From the Editor

From The Editor: Catching Bad Guys Requires Investment, Experimentation and Patience

By Kieran Beer

Technological innovation continues to promise revolutionary changes in how we live. Driverless automobiles are already navigating San Francisco and drone cars that will either hover or outright fly can’t be far behind.

But how new technologies can revolutionize the financial services industry’s efforts against financial crime remains unclear.

The prospect of regulatory technology improving customer due diligence, anti-impersonation efforts, transaction monitoring, data sharing and other compliance procedures is the subject of a report commissioned by the United Kingdom’s Financial Conduct Authority.
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Based on 42 interviews conducted this year with FCA-regulated firms and more than 20 technology providers, the report captures the potential of new advances like machine learning, natural-language processing and data analytics, while also illuminating obstacles to their adoption.

“Respondents were almost universally excited by machine learning,” the study says. But it adds that a conservative financial services industry under regulatory pressure has been slow to experiment, let alone adopt emerging technologies whole-hog.

And given the expense, why adopt a new technology when your existing compliance tools have already passed regulatory muster?

The black box nature of many proprietary technologies gives plenty of reason for pause: how the products work isn’t always transparent to financial institutions, let alone their examiners, requiring FIs to undertake lengthy testing to gauge their efficacy and run “new and old solutions in parallel, at considerable additional cost,” the FCA report concluded.

Efficacy of the new technologies would also be somewhat dependent on “collaboration between regulated firms, such as agreeing standardized approaches to transaction monitoring. The overarching view is that this is unlikely to happen in the short to medium term without regulator intervention."

It is therefore not surprising that regulated firms would hold out for proven capabilities and that all but the biggest FIs are daunted by the cost of new technologies. Financial institutions, moreover, are quite familiar with the experience of upgrade costs exceeding initial estimates as new systems and software routinely require fine-tuning.

Yet many in the financial services industry are nonetheless eager to acquire better tools for customer onboarding and account maintenance, and excited by what data analytics, machine learning and other regulatory technologies portend for compliance.

FIs identified transaction monitoring and management of the growing volume of alerts now being dealt with manually.as the most likely compliance processes that can be streamlined by the new technologies, according to the report.

However, actual advances may require more investment from financial institutions, more patience and support from regulators, and tolerance for initial failures that technological upgrades almost certainly will entail.

kbeer@acams.org
Follow me @KieranBeer on Twitter

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