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ClauseMatch on Regulation 2.0: How Digital Regulation Is Transforming Compliance

The process for drafting and issuing regulations hasn’t changed much over recent decades – as regulators mostly still depend on paper-based procedures. Though regulatory documents have been digitised and been made the norm, should someone want to find a specific law, they would still have to manually search each document in order to find what they were looking for. 

RegTech removes some of the headaches involved in compliance once the rules are coded into the systems, but they still need to be understood and programmed by humans. In a similar way that they can be misunderstood by the person looking up the regulation, policymakers can also make mistakes as they have to cross-check the impact of any changes on previous rules. 

Evgeny Likhoded, CEO and Founder of ClauseMatch, had worked in the legal profession in Morgan Stanley and Gazprom UK for over a decade. As a member of the Technology Committee in Morgan Stanley, he saw the inadequacy of existing legacy and incumbent solutions on offer for compliance and legal departments. He created ClauseMatch to address challenges that he had experienced himself in working on trading contracts and implementing regulatory changes brought about by various acts.

Here Likhoded gives his views on how digital regulation is transforming compliance:  

Evgeny Likhoded, CEO and co-founder of ClauseMatch
Evgeny Likhoded, CEO and Founder of ClauseMatch

As the financial sector has become increasingly digitised, interconnected, and more global, regulatory compliance has become ever more challenging. Firms are increasingly turning to regulatory technology (RegTech) to help automate some of the tasks, such as testing and monitoring against controls. However, a crucial part of the challenge is that, while financial services regulators are increasingly making steps to become tech-first, the same cannot always be said for companies on the other side of the fence.

In fact, the process for drafting and issuing regulations hasn’t changed much over recent decades. While electronic documents have become the norm, regulators still mostly depend on paper-based procedures, publishing rules, and guidance as PDF documents. So, if someone wants to look up all the laws about, say, commodities futures trading, they’d have to go into each document and search each one separately and manually.

This fragmentation creates issues for financial firms who have to comply with the regulations, as they need to interpret a vast array of documents correctly to ensure compliance. RegTech removes some of the headaches involved in compliance once the rules are coded into the systems, but they still need to be understood and programmed by humans.

Policymakers themselves are actually faced with the same challenge. When it comes to drafting new rules or updating existing documents, the process of cross-checking the impact of any changes is extremely arduous and can be fraught with human errors.

Changes Afoot

There are signs that things are starting to change, partly in response to the increased focus on digitisation brought about by the global pandemic. A joint survey carried out by the World Bank and the Cambridge Centre for Alternative Finance found that 72% of regulators have either accelerated or introduced initiatives on digital infrastructure, and 58% have either accelerated or introduced initiatives regarding RegTech or supervisory tech (SupTech.)

For instance, the Monetary Authority of Singapore is working with a local firm that uses machine learning and natural language processing to improve name screening processes. In the US, FINRA is using surveillance algorithms to scan vast amounts of trading data as a means of detecting breaches, including insider trading and market manipulation.

However, some of the more intriguing and transformational opportunities come from applying AI to regulatory processes and documentation. The UK Financial Conduct Authority is engaged in a pilot program to make financial reporting machine-readable.

In the Middle East, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has been working with ClauseMatch on a pioneering Regtech project ushering in the age of “Regulation 2.0.”

“Dynamic and Intuitive”

The year-long project started in 2019 when ClauseMatch was tasked with digitising the ADGM library of rulebooks and expressing them as a set of APIs. The objective was to give firms the tools to interact with the rulebooks more dynamically, achieve better compliance, and gain efficiencies in the time and cost spent on managing their regulatory obligations.

The project team developed AI algorithms that successfully analysed and correctly labelled over a thousand pages of regulatory texts with an accuracy score above 90%. Based on the data the algorithms collected, the next stage was to create “dynamic, interconnected knowledge graphs,” which present the regulations in a structured, visual format where each word represents a data point.

Taking this a step further, the regulator believes that in the future, these graphs can link to the GRC systems within financial institutions via APIs. The net result creates a more dynamic process for defining regulations and ensuring compliance. In the words of Barry West, Head of Emerging Technology at ADGM, who supervised the project:

“Regulation 2.0 will express rules and regulations in a much more dynamic and completely intuitive manner, instantaneously sucking in knowledge from elsewhere to help augment people’s understanding of what the regulator is expressing.”

A New Approach to Managing Adaptive Regulations

In the US, there’s a fairly seismic shift underway in the regulatory landscape as the Biden administration starts to implement many of its election pledges. Among these is increasing scrutiny of investor disclosures relating to climate and environmental, social, and governance (ESG) risks.

In March, the SEC announced it was creating a dedicated Climate and ESG Task Force that will “develop initiatives to proactively identify ESG-related misconduct.” However, a letter published only a week later outlined the need for the SEC to be “adaptive and innovative” and how continual adaptation of existing rules and standards would be necessary to respond to changes in ESG and climate risks.

Situations like these underscore the urgent case for accelerating the adoption of Regulation 2.0 solutions. Where regulators need to be adaptive, there also need to be solutions that enable and empower compliance.

Finally, applying AI technology in this way has use cases that stretch far beyond financial regulation. In the UK, the LawTech sandbox aims to support more innovative legal technology to overcome the vast inefficiencies and high costs in areas of the legal sector.

For example, LawTech UK is seeking to develop a tech-enabled Dispute Resolution Platform to help address the £11.6 billion ($16 billion) spent each year by small businesses attempting to recover late payments. The idea is that it eliminates judicial intervention, creating significant efficiencies within the legal sector and for SMEs.

Also, the energy sector that had been criticised for ‘long’ and ‘difficult to understand’ documents and out-of-date practices, has made significant steps forward too. As a result of the partnership to help tackle these challenges, Gemserv integrated ClauseMatch’s platform into its practice to launch the code and regulation management platform CodeWorks that has been a game changer. The platform has already improved SEC parties’ experience when navigating the SEC, it is helping customers engaged in regulation and policy management to do more with their time as it makes essential information much easier to access.

Perhaps the most exciting part of the transformation to Regulation 2.0 is that it’s only just the beginning. Over the coming years, it’s entirely feasible that the whole regulatory landscape will change as a result of the initial results we’re seeing today.


  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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