As a regulatory hosting platform, we are always considering how the compliance landscape will evolve in the future. Laven is lucky enough to work alongside our fantastic sister company Leo who provide us with the RegTech platform that underpins our day-to-day compliance activities, and consequently technology is a key part of Laven’s DNA. At Laven we regularly find ourselves engaging with the Leo team on exciting new projects incorporating the latest technologies to assist us in completing our compliance obligations. Over the last year this has increasingly involved working with Leo on AI initiatives. Some of these projects, such as Leo’s AI chatbot, have already been made available to Leo users while other exciting projects that remain under wraps promise to have a significant impact on how Laven and Laven’s clients approach compliance. Equally, on the client side, we see more and more businesses looking to engage in AI and blockchain enabled activities such as algorithmic trading, crypto assets, and AI analysis. Given the ever-increasing adoption of technology by Laven and our clients, this article will consider three key technologies and how they can transform compliance in the future.
Distributed Ledger Technology
Distributed Leger Technology (DLT), a technology most closely associated with block-chain, is a system whereby records of information are held across multiple locations (nodes), rather than relying on a single central database. This creates a very secure record of information, as any information lost in one location can be recovered from the other nodes, and any changes to the information must be verified by each node, to create a consensus that the change is legitimate. In simple terms, any attempt to fraudulently alter a database requires accessing at least a majority of nodes rather than merely a single database, introducing a vastly higher level of security. The creation of such trustworthy data records has allowed firms to begin trading assets, especially crypto-assets, without requiring physical contacts or records. Ultimately, DLT is about creating trust, and so has the potential to transform any regime which utilises trust such as the Appointed Representative regime or management hosting.
AI
Surely one of the most powerful technological breakthroughs of the 21st century, AI has an almost unimaginable potential to transform our lives, and is likely to affect almost every technology based industry in the coming years. Despite already being a familiar concept to most of us, few of us have a deep understanding of how it works. At the heart of todays AI is the concept of machine learning. While traditional code essentially follows simple formula, machine learning is able to utilise trial and error approaches and pattern recognition methods to train itself to reach better outcomes, even if this requires the AI to develop very complex or otherwise opaque processes.
AI is able to complete tasks that would be too complex to task normal software to complete. Of particular relevance to compliance, AI is able to scan through large documents and extract relevant data with a success rate comparable to, or even exceeding that of humans.
AI has the potential to revolutionise financial compliance in numerous ways:
- Pattern Recognition: AI algorithms can help identify any abnormal activities or transactions that could be indicative of fraud or a compliance issue.
- Monitoring Communications: AI can monitor emails, messages, and other forms of communication to ensure compliance with regulations. If any problematic communication is detected, the system can alert supervisors.
- Regulatory Changes: AI systems can help organizations stay updated with the frequent changes in financial regulations. AI can understand and interpret regulatory updates and analyse their impact on the organization’s processes.
- Automation: Routine and repetitive tasks such as report generation, data collection, etc., can be automated. This minimizes human error and increases efficiency.
- Risk Assessment: AI can provide more accurate risk assessments by analysing a higher volume of data more precisely than a human ever could. This can help companies make decisions that are more informed and mitigate potential regulatory challenges in the future.
- Predictive Analysis: Using machine learning, artificial intelligence systems can predict future outcomes based on historical data. Therefore, potential compliance issues can be identified before they occur.
And yes, this list was created using AI!
Smart Contracts
The power technology has to change our relationship with regulation is even greater if we reconsider the foundation of compliance itself – the written regulation.
Smart contracts are contracts that contain an element of code – that is to say that they contain an active element that can react to inputs, allowing them to be self-executing. An example would be a contract that enables a business to order new supplies as they become depleted, without requiring human input. So long as the usage of the supplies are electronically monitored, both the order and the payment can be handled automatically. Often these contracts utilise technologies such as DTL to automatically record transactions and key events on immutable ledgers that cannot be falsified. In contract law smart contracts are already beginning to transform the way entities interact with one another by allowing for continuous monitoring of conditions, allowing for automatic fulfilments and terminations to occur.
Example – Monitoring Financial Promotions
AI, DTL and Smart Contracts have been embraced by algorithmic traders and managers looking to gain a competitive edge over their competitors, but also highlight how the technologies could impact the more ‘creative’ aspects of compliance, reaching even firms without a technology focus. As an example, the utilisation of these new technologies will revolutionise the way financial promotions are created, approved and distributed. Rather than a back and forth between principal and AR, AI enabled software will be able to automatically identify concerns and red flags within the content of marketing materials as they are created, aiding compliance consultants in approving documents in near-real time. Furthermore, the distribution of regulated materials could be more closely monitored, allowing software to check the appropriateness of materials against each individual the material Is distributed to.
Perhaps most importantly, as our AI friend has already noted in its list above, the compliance of financial promotions will no longer be reliant upon humans constantly updating their knowledge of relevant regulations; instead, software will automatically detect the latest changes, and highlight them to compliance team members and promotion authors. It may even be possible to implement adaptable elements such as disclaimers that automatically update themselves as necessary. This would not only speed up the approval of financial promotions, but also increase the lifespan of promotions since they will always be updated to remain compliant.
Conclusion
So, with technology bound to play such an important role in the future of compliance, is it time for us compliance consultants to start looking for another career? Thankfully not. It is unlikely that the regulators will be comfortable with compliance firms and regulatory hosts offloading all the work onto machines anytime soon. For a start, the technologies mentioned in this article remain in their infancy, and the regulators will need to see that they are error-free and reliable over a long period of time, and in many scenarios. Furthermore, even once these technologies are deemed sufficiently mature and trustworthy, the current compliance regime does not just rely on trust, but also responsibility; something that will always require a human presence. Adapting the regulation to recognise machines’ role in compliance will also require a significant re-evaluation into who is responsible for their good running, with technology providers such as Leo needing to work closely with regulators. Finally, in order to get the most out of the technologies, the regulators may want to change how they create their regulations. Today’s regulation is written for humans to interpret – tomorrow it may be written for machines. This undertaking would doubtless require significant consultation with stakeholders, and take a considerable amount of time. Nonetheless, we can expect the compliance landscape of the future to incorporate transformative technology on an increasing basis moving forward.
