Regulation has historically been a challenge for the financial services space, but considering today's fast pace of change in both financial services innovation and regulation, compliance is increasingly becoming a headache.
The compliance ecosystem has given rise to RegTech as technology companies deploy more sophisticated tools to help multinational corporations and financial services companies handle compliance demands. But understanding what can be a dizzying array of policies is only part of the battle.
In Europe, financial services regulation is especially disruptive. From MiFID II, which impacts investment intermediaries providing services for financial instruments like bonds and shares, to Basel III, which aims to enhance risk management in the financial services space, these rules are vast and complicated.
To make matters more frustrating, these rules can have overlapping requirements or even conflict with each other.
Waymark Tech, which provides software to help financial services and legal companies with compliance efforts, has rolled out what it calls the world's first artificial intelligence-powered solution to identify these overlaps and contradictions.
According to Mark Holmes, Waymark CEO, compliance has always been a challenge but the pain point is becoming more acute.
"It's coming to the forefront now, purely because we have some very large regulations that are hitting next year," said Holmes. "Big, sweeping changes that require large-scale scale changes to the infrastructure of banks and organizations."
The regulatory landscape is demanding a more efficient process for managing compliance, he added, especially considering that the traditional way of handling these issues is far too manual.
"People are still literally printing out regulations and sitting there with yellow highlighters and highlighting them," Holmes explained. "They work regulation-by-regulation, effectively in silos."
Organizations often set up internal teams to explore each regulation individually. It's not until each team is ready to implement a particular policy's essential compliance measures that they become aware of overlaps or conflicts with other regulations. Additionally, implementation of a set of compliance measures for one regulation may not be adequate for another incoming regulation.
This is a challenge for organizations large and small, Holmes noted.
In its announcement of the new solution, Waymark gave examples of overlap and conflict. Both MiFID II and PRIIPs — which applies to contractual disclose requirements for retail investment products —require fund managers to provide product investors and their advisers with adequate information to compare products and understand risks. An example of a conflict exists within the MiFID II and GDPR regulations (the latter focuses on data protection). While MiFID II requires firms to provide regulators with immediate access to client databases, GDPR requires that the data be encrypted.
Within the language of these rules, Holmes explained, there are frequent uses of words and phrases that may all mean the same thing. Further complicating the matter is that policies are published in a variety of formats, making cross-referencing difficult.
Waymark deploys artificial intelligence and natural language processing that can identify word relationships and common phrases to understand a policy and compare it to others. The technology, Holmes said, can learn as it goes, able to continually take in additional information about changes to existing policies or new regulations. This brings speed and efficiency to the process of identifying overlaps and conflicts.
Additionally, API technology is connected to the websites of regulators. Any time a regulation is published on the European Commission site, for instance, Waymark can pull that information into its system and begin using it immediately.
With aspirations to bring its solution onto a global stage, Waymark is looking to address a critical financial services pain point that Holmes said can often stand in the way of innovation.
"The fact that this has [traditionally been] done manually, the fact that there is no standardized interpretation within the market, means that teams within different organizations are all doing the same work," he said. "[Automating the process] gives your team the freedom to focus on the value-added tasks they're there to do."
There's also a competitive advantage. Having each individual organization tackle compliance and regulatory analysis means banks and other players are using valuable time to all do essentially the same exact thing.
"This solution helps with knowledge sharing, and [it means] being able to share that know-how across different firms in what is essentially a non-competitive area," said Homes.
With everyone able to seamlessly address one of the industry's biggest pain points, the financial services space can ramp up innovation and competition.
"Any time spent having to manually read, assess [or] stay on top of regulations is time taken away from core tasks," Holmes continued. "Where you really gain your competitive edge is when you are free to do the innovative and value-added things your team is trained to do."