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Why 2023 is Another Paradigm Shift Year for Compliance

In the ever-evolving landscape of global finance, 2022 presented a multitude of unprecedented challenges for the financial system. As we step into 2023, a new dilemma arises: how can banks strike a balance between the risks and rewards of incorporating disruptive technologies into their operations?

Tom Padgett, general manager of Smarsh Enterprise – which helps organisations to identify regulatory and reputational risks within their communications data – sheds light on this as he explores the confluence of economic, technological, and regulatory forces reshaping the financial services ecosystem, with compliance poised to serve as a vital interconnector.

Tom Padgett
Tom Padgett, general manager of the Smarsh Enterprise

In many ways, 2022 was an unparalleled year in terms of the number of challenges the global financial system had to contend with. From returning to a post-pandemic world, to navigating the wide-ranging consequences wrought by the Russia-Ukraine War – be it the breakdown of global supply chains, or the highest inflation levels in decades – the challenges have been immense.

While these difficulties continue to persist, 2023 has brought a new challenge – namely, how financial institutions balance the risks and benefits of integrating the latest, disruptive technologies into their operations. This technological shift has contributed to an increasingly active regulatory field, looking to not just understand ever more complex financial markets, but steward them effectively.

Together, the confluence of these economic, technological, and regulatory headwinds, point towards a fundamental transformation of how the financial services ecosystem functions. At the centre of this transformation, compliance is uniquely positioned to be an essential interconnector, both enhancing how financial institutions operationalise and draw value from their data as well as informing regulators on how to produce safer financial systems.

Evolving what compliance means to financial institutions

For a long time, banks have approached the topic of compliance and data management with the question “What do we need to do?”. This narrow focus on needing to fulfil legal and regulatory requirements is understandable, given that meeting these standards are the very pre-conditions to operating in the financial world.

However, as financial institutions collect and manage larger pools of information, the question becomes “What could we do?”. Beyond minimising risks, banks should now be asking how they can maximise benefit from their data: “How can we derive value from all this data we have available to us?”

For example, in recent months, some major financial institutions have moved from exploring the potential of artificial intelligence or AI, to adopting it within their operations. Investment bank Morgan Stanley has rolled out an OpenAI-powered chatbot to its 16,000 financial advisors while Japanese brokerage Daiwa Securities has adopted the ChatGPT chatbot to help increase employees’ efficiency in activities such as creating documents. Wall Street behemoth Goldman Sachs has even suggested the bank could train its own ‘ChatGS’ A.I Chabot.

From a data management perspective, the adoption of these AI-powered tools will undoubtedly increase the scale of communication data that banks will have to capture and monitor. However, with this increased scale, comes greater opportunity for banks to leverage the vast amounts of data to their advantage – from increasing the visibility of their operations to enhancing the early detection of potential problems.

It’s important to remember, however, that not every bank is readily embracing AI, with some institutions even banning chatbots citing regulatory concerns. As a leader within the compliance industry, Smarsh understands these concerns, but we also believe that from a communications perspective, AI is just the next chapter in an ever-changing landscape.

Our inception over two decades ago was prompted by the advent of email messaging, and since then, we’ve continually evolved to accommodate new forms of communication – be its workplace messaging platforms like Microsoft Teams or personal communication apps like WhatsApp. So, while it’s true that AI is a ground-breaking technology, it’s also just the next stage of communication and one that we’re prepared for.

Despite the ongoing debate around the adoption of AI, my view is clear: people have been using AI for years already in day-to-day applications like Google Maps so its use is already normalised. By extension, financial institutions will soon regard it less a shiny, new technology, and rather just another intelligence tool to enhance their operations. This notwithstanding, the incorporation of AI, alongside other complex technologies, means that financial regulators face tough challenges ahead in stewarding financial systems.

Building safer ecosystems through compliance

The 2008 financial crisis is widely considered to be a result of regulators’ failure to both understand, and as a result, to steward the financial systems they were supposed to be regulating. Despite this historic lesson, today we’re observing a wave of failures at US regional banks, again raising the question of whether regulators are informed enough to manage the increasingly complex financial systems in which we operate.

More concerning still is that with the continuing adoption of new technologies by financial institutions, regulators’ ability to respond to financial crises by looking to historical examples is further weakening. Put simply, how are regulators supposed to manage risks that haven’t yet existed before? This is troubling, because whilst we understand conventional crises, such as a bank run, the risks that really matter are the ones that we can’t see coming.

However, in the same way that communication compliance can enhance how financial institutions operate, so too can it support regulators to keep financial systems safe. This central problem of the unforeseeable risks attached to new technology need not be the case if compliance is leveraged to make potential risks visible to regulators early on.

Smarsh helps capture and monitor the communications of the world’s largest financial institutions, so we understand the power of bringing our own machine learning and AI tools over huge data sets to help us see patterns and areas of concern as they emerge. By identifying emerging risks before their consequences become inevitable, regulators get a head start and can take action to ensure the safety of the financial system.

Often banks and regulators are framed as opposing forces, but ultimately the former needs the latter to ensure the financial system within which they operate is reliable. Similarly, it is in the interest of these institutions to share their latest insights with regulators so that they are as equipped as possible to tackle the risks ahead. I see a world where companies like Smarsh – in partnership with their customers – are informing the regulator about what they should be looking for.

As the financial field continues to evolve, compliance is primed to play a central role in connecting these two pillars to the mutual benefit of a safer, more secure financial ecosystem.


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