Harnessing AI to Navigate Regulatory Complexity in Banking and Finance

By Harry Borovick, General Counsel, Luminance

The global banking and finance sector is navigating an increasingly complex regulatory landscape, compounded by uncertain macroeconomic conditions, marketplace competition, and heightened customer expectations. These pressures have increased the volume and difficulty of compliance requirements and raised the risk of substantial fines for businesses operating in this sector. Amidst these challenges, AI can offer practical solutions to ensure compliance and mitigate risks.

The Challenge

Whether it’s successfully navigating the London Interbank Offered Rate (LIBOR) or remaining compliant with newly implemented regulation like Digital Operational Resilience Act (DORA), financial institutions are no stranger to new regulations. From antitrust and competition laws to sustainability-focused regulations like the Financial Disclosures Regulation 2019/2088, growing regulatory complexity presents significant hurdles for legal departments within financial institutions. Additionally, the sheer volume and fragmented nature of the data at hand adds significant friction to legal workflows.

Legal teams in financial institutions are mandated to stay aware of incoming changes and must be equipped to handle them. After all, non-compliance carries severe economic, operational, and reputational consequences. In 2021, the UK’s Financial Conduct Authority (FCA) issued over £500 million in fines for non-compliance. The stakes are higher than ever, and the repercussions of failing to meet regulatory standards can be catastrophic. For instance, a prominent financial institution faced massive fines for failing to comply with anti-money laundering regulations, even being subjected to the first ever criminal charge issued by the FCA. This event highlights the significant financial and reputational risks involved when institutions fail to adhere to regulatory measures.

However, the issue extends beyond fines and potential financial loss. The stress exerted on industry professionals tasked with ensuring compliance is leading to increased mental health issues and high turnover rates. Reportedly, 60% of compliance staff feel burned out by the responsibilities they face. The pressure to maintain compliance amidst an ever-evolving regulatory environment should not be overlooked, as it may lead to a talent drain within the sector.

The Solution

AI provides a tangible solution to the compliance challenges faced by financial institutions. But what does that look like in practice?

  • Effective Third-Party Risk Management: Financial institutions must maintain effective third-party risk management to identify and reduce risk across their service providers. This is often a manual, labour intensive task, but remains deeply important to compliance. Financial institutions can conduct thorough due diligence by centralising service provider contracts to ensure comprehensive oversight and risk management. AI provides a far more comprehensive ability to search through these documents, automatically surfacing key figures and grouping documents which are conceptually similar.
  • Accelerated Compliance Process: AI can automate documents routing across the team, ensuring an effective review process. AI automtically flag renewal dates in contracts, reducing time spent searcging for these vital data points.
  • Empowering Non-Legal Teams: Non-legal departments can use AI to generate standard agreements based on compliant, gold-standard language through self-service contract generation tools, streamlining approvals and reducing delays.
  • Navigating Global Complexity:  Global companies are often juggling multiple regulatory regimes, making compliance an even more complex, labour-intensive task. AI tools can quickly and comprehensively analyse data sets in multiple languages, removing barriers in global operations and expediting the document review process.

But what does this look like in practice? A leading US-headquartered private equity firm used Luminance to review nearly 1,000 documents, including NDAs, credit agreements, and fund documents. A project estimated to take two weeks manually was completed significantly faster, with over 350 LIBOR definition clauses identified upon upload. This kind of saving is instrumental to company success, particularly in such a competitive environment.

In an era where regulatory requirements are becoming more stringent and the consequences of non-compliance are more severe, financial institutions must leverage AI to navigate the evolving compliance landscape and maintain a competitive edge in a challenging sector. Within a trend towards both financial transparency and environmental intervention which will only keep growing, taking steps now will be a key step for business continuity tomorrow. Adoption of AI-driven solutions enables compliance teams to keep up with the pace of regulation, even as it rapidly changes and evolves.


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