AI is Groundbreaking Technology—But What Will the Regulators Say?

In one sense, regtech—a recent word invention that stands for regulatory technology—is just a rebranding of an evolutionary process that has been going on for decades. Ever since the first IBM mainframe computers rolled off the assembly line in the 1960s, banks have been deploying technology to improve the efficiency and effectiveness of their operations and lower their costs. Of course, technology has come a long way since the dawn of the IBM mainframe—or “Big Iron” as they were sometimes called. Consider for a moment that anyone walking around today with an Apple iPhone 8 has more computer power in the palm of their hand than the Apollo 11 astronauts used on their 238,900-mile journey to the moon.

Another example—one with the potential to revolutionize the task of regulatory compliance—is artificial intelligence, or AI. “People see it as something that can solve all of your problems,” Harshad Pitkar, a partner at the consulting firm PricewaterhouseCoopers, said during a presentation at Bank Director’s The Reality of Regtech event, which took place April 18 at the Nasdaq MarketSite in New York.

While it holds great promise, Pitkar said deployment of AI in the regulatory compliance space needs time to mature, with more focus on building on “practical applications” that address specific compliance challenges within the bank. Pitkar also cautioned that like many complex technology solutions, AI projects take time and patience to get off the ground. “[They’re] not so easy to implement,” he said. “It’s not as easy as turning on a switch.”

It is still unclear however, how regulators will embrace technology-driven compliance solutions. Concepts and emerging technologies like AI in oversight of the compliance process are taken very seriously.

Regulators are by nature conservative, so it shouldn’t be surprising they may be slow to warm up to an innovative new technology solution proposed to replace a more manual, people-driven process they are very familiar with. At the same time, financial regulators are well aware of the many innovations emerging in regtech and financial technology generally—and the need for them to keep pace with this innovation. A number of regulatory agencies around the world, including a few in the United States, are establishing “reglabs” or “regulatory sandboxes” to test new ideas.

James Kim, an attorney with Ballard Spahr and a former regulator at the Consumer Financial Protection Bureau, said during a later panel discussion that banks should make a concerted effort to educate their supervisory agencies about regtech projects they have undertaken. “Educate your regulators,” Kim said. “They need to feel comfortable that your new technological systems are effective.” Speaking from experience, Kim said regulators will always be playing catch with the banking and fintech communities as the innovation tide rolls on. “They probably will always be dead last in having the expert knowledge in this area,” he said. “They need to be led.”