How AI is impacting RegTech, and why it’s the future for firms

Have you seen the United States Code of Federal Regulations? The first chapter of Title 12 is over a thousand pages long and contains over 600,000 words. It would take us 33 hours to read…

And when you’ve finished that chapter, there are 18 more chapters (with a total of 50 titles overall) to get through. This example highlights the sheer complexity and volume of regulations, which can be overwhelming for individuals, businesses, and institutions trying to stay compliant. 

That’s where RegTech, short for regulatory technology, enters the picture. Regtech helps law firms and financial institutions stay abreast of these complex, evolving regulations. It can help reduce money laundering and be used to demonstrate compliance. Until recently, this technology can extract, process, and categorise open source information. 

Advances in data science, machine learning and cloud computing have taken that one step further. Regtech can now not only read but understand. It can tell you what information is relevant to specific cases, and explain how this information is evolving in real time. As it understands information in context, it can identify individuals, content and potential threats with few to no false positives.

Quick recap: What is RegTech?

RegTech, short for Regulatory Technology, refers to the application of technology, particularly artificial intelligence and data analytics, to streamline and enhance regulatory compliance processes. We wrote a blog on what RegTech means for legal firms here.

AI and Regtech

Back in 2019, the then-Bank of England Governor Mark Carney said financial regulators would need to embrace AI to cope with the surging influx of data. 

To illustrate his point, he pointed out that the bank receives 65 billion pieces of data every year from the companies it oversees. Reviewing such amounts would be like “each supervisor reading all of Shakespeare’s work twice a week for every week in the year.”

It’s worth noting that these numbers only covered information reported by regulated firms and didn’t account for the additional volumes of external data from sources like public records, news media, and social media. Because of this, AI is even more crucial for accurate, efficient, and justified regulation or compliance processes. 

The war in Ukraine and stricter sanctions on Russian oligarchs have shown the importance of improving screening methods to restrict sanctioned individuals’ finances. More than 65% of regulated companies expect increased regulatory requirements in beyond 2023, but only 50% will increase their investments in RegTech during this time, Grant Thornton found.

Some might not realise just how powerful AI-driven RegTech is now. Older automation tools tend to lack adaptability, so are less useful in complex, dynamic regulatory environments. AI-driven systems are able to continually learn and update based on new data, changes in regulations, and emerging threats. Firms, whether in finance or law, that don’t adopt modern RegTech solutions may lag behind. 

In April, the City of London Corporation announced a partnership with Innovate Finance, the trade association for RegTech to set up a ‘RegTech Platform’. The platform will host strategic dialogues between vendors, financial institutions, and other key stakeholders in the RegTech ecosystem to tackle problems that are affecting the sector. 

How AI enhances RegTech

According to Thomson Reuters, the top five challenges compliance practitioners face are the volume and implementation of regulatory change, a lack of budget and resources, the availability of skilled resources, the need for effective compliance monitoring and cyber resilience. But RegTech tools powered by AI make these challenges easier to overcome. 

Regulatory reporting

For starters, it boosts regulatory reporting by automating data collection and analysis. 

Machine learning algorithms can process vast amounts of data, ensuring accurate and timely reportings. This streamlining minimises human errors, enhances data accuracy, and reduces compliance burdens. 

AI can automate the preparation of regulatory reports, for accuracy and rapid submission, while also making it simple to gather data from multiple sources. Authorities including the UK’s Financial Conduct Authority (FCA) have pointed out how this category of RegTech helps to generate more intelligent and uniform regulatory reports. 

It can also help boost transparency and consistency in meeting Environmental, Social, and Governance (ESG) standards.

Risk management

AI-powered RegTech helps institutions strengthen their risk management. AI models can assess historical data, identify patterns, and predict potential risks that humans might overlook. By providing real-time risk insights, AI and RegTech can enables proactive risk mitigation and strengthens overall resilience.

Compliance

AI can efficiently interpret complex regulatory documents and databases and extract relevant information. This helps organisations remain up-to-date with changing regulations and meet compliance standards more effectively.

Monitoring

AI powered RegTech enables continuous monitoring of client activity for regulatory violations or inclusion on sanctions lists. Machine learning algorithms continuously analyse transactions and detect suspicious patterns, enabling institutions to combat fraud and money laundering. Real-time monitoring ensures prompt identification and response to potential threats.

KYC

AI can enhance KYC procedures by swifty verifying customer identities, carrying out in depth background checks, conducting risk assessments, and ensuring compliance with regulations – while reducing manual efforts and processing time.

The benefits of AI-powered RegTech

Reduced costs

The total cost of financial crime compliance across financial institutions worldwide in 2022 hit $274.1 billion, up from $213.9 billion in 2020, according to LexisNexis. Because AI can perform repetitive tasks like research and data gathering far more quickly than humans, it can help bring down this cost. 

Meanwhile, compliance teams can focus on more strategic tasks and decision-making processes. Automating compliance-related tasks reduces the time spent on manual processes, freeing up resources for more billable client work. 

Faster, more thorough compliance

AI not only speeds up the compliance process but also ensures a higher level of accuracy in adherence to regulatory requirements. By automating compliance monitoring and reporting, financial institutions can respond swiftly to any emerging risks or non-compliance issues, reducing the potential for regulatory fines and reputational damage.

RegTech ensures ongoing compliance in the fast-evolving regulatory landscape. By aggregating information from various sources, such as sanctions lists and adverse media, it establishes connections and uncovers crucial insights, assisting law firms in staying ahead of regulatory demands.

Increases in personal liability for compliance officers may deter capable individuals from joining the profession and spur experienced personnel to leave, according to Reuters. AI can increase accuracy and thoroughness, which can boost confidence among compliance officers.

Speedier research and onboarding

In the past, RegTech helped financial institutions with AML, but they produced false-positive rates of over 90%. Now, AI can reduce that to close to zero. At the next stage, automated client onboarding tasks, including research, verification, and due diligence, streamline the process and enhance efficiency. This minimises back-and-forth emails, enabling firms to better serve their clients

Equal opportunities for smaller firms

RegTech levels the playing field, granting smaller firms access to advanced compliance tools and technologies. This helps smaller firms to meet regulatory requirements, deliver high-quality services, and avoid missing critical client or case information

Compliance is easy to prove

RegTech helps law firms show adherence to regulatory requirements during audits or regulatory scrutiny as every search or request is recorded. The best part? Firms can show their procedures to regulators at any time.

Why Xapien?

One of the biggest challenges facing RegTech is the ease of use and implementation, according to Grant Thornton. Many organisations have legacy systems and complex data structures that don’t allow the true benefits of RegTech solutions. 

“An ecosystem where all parties can work together to address these challenges and define benchmarks for best practice will make more adoption more efficient,” said its recent report.

With Xapien, that’s not an issue. You simply enter your subject’s name into our platform and press go. Our advanced AI technology delivers rapid and systematic due diligence reports in minutes. 

By searching the entire indexed internet, Xapien can present all the relevant information about a subject in a single place. The breadth and depth of our searches are unmatched 

Xapien reports are fully sourced and auditable, featuring timestamps that demonstrate compliance. With Xapien, firms can confidently showcase to regulators that their decisions are backed by a thorough analysis of all available information at the time. Book a demo with the team to see it in action.