Don’t let Regulation & Compliance burn a hole in your shareholders’ pocket

By: Cindy Nicholson - July 6, 2020                                                  

Regulation and compliance provide the crucial mechanism that keeps the operations of businesses in check while looking out for the interest of the general public. However, implementation of compliance is a mammoth undertaking for organisations. In recent years, compliance has increasingly become more and more costly. Moreover, the alterations introduced in 2018, including GDPR in Europe and MiFID II, further ratcheted up expenses, increasing the burden on the organisations.

Current scenario of compliance costs

The staggering impact of the changes introduced in 2018 became evident when a global survey reported eye-opening statistics. Out of the 800 financial services firms that participated, 66% were expecting the costs of senior compliance staff to increase, up 60% from the previous year. Also, nearly 2/3rd, i.e. 61% of firms expected the total compliance budget to slightly or significantly increase over the next 12 months, which was another hike from the last year’s 53%.

The total cost of compliance is estimated to be a lofty $250 billion a year. This means that Australians, both workers and businesses, are spending no less than eight weeks of their hard-earned labour every year, over administration and compliance costs, that we have put into place.

The figure seems preposterous, especially in the context of the digital world that we inhabit. A world that is going paperless, it seems outlandish that we would spend such a tremendous amount on regulation. Isn’t this exactly the kind of problem that technology should solve? This is where it gets tricky.

Challenges pertaining to regulatory compliance

In a perfect world, data would be accessible for real-time reporting allowing regulators to have a clear path of visibility to the exposures of organisations. However, in the absence of such mechanisms, organisations face major challenges when it comes to compliance. These include: -

   ? Overall increasing cost of compliance

   ? Changes in IT and system requirements

   ? Increased reporting

   ? Increased regulatory scrutiny

Out of all these challenges, the overall elevation in compliance expenses is the only challenge that organisations can at least try to mitigate on their own. Mitigation of the remaining challenges requires the government and regulatory bodies to take initiative.

 The role of Artificial Intelligence in managing regulatory compliance

Data management is central to A.I. and machine learning. Data should be structured in a manner that can effectively serve the organisation and eventually, contain the compliance costs.

 -Fixing issues arising from legacy systems

The first thing that could be done to curb unnecessary expenses is to address issues pertaining to legacy systems. Often the biggest hurdle in the pathway of accessing secure and reliable data, by fixing legacy issues organisations can gain an upper hand in alleviating their capital exposure to regulatory and compliance requirements.

 -Automation of workflow

The frequency of regulatory reporting has multiplied, and massive amounts of data are required to support risk aggregation. Therefore, workflow automation has become a necessity, as manual management of such large quantities of data has become impractical.

 -Ending Human dependency

Simplistic models that are based on human designs for recurring regulatory reporting run independently and not simultaneously for scenario testing. Thus, an organisations’ ability to adhere to the regulators' requests is limited by human dependency on gathering data from complex systems. 

 What could be done to curb compliance costs?

There are several suggestions that both regulators and industry insiders agree, would help organisations to better manage their regulatory compliance.

Following are some of the most routinely cited recommendations: -

1.    Organisations should detect customer outcomes more accurately. Poor estimation of customer outcome effects fixed expenses such as Superannuation. This can be a huge opportunity for technology corporations, as they can develop tools that are capable of effectively scanning the market and presenting their assessments.

2.    Prudent implementation of AI and ML could prove extremely advantageous. By deploying AI, organisations can receive unstructured data and structure it at the front end, while ML could improve the predictive power of the credit model.

3.    Cloud should be the strategy for every organisation out there. Developments in technologies such as cloud are here to stay, and organisations should adapt to these changes, as soon as possible.

4.    Technology is the way forward. Given the frequency and complexity of recurring regulatory compliances and their reporting, manual handling has virtually become impractical. Not only is manual handling a high cost to the organisation, but also it is a lengthy process, which can be very time consuming. Above all, with human dependency, there is always plenty of scope for errors and mistakes, that are easily avoidable with clever use of technology.

How does an organisation make sense of the data to address the requests of the regulators?

Organisations should prepare themselves for the predicted exponential growth of data and the speed at which it is likely to grow. The only way to do this is to address the issue of retaining and building trust.

Trust is no longer based on a linear relationship between an organisation and its customer or employee. Instead, it is a distributed model based around the individual connecting with organisations and peers, with the help of new and existing technologies. Regulators will have the challenge to keep up with the customer-driven mass adoption of new technology, as well as to ensure users are securely accessing and sharing data.

Risk management frameworks are also critical. Faced with emerging technologies, new platforms and unique communications, enterprises need to be ready to address unknown threats. Implementing a risk framework enables a common language and understanding across the organisation so that it can monitor threats constantly and uniformly.

The benefits of increased trust positively impact enterprise and government. Yet a decrease in the trust will have a greater impact, negatively in both sectors.

It means partnership and collaboration between all facets of Australian society are required. Best practices and learnings must be shared. Doing so will ensure that frameworks and models remain one step ahead of the ongoing and evolving changes that threaten to undermine the trust of customers and employees.