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The regulatory structure across the globe is complex, fragmented, opaque, and constantly changing— making it difficult for financial institutions to keep pace. The U.S. Government Accountability Office (GAO) admitted that “the 2007-2009 Financial Crisis highlighted the lack of an agency or mechanism responsible for monitoring and addressing risks across the financial system.”
While technology has been adopted to address issues related to guidelines and compliance, the never-ending amendments and additions have filled regulatory silos. Now, IBM’s (IBM) Watson is set to deliver regulatory requirements more efficiently and effectively than existing capabilities. Here’s how.
There are huge costs involved in managing risk and compliance, due to high volumes and complexity of regulations, constantly increasing regulatory requirements, multi-jurisdiction landscapes, and inadequacy (or inability) to transform antiquated systems to handle those tasks in a cost-efficient manner.
Many financial institutions still rely on the legacy systems that date back to the 1960s. A Deloitte report mentions that “in 2014, banks in Europe spent €55 billion on information technology, however what is most interesting is that only a remarkably low figure of €9 billion was spent on new systems.”
The number of individual regulatory changes that banks must track on a global scale has more than tripled since 2011, to an average of 200 revisions per day, as per a 2017 report by Boston Consulting Group (BCG).
On one hand, financial institutions are spending huge sums on compliance efforts while on the other, they are paying equal or higher amount as fines and penalties since their efforts fall short—as something or the other from those extensive updates is misinterpreted, ignored or missed. The fall-out of this is evident in numbers.
Banks have paid roughly $321 billion in fines due to stringent regulatory enforcement post 2007-2008 financial crises through the end of 2016.
Accenture’s recent report highlights that 89% of financial services executives expect cost increases in their compliance departments over the next two years. According to McKinsey’s estimates, 10-15% of operational spending budgets among major banks are allocated towards managing risk and compliance, with annual spending estimated at $270 billion per year for financial services organizations.
This burden is expected to only grow in the coming years. JWG estimates that over 300 million pages of regulatory documents will be published by 2020.
The first suite of cognitive solutions powered by IBM Watson Financial Services has been launched to better equip financial institutions and professionals to manage regulatory and curator responsibilities.
The regulatory intricacies aren’t easy to understand; nevertheless, it is believed that the use of cognitive technologies can create consumable information from data while helping in comprehending not just the explicit meaning but also the nuances that are hard to digest and assess.
The acquisition of Promontory Financial Group by IBM in September 2016 was a significant step towards cognitive compliance. Given the fact that Promontory had a high percentage of former regulators, Watson is well trained “in the science, art and language of regulatory compliance”: it has already been trained on more than 60,000 regulatory citations.
Watson is now expected to streamline the activities managed by a compliance professional on daily basis, while ensuring a company-specific view of regulations.
Watson’s cloud-based Regulatory Compliance can give professionals “access to a customized and searchable library of regulatory requirements, with the ability to identify the obligations and controls applicable to their business, which can be easily filtered by geography, line of business, product, process and compliance area,” according to IBM’s press release.
Watson’s cognitive compliance has the potential to drastically reduce the amount of time and effort that goes into finding the relevant information from the ‘silos’ amid the ever-evolving regulatory environment. This will enable financial institutions to place appropriate mechanisms and effectively manage the situation at hand.
Overall, cognitive solutions can reduce risks and drive significant savings, enabling institutions to reallocate resources and spend on more productive channels.