The risk and compliance function of the future

Asian banks have seen an exponential growth in regulatory requirements in recent years, including a greater focus on consumer protection, market integrity and a demand for faster remediation of supervisory issues.

This has added to the cost of operationalising compliance across the three lines of defence. For instance, firms are investing heavily on the business side to develop consistent methodologies, enhance data lineage, and implement risk identification. The industry’s approach to compliance though has been tactical and has amplified the need for end-to-end tools and platforms capable of automating and integrating front-to-back operations with compliance requirements that will ultimately drive accountability into the first line.

As firms continue to make technological advancements that enhance customer experience and increase convenience, the next challenge for Asian banks is to look for practical and more effective ways to take advantage of “big data” — customer, risk, financial, operational, and more — that holds the potential to address many of these compliance concerns.

However, managing this data efficiently, manipulating it effectively to serve a variety of purposes, ensuring sufficient quality to yield actionable results, and safeguarding it from cyberattacks remain elusive. Human biases and other limitations in managing big data’s multiple sources, volume, and complexity, whilst unavoidable, have only served to exacerbate these concerns. Although significant cost and effort has been expended, many firms still find themselves in non-compliance with regulatory obligations which has led to substantial fines and considerable reputational damage.

From big data to smart data
To address these challenges, Asian banks are exploring RegTech solutions to move away from the concept of big data towards one of “smart data.” Smart data uses machine learning and intelligent algorithms to make sense of big data’s overwhelming volume and complex patterns by structuring these patterns in a cost-effective way that is better able to identify current and emerging risks, predict compliance failures, and enhance business line coordination. Amidst significant business model disruption from increased competition and the rapid pivot toward growth objectives, it is critical that many of the manual processes firms have relied upon are automated to promote agility, scalability, and enhancements to customer and employee experiences.

Increased competitive pressures from various market players, new entrants, and idiosyncratic customer demands for an improved delivery experience are also driving a need for agility in firms’ business processes and their ability to simultaneously achieve real-time compliance. To address this, many banks have either purchased or partnered with FinTech startups to support these key functions, assist in developing a lower-cost operating model, and provide technological innovations in financial product and service development.

This trend is expected to continue for the foreseeable future as more banks consider their options. As profitability continues to improve and technologies become more scalable, the industry will likely continue attracting additional FinTech competitors, and smaller institutions will likely consider following the lead started by larger firms by leveraging technology hubs designed to foster innovation in product development and provide agile platforms to support growth.

Risk management ‘as a service’
Another area that organisations are exploring is the use of the cloud and the benefits of 'as a service' solutions. This is of particular assistance to Asian banks as it allows them to access best in class solutions in a “turnkey” format which has the attraction of reducing costs through economies of scale, accessing specific intellectual property, and providing regulatory compliance. It removes a significant amount of the headaches involved in implementing a risk or regulatory driven project (think IFRS9), and moves it from a Capex expense to an Opex one through subscription services. It also opens up access to a range of cognitive approaches to enhance analytics or automate processes through the additional computational power that can be accessed.

Whilst there are some regulatory hurdles that may need to be crossed, the general tone from the industry is that the benefits provided by these platforms far outweigh these challenges.

Overall, Asian banks are having to change their mindsets around how to meet these challenges and leverage emerging technologies to remediate current tactical approaches and solutions, automating these processes to reduce costs and allow staff to focus on value adding activities, as well as differentiate themselves from their peers from a pricing or shareholder point of view.