Regulation places the greatest burden on those who comply. The impact of KYC (know your customer) and AML (anti-money laundering) regulations is a good example. We’ve all experienced the frustration of having to repeatedly prove our identity to institutions we’ve dealt with for years.
We generally accept this burden with good humour because we understand the rules are there to help fight financial crime. But, here’s the rub, less then 1% of illicit money flows worldwide are ever identified and investigated.
It’s a similar story with almost all regulation. The individuals and organisations that play by the rules carry the lion’s share of the regulatory burden. A disproportionate share of the time, effort and cost of compliance is born by the most compliant, while only a small percentage of the machinery of regulation bears down on the miscreants, who often operate completely outside the regulatory framework.
Of course, this isn’t an argument against regulation. It’s a plea for more efficient and effective compliance. It’s in everyone’s interests to design systems and processes so the vast majority are compliant and easily demonstrated to be so, while the minority of non-compliance is prevented (the best-case scenario) or identified and addressed quickly and accurately (i.e. no false positives).
In essence, the challenge facing both the regulatory authorities and the companies being regulated, is to ensure the regulation does what it is intended to do – improve consumer protection, improve market stability, prevent fraud and criminal activity etc. – and not simply create a monitoring and reporting industry. In other words, focus on the intentions of regulation and the outcomes of regulatory compliance.
The good news is we now have the tools to do precisely this. AI and robotic process automation, data science and machine learning technologies are increasingly being used to ensure and demonstrate regulatory compliance. These “regtech” innovations are driving huge improvements in the efficiency, accuracy and effectiveness of compliance programmes across all affected industries, especially in financial services but also in pharma, food production, energy, transport, telecoms, etc.
As a consequence, there is a second wave of compliance transformation sweeping across these industries, as companies make use of these new technologies. This transformation is characterised by three unifying themes:
If companies and regulators work together to fully exploit these new technologies, the burden of compliance could be radically shifted.
In an ideal world, the only people who would be inconvenienced by compliance processes would be the non-compliant; 100% of the time and money spent on compliance would be focused on the bad-actors; and banks wouldn’t ask for original paper copies of bank statements to open paperless bank accounts.
In the meantime, I will keep to hand my passport and two recent utility bills.
Andrew Simmonds is Consulting Director at Clustre – the innovation brokers – www.clustre.net