In the rapidly evolving landscape of financial services, compliance is undergoing significant transformations. Compliance in financial services in 2024 already looks very different than it did two years ago. Five years from now, it will be a whole different ball game.
Technology, and in particular AI, is driving the sea change both in terms of new risks companies face and how compliance is managed. Technology, in other words, is both the problem and the solution. AI and machine learning promise increased efficiencies, better accuracy and more comprehensive data analysis. But these very same technologies also drive the growing and increasingly elusive threats of fraud, cybercrime, money laundering and the like.
What will the future hold in terms of compliance in the financial industry? Here are some trends to watch for.
1. Increased Risks Because of AI
As artificial intelligence (AI) becomes more prevalent, so do the risks associated with it. Tools like ChatGPT can easily generate and disseminate erroneous information, leading to increased fraud. Schemes are becoming more sophisticated and harder to detect, posing a significant challenge to financial institutions. Deep fake and AI-generated content, when spread pervasively on social media, can also impact markets even if they don’t seem directly related to the financial industry. Consider the example of the fake image of the Pentagon exploding, and how it temporarily jolted the stock markets.
2. AI-Driven Compliance Management
Despite the risks posed by AI, the benefits of the technology are countless when it comes to compliance. AI-based technology is quickly becoming a must-have tool for compliance teams in financial services companies; there is simply no more efficient or effective way to manage compliance on a large scale in today’s hyper-regulated and rapidly changing climate. AI-driven compliance monitoring tools understand human intent, and identify and prioritize risks in real-time. Effective in any language, Natural language processing (NLP) and machine learning can flag even subtle signs of fraud that may go unnoticed by human analysts. Furthermore, companies are increasingly using AI-powered AML systems because of their precision.
Lookout for technology that:
- Uses highly advanced data analytics to detect risks by performing behavioral analyses.
- Helps companies adhere to rapidly changing regulations by automatically staying up to date on the latest requirements and regulations, while taking geography into account.
- Creates customized reports and risk assessments.
3. One Source Data
In the coming years, siloed data will become obsolete. To reduce risk and ensure compliance, banks and financial institutions will need to consolidate their data sources so it can best be analyzed and monitored for compliance.
4. Increase in Risks Due to Working from Home
Far more people are working from home and hybrid is the new norm. Despite all the benefits (and the debates) the way we work in the post-Covid era presents serious compliance risks. With boundaries between work and home life increasingly blurred, employees are more likely to use private messaging programs and personal devices. Financial institutions will need to develop and implement strategies to monitor and prevent misconduct. This issue applies to any sector, but the stakes are higher for financial services companies who deal with sensitive financial and client information.
5. Reduction in Onboarding Costs
Today, 25% of the market still relies on manual compliance operations and onboarding costs have risen by 28%. Here, too, technology will be a game changer. Automation through regtech solutions can help reduce these onboarding costs while maintaining compliance standards particularly as a company is scaling rapidly.
6. Stricter Regulations
Because of the increased risks presented by AI (see item #1), we anticipate stricter regulations across all financial industries in the coming years. Regulatory bodies are likely to issue more sanctions in response to geopolitical events. As an example, we’re already seeing increased regulations related to cryptocurrency. This change means that compliance programs will need to be increasingly data-driven and AI-powered to ensure they are compliant.
7. Compliance Costs Will Decline
Sounds counterintuitive, we know. If compliance risks are growing and becoming increasingly complex, how will costs go down? Because while today many financial institutions spend a significant portion of their revenue on compliance, tomorrow much of what is done manually will be done with the help of AI. This means that even as a company grows, the costs will remain stable. Importantly, tech-based solutions will lower compliance costs while also decreasing exposure to risk.
In addition to making it easier for companies to grow and enter new markets, lower compliance costs will also level the playing field for smaller companies. While the high cost of compliance has traditionally been a limiting factor for entry into the market, digital solutions make it easier for startups, small companies and new businesses to get started, without exposing their businesses (and staff members) to enormous risks.
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The future of compliance in financial services will be shaped by technological advancements, regulatory changes, and evolving risks. Financial institutions that embrace AI and data-driven compliance strategies will be better equipped to navigate these challenges and seize new opportunities.
“Training and monitoring of consumer-facing employees will be critical to ensure that an organization is compliant. Technology will support and help the credit and collections industry meet demanding obligations with ease and efficiency, in order to produce the outcomes a regulator wants to see.”
Consumer Financial Services Regulatory & Compliance Group
Clark Hill
“Our challenge going forward is to position our industry and our companies as desirable places to work. We must implement diversity, equity and inclusion in our workplaces, and get the word out that we have changed. Ask your newest employees for feedback—what would make our workplace desirable for their friends and acquaintances? In this post-pandemic world, getting people to crawl out of their comfortable cocoons may be difficult, but it can be done!”
CACi
“In the last few years, the buzz of the call centers faded away. Now that many people still have the opportunity to continue to work from home, performance directors need to pivot their focus. We need to ensure that the training is effective in this new environment. The move is from hours in a classroom setting to immediate, personalized micro-learning units that enforce the corrective behaviors.”
Resurgent Capital
“The digital collections movement continues to be in full steam and we are excited to see all of the new technologies that are coming into the ARM industry to help drive enhanced collection performance in a compliant manner. We anticipate additional M&A consolidation globally in the ARM industry, as more digital ARM companies look to accelerate market entry and obtain blue-chip clients and deploy digital-first solutions.”
“Digitization will be critically accelerated in 2023. Recovery organizations may be required to furnish consumers’ account data through consumer-selected platforms that will likely be different from organizations’ traditional payment portals. Organizations should start preparing their technology and operations for that contingency now to harness the trend to their benefit.”
Kredit
“Data is the new oil, and extracting data from all sources, especially voice, will be a must-have in 2023. We are in the age of machine learning, and ML runs on data. Getting ALL the data and getting it into one place for the ML to do what it can are the key differences between organizations that will make it and those that don't.”
Indebted
“In 2023, collectors and creditors will be required to work closer together. Reg F oversight requirements have created a new reality of shared compliance responsibility. Servicers and creditors can better collaborate by using new data-driven compliance platforms that provide all parties with critical insights and generate the transparency and trust needed to succeed in a tightening regulatory climate.”
As Gen Z enters the workforce, you’ll have up to four generations in your agency. Everyone learns differently. Young people learn from TikTok videos, and there is a professional term for this: micro-learning. Such short videos are especially efficient when sent out close to the time when the violation occurred.
Barron & Newburger
The most efficient training systems I’ve seen are those which build surgical, data-driven compliance content and provide agents the exact training they need when they most need it. This approach avoids wasting time and money on training which does not address the need. Continuous, role-based training programs that focus on the needs of each individual agent are some of the most efficient and effective I’ve seen.
Bedard Law Group
“Training is only going to be effective if it's done at or near the time the violation occurred. As agents handle hundreds of calls a week they will not have the capacity to remember particular moments of each consumer interaction. Therefore, effective monitoring will be critical to address the deficiency when it happens, in order to remediate quickly so that it does not become a systemic problem going forward.”
Consumer Financial Services Regulatory & Compliance Group
Clark Hill
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