Will technological developments pose a threat to compliance?

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Technological advancements are accelerating the collective progress of businesses and have paved the way for increased efficiencies and cost savings which were not previously possible. As with any major technological disruption, opportunities come hand-in-hand with challenges and potential pitfalls that can have widespread implications. Such negative ripple effects can appear in any shape of form, as recently seen by the airport drone fiasco.  

When Elon Musk, the rather outspoken CEO of Tesla and founder of Space X, warned of an imminent attack by drones last year, he probably wasn’t expecting that within just two months two unmanned aircraft would ruin Christmas plans for hundreds of thousands of passengers.  

Travel plans of 140,000 people were affected as a result of two unmanned aircraft that held up London Gatwick Airport ’s operations for two days. Speaking to Sky News about these incidents, Chris Grayling, the UK’s transport secretary, stated that as technology advances, such challenges will become more frequent.

Progress: a two-edged sword?

The last decade has seen tremendous technological innovation which has not only improved the range of services available but has also significantly increased the accessibility to information and knowledge. Someone browsing the internet from a remote corner of the world now has access to the same information as someone working in Silicon Valley and can use it to make informed business decisions. Whilst this is a clear step forward in terms of human and business growth, in particular in terms of facilitating international collaboration, such developments have also created their fair share of challenges and posed a threat to the holistic progress of many businesses.   

In November 2018, police in India arrested more than 20 people on the suspicion of defrauding individuals globally, the plaintiffs were the FBI, Interpol and Microsoft. Only now, years after such cells have been set up, are the legal and regulatory bodies succeeding in finding illegal activities of this sort. This wouldn’t have happened a decade or two ago. This type of fraud is just one example of the pitfalls of fast technological advancement, but there are unintended consequences to it as well.

Take high-frequency trading for example. Despite the financial sector being heavily regulated, there have been many issues, including the 2010 Flash Crash, Knight Capital losing $440 million due to a trading error in 2012 and more recently, an innocent login glitch at the Tokyo Stock Exchange. In the case of Knight Capital there was no mal-intent on the computer’s part, yet its actions wiped out 75 per cent of the firm’s equity value within days. The authorities have since introduced stricter regulations in the form of MiFID II (in Europe) to manage these risks, but uncertainty over what algorithms can do remains.

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Chasing transformation 

As the fintech sector continues to flourish, shape and disrupt the traditionally rigid processes, we’re seeing that Blockchain, AI and robotics once again dominate the sphere, not only in terms of innovation and level of investment, but also on the media and political front. As a result, we must ask whether the existing compliance and operational departments are ready to deal with the disruption, and if their tool sets are adequate to address the challenges ahead. Judging from recent events, the answer appears to be no. While big financial institutions themselves have generally been conservative in their adoption of new technologies, they are now facing unprecedented disruption.

Competition from fintech is stronger than ever before, particularly in the area of payment services. Digital payment firms such as Venmo and Revolut, are continuing to take market share from the incumbents, while Apple IPay and Google GPay are additional threats which didn’t exist a decade ago.

With regulatory initiatives such as Open Banking, the traditional banking institutions no longer control the end-to-end eco-system. Going forward, banks will have to integrate with newer entrants who are already offering more innovative technology as part of their offering.  

Impact on the workforce 

With the influx of new technological developments being deployed into the market, it is also vital to recognise the impact this will have on the face of our workforce, especially in the banking and fintech sectors, as well as how businesses can remain compliant as these changes come into play.  

Firstly, banks will need to reflect internally and change not only the culture, but also the way people work. The expected increase in automation will reduce the need for as many repetitive jobs, shifting the focus to the workforce’s ability to innovate or disrupt. As millennials join the workforce, this is an opportunity to design organisations so they are able to adapt to innovation faster and more securely than before. The controls should be predictive in nature and focus on the root of the problem unlike the current end-of-day reconciliations that fix the issue after the fact.

Secondly, banks should work closely with regulatory and legal authorities, as well as their counterparts, to build a framework that is standardised across the globe in order to take the pressure off once new regulations are introduced. The current regulatory requirements comprise a myriad of requests for data in various formats that is not easy to decode for either the firms or the regulators. Simpler outcome-based standards with foundations based on the ‘right’ behaviour will better serve the goals of being compliant.

As with elsewhere in the financial sector, the key focus for talent selection is now more about technology and less about having specific sector knowledge and experience.  

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Defining DNA 

Before deploying new technologies and putting significant investment in the area, banks and fintechs need to understand their current data, processes and infrastructure in order to keep up. Identifying and defining the building blocks are integral in ensuring that the respective departments are ready to deal with both the opportunities and challenges that technological developments bring. To conduct a successful digital transformation, banks need to understand where they are going, where they are now and the path that needs to be traversed.

Like the proverbial sword, disruptive technology, if used incorrectly, can act as a weapon in the wrong hands. Fortunately, with the right behaviour and conduct, it can form a protective force to herald the move of centuries-old financial institutions into the future. There is no doubt that compliance can’t compete with technological innovation, but it can certainly adopt it. After all, in the case of the incident at Gatwick Airport, it was technology which came to the rescue of the passengers.

Harpreet Singh, Executive Director at Brickendon

Harpreet Singh
Harpreet Singh, Executive Director at Brickendon is a highly-experienced financial consultant, specialising in regulatory data issues and advising banks how best to implement regulatory and risk projects across their global operations.