prevent fraudulent activity.


Humans are here to stay

For the time being, artificial intelligence will simply assist the financial services sector. It’s not yet ready to become an integral part of regulatory compliance and standard management.

There are clear advantages to handing over the reins of regulatory compliance to a computer designed to review and complete administrative tasks.

However, while the technology is still in a state of learning, it does not have the upper hand over human employees just yet.


Please note, we originally published a version of this article here.


Useful links

AI in finance: automation, chatbots, and banking

Do we need to worry about artificial stupidity?

The disruptive force of finchat


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