The steady flow of automation, robotics and AI into non-financial risk management is becoming a flood, 1LoD’s 2019 survey reveals.
Existing controls are being replaced with enhanced machine learning and AI, and firms are placing increased reliance on automated controls throughout their global control frameworks.
“There is a compelling shift we are seeing in communications surveillance, aided by automation,” said Brandon Carl, Vice President of Product Management at Digital Reasoning. “Machines are significantly reducing the number of false positive alerts, which is freeing compliance teams to perform richer person-centric investigations.”
The 1LoD 2019 Benchmark Report & Survey results show the direction of travel is in line with regulatory expectations of fostering new technologies to tackle non-financial risk with progress made in a number of key areas including communications and trade surveillance.
While automation promises to revolutionise surveillance and free up resources, the industry recognises the technology in its current form often only proves useful alongside a level of manual review via expert human oversight.
All about the money
As machine learning, natural language processing and big data analytics become more sophisticated, they may contribute towards revenue generation, but for many firms, automation is predominantly a way to cover larger data sets in a cost-effective way. Sluggish capital markets and below-par trading revenues have generated poor results across the street in 2019, causing even greater pressure to reduce costs.
According to the 1LoD 2019 Benchmark Report & Survey, data has now overtaken budget as the greatest barrier to delivering an effective control platform with an average score of 4.12 compared to 3.75 when scored on a basis of 1 to 5.
“Financial institutions have seen their return on equity drop, and these returns have not rebounded to levels seen prior to the financial crisis,” says Brian Fink, Financial Services Partner at Accenture in New York. “This has forced financial institutions to reduce their cost structure to maintain profitability. Increased regulatory demands have also forced institutions to reorganise and upgrade their technology to support evolving regulatory controls and reporting.”
During periods of cost-cutting, investment spend comes under greater scrutiny and transformation budgets are usually cut while adhering to the latest regulatory demands. The key focus often turns to automating processes to improve efficiency.
Finding the happy medium
In front office control functions, there is a recognition that the current technology solutions are starting to deliver after many years of hype, but there is a balance to be struck with smaller budgets and an unwillingness to replace legacy systems with third-party vendor solutions on the promise of little more than a proof-of-concept test.
“The third-party technology scene is progressing apace, and there is some good stuff out there,” says the chief compliance officer of a tier one global investment bank. “While the bigger firms recognise this, it is challenging and expensive to take a specialist vendor system and slot it into the existing monitoring landscape, with all input data and output data pipes aligning.”
Most firms understand that, under pressure from the regulators, investment in areas such as surveillance monitoring is essential. Internally, however, they are being asked to do more with less.
“Banks are under increasing regulatory pressure to improve monitoring of voice channels but need a solution that enables surveillance scope to be expanded with the same staffing,” says Carl of Digital Reasoning.
Change is slow, however, especially in large organisations where multiple stakeholders have oversight of a range of systems.
“These technology upgrades come on top of generations of legacy product evolutions and market consolidations that have increased the complexity of operating model and technology integration,” says Fink.
For some firms the priority is often ensuring a greater level of consistency in the existing processes and data before potentially overreaching with an unsuitable technology solution.
With the amount of new data now required to be captured by regulators, over-reporting and multiple inefficiencies are a reality for firms without a clearly defined and effective strategy for properly capturing and interrogating data. Doing so will allow firms to build the context on which decisions can then be made.
Tools that can interrogate vast amounts of data and automate manual aspects of the investigative process will deliver more context to the human reviewer, who can then make a decision that delivers both effectiveness and efficiency gains.
Regulators have made no secret of their desire for banks to adopt the latest technology to improve risk and control functions. The key is ensuring that this helps protect the business while not drawing out projects and implementations over long periods, which heightens risk.
There is no one tool that can do it all, however, and surveillance executives highlight the importance of systems being able to talk to each other and share data with ease. It may be difficult to detect issues lurking beneath the surface or anomalies in behaviour in isolation that only become apparent when viewed across a series of data or the output of several controls when combined.
Great regulatory expectations
Historically, a certain level of pragmatism has been shown by regulators towards technology and surveillance controls in certain challenging areas where manual controls have been more prevalent. Carl of Digital Reasoning says: “A review of regulations – from Dodd-Frank through to MAR and MiFID II – shows that voice communication is not regarded by regulators as being any less important than text communication.”
Historically, lower levels of enforcement have been due to regulators’ being realistic about what can be achieved through manual sampling or basic phonetic technology, he adds.
Some are predicting, however, that this could be about to change as improved automated technology solutions become more feasible. “Our prediction is that the regulatory demands of voice surveillance will follow a similar pattern as we have seen with text,” Carl says. “Improvements in audio analytics technology will raise regulators’ expectations of what surveillance organizations must achieve.”
Such is the pace at which automation in technology is progressing, the industry must brace itself for additional regulatory oversight of the new tools on offer, says Jamie Hamilton, Global Business Control Officer, Global Markets at JP Morgan.
In addition, firms need to continue to consider how they adapt their control framework to control a trading floor with fewer front office staff and more interactions taking place electronically.
“Firms are spending significant amounts of money to automate client interactions and client pricing,” says Hamilton, “but how do you supervise a business that is becoming more and more electronic? This is something everyone will have to think about.”
1LoD are hosting a Digital Debate: Control Automation Within the 1st Line US Edition 09.00 – 10.30 EDT, 11 August 2020.
Shelly Liposky, Managing Director & Global Head Business Risk and Solutions, BMO Capital Markets
Susan Evans, Director, Global Markets Control COO, Credit Suisse
Konstantinos Rizakos, Managing Director, Compliance Division, Goldman Sachs
Farhan Amin, Regional Chief Control Officer – Global Markets Americas, HSBC
Christopher Scarpati, Lead US Capital Markets Advisory Partner, PwC
Find out more and book now here.