Expensive shortcuts in the quest for compliance tech

Compliance today is really all about data, and compliance management will inescapably require highly sophisticated software in future, says Nicolas Espinoza, CEO of Grand Compliance. To stay competitive and manage available resources effectively, financial companies will need to bring on a whole new breed of experts: legal technologists.

According to the Cost of Compliance Report 2022, Banks spend up to 10 percent of their top line revenue on compliance related activities, corresponding to approximately 250 billion USD worldwide.

In the coming 12 months, the financial landscape is poised to witness a surge in compliance costs. This uptick is attributed to the impending arrival of additional regulatory requirements, coupled with the ongoing necessity for organizations to consistently project a culture of compliance to stakeholders such as investors, customers, and Financial Services Authorities (FSAs).

Despite these escalating demands, a persistent and substantial gap remains between compliance outcomes and technology integration. Dr. Nicolas Espinoza, CEO of Grand Compliance, brings his 20 years of expertise in decision science, risk management, and analytics to shed light on the prevalent challenges in this arena.

A key point of contention, as highlighted by Dr. Espinoza, lies in the procurement process, compounded by limitations in time and resources. Typically, the initiation of a compliance project involves a budget-driven approach led by a Chief Risk Officer or the CEO. In this process, a project manager spearheads the procurement, evaluating various vendors.

However, Dr. Espinoza underscores the potential pitfalls when this process is initiated without well-defined user or functionality requirements. In the absence of these prerequisites or even general principles for assessment, the risk of resorting to costly shortcuts significantly increases. This scenario not only jeopardizes the efficiency of the procurement process but also raises the specter of unnecessary expenditures.

As organizations grapple with the widening chasm between compliance goals and technological solutions, Dr. Espinoza's insights highlight the critical role of a well-structured procurement process. By establishing clear criteria and principled assessments from the outset, organizations can navigate the challenges posed by rising compliance costs while ensuring that technology aligns seamlessly with their compliance objectives.

Many organisations are struggling to understand and deal with the impact of regulatory compliance while simultaneously trying to implement IT-systems to mitigate that impact. Modern banks today will ideally have a technical department to manage this, working in parallel with a compliance department tasked with specifying the requirements that processes and systems should satisfy.

The knowledge gap between these two areas can be significant, and what should be the most suitable solutions tend to get lost in translation. Typically, the compliance officer working with a regulatory mindset and the tech-speaking systems architect may fail to arrive at a common understanding of the issues at stake. In the absence of an accurate and workable understanding of a defined specific problem and corresponding solutions, financial companies may resort to a compromising reliance on systems vendors based on claims that their software can meet most or all their needs.

Considering the steady stream of new regulatory requirements, corresponding internal processes and procedures that need to be in place are likely to only become more complex, and as a result necessitate increasingly advanced technical solutions. To stay competitive and manage available resources effectively, financial companies will need to bring on a whole new breed of experts: legal technologists.

Some recommendations that can be helpful to avoid costly shortcuts and expensive decisions may sound obvious but remain considerable challenges in many financial companies:

• Understand the core issue and needs, and only thereafter set the specification of requirements
• Establish scenarios and, in parallel with the procurement process, understand existing processes which very often are not even properly mapped out.
• Design future processes that enable upcoming regulatory obligations. This may include multiple aspects, including workflow automation and machine learning-assisted decision orchestration.