How Technology Alters the Reality of Regulatory Compliance


regtech-4-18-18.pngIn case you haven’t noticed, regulatory compliance is expensive. The banking industry spends an estimated $60-$70 billion a year on compliance, and many banks complain they have been forced to expand their compliance staffs in recent years just to keep up with the increase in regulations. Indeed, compliance-related activities can account for nearly 20 percent of a bank’s overhead.

The compliance function is also critically important. The three federal prudential bank regulators consider a poor compliance track record to be an indictment of a bank’s overall management capability, and they will severely punish any bank that has a significant compliance violation, especially of the Bank Secrecy Act (BSA) and related anti-money laundering (AML) regulations. Among the negative ramifications of a serious BSA violation is the inability to consummate an acquisition or execute a major business expansion. The poster child for this nightmare scenario is probably M&T Bank Corp., which acquired Hudson City Bancorp in July 2012 but was prevented by the Federal Reserve from completing the acquisition until November 2015 after the Fed uncovered deficiencies in M&T’s BSA program after the deal had been announced.

These and other issues will be topics of discussion at Bank Director’s 2018 The Reality of RegTech event, which takes place at the Nasdaq MarketSite April 18 in New York’s Times Square. Presentations focusing on regtech include an examination of some of the technologies impacting AML and know-your-customer (KYC) rules, and how artificial intelligence can be incorporated into a bank’s compliance program.

Compliance requirements like BSA, the Community Reinvestment Act, the Fair Lending Act, the Home Mortgage Disclosure Act and vendor management lend themselves well to the use of technology because they often involve large amounts of data and repetitive tasks, and the application of regtech solutions to these activities can lead to improvements in accuracy, efficiency and costs.

However, the promise of lower compliance costs may take longer to materialize since the initial investment in new technology, the time to train the compliance staff with the technology and for them to become proficient could actually raise a bank’s compliance costs in the short run. In fact, in Bank Director’s 2018 Risk Survey, 55 percent of the participating directors and senior bank executives say their compliance budget actually increased after the introduction of new technology, while 27 percent say it had no effect and just 5 percent said it decreased.

The compliance function is not the only area where technology is increasingly being used to improve bank performance. Advanced tools also help senior executive teams and boards of directors improve their management and oversight of a variety of risk exposures. The risk management challenge is not unlike the compliance challenge in that there are often large amounts of data to manage and analyze—particularly in an area like credit risk—and technology can both accelerate and improve data aggregation and analysis. The Reality of RegTech event will also offer presentations on the integration of solutions to manage credit risk, emerging enterprise risk management solutions, and advancements in operational risk management.