technology as driver of change: automation and cognitive
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Technology as driver of change: Automation and Cognitive Solutions in Business Compliance
CeTIF OPEN SUMMITUNIVERSITA’ CATTOLICA DEL SACRO CUORE5 LUGLIO 2018 - MILANO
Raffaele Cosimo
Amministratore Delegato
Promontory Italy S.r.l., an IBM Company
The Financial Services Industry is at a Crossroads
The financial services industry is operating on inadequate, legacy systems and
being held back by a manual, labor-intensive approach to regulatory compliance.
Managing the abundance of data – banks could be handling data volumes in the
tens of exabytes before 2020 – is making the industry’s job even harder.1
And compliance responsibilities and expectations for banks and their executives
have never been higher.
These limitations are amplified by many firms struggling to achieve meaningful and
consistent gains in return on equity
1. Nasar, Mohammed and Christopher J. Sifter, “Putting Big Data to Work in Your Bank.” Crowe,
Howarth, LLP. June 2016. http://www.aba.com/Products/Endorsed/Documents/Crowe-Putting-big-data-to-
work-in-your-bank.pdf1
Cognitive RegTech is the Answer
By leveraging RegTech across the entirety of the banking enterprise, firms can
combine data, technology innovations and new methodologies for regulatory
compliance and augment the ability of compliance teams to do their jobs more
efficiently and effectively.
RegTech is the digitization of manual reporting and compliance processes. It
promises substantial cost savings for the financial services industry.2 Deploying the
right combination of expertise and technology can help firms manage new and
changing regulations. Cognitively enabled banks will have the tools to help
prevent fines, penalties and reputational risks, and they will be able to scale
these solutions without continually adding to compliance teams.
2. Arner, Douglas W., Janos N. Barberis and Ross P. Buckley. “FinTech, RegTech and the Reconceptualization of Financial Regulation.”
Northwestern Journal of International Law & Business, Forthcoming; University of Hong Kong Faculty of Law Research Paper No.
2016/035. October 1, 2016. Available at SSRN: https://ssrn.com/abstract=2847806
An Integrated Aproach
An integrated approach calls for:
Industry expertise and deep domain knowledge: Cognitive systems are literally
taught by experts – whether doctors, researchers, wealth advisors, customer
service reps or veterinarians.
When considering RegTech systems, inquire about who did the training. Was it
done by programming experts or regulatory experts? Was the solution trained to
understand the intent of regulations, or just to recognize keywords? Is there
consideration for the front, middle and back office and the implications of the
same regulatory mandates as applied across the firm?
Simply identifying new regulations is not a path to success. Understanding the
intent of the regulation is critical in determining how best an organization should
respond. Again, this requires deep domain expertise.
An Integrated Approach
Data insights: Data is a key factor in gaining competitive advantage.
Organizations that are able to access, understand and generate actionable
insights from their data put themselves in a position to foster and strengthen
trust, which can lead the transformation of the firm as well as professions and
industries.
Similarly, it is not just about crunching on large volumes of data; it’s about finding
the hidden insights in the data, across both structured and unstructured data
(such as video and social media). This requires truly cognitive technologies that
can understand, reason and learn.
Most important, it is no longer sufficient to rely solely on domain expertise or
advanced technology; it is the integration of these capabilities – with many
abundant data sources – that differentiates a RegTech solution. And, it is exactly
this combination that is required to tackle the increasingly complex risk and
compliance challenges the industry faces today.
IT’S NOT HUMAN VS MACHINE
DANGER IS
making automated
decisions based
on untrustworthy
learnings that are not curated.
IT’S HUMAN AND MACHINE
RegTech: Regulatory PerspectiveRegtech could address a wide array of requirements related to regulatory reporting, financial crime, operational risk
(including cyber-security and fraud detection), consumer protection and data protection regulation. The technologies
used include IT (software, cloud computing, API, automation and AI), data technologies (big data, machine learning, risk
scoring, real-time monitoring), identity technologies (biometrics, vocal recognition) or new technologies such as the DLT
combining cryptography and IT solutions (BCBS - Sound Practices Implications of fintech developments for banks and
bank supervisors, 02/2018, based on IOSCO, Research Report on Financial Technologies, 02/2017)
The European Banking Authority (EBA) published the first products of its FinTech Roadmap, namely a thematic report on
the impact of FinTech on incumbent credit institutions' business models and a thematic report on the prudential risks and
opportunities arising for institutions from FinTech (EBA - Report on the impact of FinTech on incumbent credit
institutions' business models, 07/2018; Report on the prudential risks and opportunities arising for institutions from
FinTech, 07/2018)
• The first report sets out five factors that might affect incumbents' business models from a sustainability perspective:
1. Digitalisation/innovation strategies pursued to keep up with the fast-changing environment
2. Challenges arising from legacy ICT systems
3. Operational capacity to implement the necessary changes
4. Concerns over retaining and attracting staff
5. Increasing risk of competition from peers and other entities
• The second report assesses seven use cases, where new technologies are applied or considered to be applied to
existing financial processes, procedures and services:
1. Biometric authentication using fingerprint recognition
2. Use of robo-advisors for investment advice
3. Use of big data and machine learning for credit scoring
4. Use of distributed ledger technology and smart contracts for trade finance
5. Use of distributed ledger technology to streamline customer due diligence processes
6. Mobile wallet with the use of near-field communication
7. Outsourcing core banking/payment system to the public cloud
RegTech: EBA - Level of involvement in the
selected FinTech use cases (37 EU banks)
Source: EBA - Report on the prudential risks and opportunities arising for institutions from FinTech, 07/2018
10Time
The changing body of unstructured
regulatory content and manual,
labor-intensive processes require
nuance and judgment.
Cognitive computing can enable
rapid augmentation of human
capability; address nuanced,
ambiguous problems; and scale the
application of industry knowledge.
Cognitive
Capabili
ty Digital and automated
Highly manual,best efforts
Digital computing and process
automation can enable people
to multitask efficiently and
connect globally.
Many banks
are here.
RegTech is a Journey
Applications: Cognitive Computing Solution
RegTech: Vision, Objectives and Applications
Know-Your-Customer (KYC)
New regulations (e.g.,
ownership & control),
heightened expectations,
and enforcement actions
Manual, repetitive,
time-intensive,
never complete,
non-standardised,
and risk laden
Silos across business
lines and banks;
basic information
not shared
RISING
EXPECTATIONS
NATURE OF
THE WORK
LIMITED
VISIBILITY
IMPACT
High – and rising – costs
Insufficient information – many high risks
False PEP or negative news hits
Negative customer experience
Stressful jobs
Growing EDD roles
KYC Industry Challenges
Know-Your-Customer (KYC)
Challenges & Needs
High operating costs and
complexity from disparate
legacy systems
Robotic Process Automation coupled
with various analytics minimize
workloads and deliver greater
standardisation, consistency, and
efficiency
Manual processes for KYC records
are costly and lead to negative
customer experiences
Automating input from external data
aggregation avoids unnecessary
customer requests, reducing friction
while speeding up processes
False positives related to
negative news bogs
down analysis
Cognitive analytics, which quickly
identifies more relevant articles, and
context annotation accelerate analyst
decision making
How Cognitive Can Help
Technology Can Help Address the Inefficiencies of Today’s KYC
Operations
Know-Your-Customer (KYC)
Speed EDD investigations up to 2x
Standardise highly manual processes
Reduce false positives in negative news
by applied cognitive analytics
Shorten investigative time by proactivity
ingesting unstructured and structured
data
Elevate the productivity of your high-cost
resources
Intelligent robotic automation, cognitive content analytics, and identity
resolution streamline processes can:
Enhanced Due Diligence
Know-Your-Customer (KYC)
16
KYC is a particular area for improvement
Mission: To elevate the financial services industry to a common best practice for authenticating and
validating KYC documentation to sustain a sharing economy for KYC.
KYC is shared, trusted, and secure
reducing duplication and providing easier
access to new technologies and
innovation.
F u t u r eKYC is a siloed effort by each bank,
resulting in duplicative processes making
it difficult to take advantage of
technology developments.
C u r r e n t
17
Shared KYC – Key Benefits
Financial
Institutions
Costs
• Time. Reduced time spent on
on-boarding frees up RMs and
Operations personnel.
• Costs. Reduced document
storage and security costs
due to digitization.
Good for Business Reduced Risk
$
• Better Client Experience.
Eliminates duplication and
frustration for the clients. Less
need for RMs to chase clients
for documents.
• Speed to Onboard. More
efficient on-boarding leads to
quicker and greater access to
new client relationships.
• Standards. Harmonized standards ensure
consistency and ability to anticipate and
keep up with changing regulatory
requirements.
• Technology. Systems risk lowered through
enhanced document retention and recording.
Immutable audit trail creates golden source.
• Regulatory Relationships. Potentially
smoother inspections and shorter time on-
site.
Convenience
• Convenience. Documents
are only provided once and
updated documents are
seamlessly provided to all
banks.
• Consistency. Harmonized set
of documents and verification
standards among banks.
Control Greater Choice
• Visibility. Clients maintain
visibility over which
documents have been
provided to each bank.
• Control. Clients retain control
over who can access each of
their documents, eliminating
unauthorized sharing.
• Speed to On-board. Quicker
on-boarding means greater
flexibility to establish new
banking relationships.
Clients
18
Envisioning Approaches to Shared KYC
Third-Party Utility Service Provider Blockchain-based Shared KYC
Summary:
With a third-party utility service
provider, the service provider owns and
controls the data, acting as a central
repository.
Summary:
A Blockchain-based Shared KYC Platform
enables secure, permission based
sharing, leaving control of the data with
the owner.
Third-
Party
Utility
FI
FI
FI
FI
FI
FI
FI FI
FI
FI
FI
FI
FI
FI
FI FI
Blockchain
Platform
Summary:
Each Financial Institution conducts
collects customer data and conducts due
diligence activities with their own data
repositories.
FIFI
FI
FI
FI
FI
FI
FI
FI
FI
Independent KYC
19
KYC – Governance Solution Options
Consortium (Banker’s Association) Promontory
• Expert subject matter knowledge
• Global regulatory connections
• Global banking connections
• Difficulty reaching consensus and
decision-making
• Focused on one jurisdiction only
(i.e., no international view)
• Lacking independence
Banker’s Associatio
n
FI
FI
FI
FIFI
FI
FI
20
Transaction Monitoring
RISING
EXPECTATIONS
Consistent processes,
enterprise-wide imputed
knowledge, risk
appetites, customer-
specific
NATURE OF
THE WORK
Static rules,
subjective analysis,
manual monitoring,
labor intensive,
expensive
LIMITED
VISIBILITY
KYC & TM silos,
aged/disconnected
systems, ownership
& control, entity
resolution
IMPACT
High costs – labor & systems
90%+ “false positives”
Enforcement actions
Human errors
Diminished customer relations
Focus is on the signal, not the noise
Transaction Monitoring Industry Challenges
Transaction Monitoring
Challenges & Needs
Effective transaction monitoring with
cognitive accelerators that augment
current transaction monitoring
investment
Faster identification of suspicious
activity and with accurate insights,
including contextual information and
analysis
Leverage automation, machine
learning, cognitive capabilities, and
Promontory domain expertise for an
enhanced view of risk
How Cognitive Can Help
Legacy, manual AML transaction
systems hinder the ability to
meet evolving regulatory
requirements
High volume of false positives
impedes efficiency
Lack of a holistic view of data,
systems, and domain expertise
Derive Insights and Increase Effectiveness and Efficiency
Transaction Monitoring
Optimise KYC and customer transaction monitoring for AML programs by
improving quality of insights, reducing false positives, and accelerating
investigations can:
Increase speed and accuracy of insight to
identify true positives and false positives
Contextualise transaction risk with related risks
about the customer and counterparties
Understand related transactions and entities to
get better sense of true suspicious activity
Evaluate data from historical alerts, cases, and
SARs
Enhance Alert Triage and Investigations for Transaction Monitoring
Transaction Monitoring
Cognitive technology and machine
learning enhance and simplify the
onboarding and customer due diligence
process
Technology integrates the existing
customer risk rating, periodic customer
review, and transaction monitoring
processes into a single, dynamic,
customer-focused process for identifying
money laundering risk
Information sharing across financial
institution consortia facilitated through
shared business process services to
increase efficiency and effectiveness
Transforming AML Compliance
Anti-Money Laundering
Trade Surveillance Solutions
Trade Surveillance
Fuse insights to detect suspicious activities
View linkages with instant drill-down & playbacks
Build employee profiles with personality & behavior traits
Order
Trade
Execution
Reference
News
Social
Chat
Voice
Transactions
Communications
External
Su
rveilla
nce
See alerts & investigationsfrom continuously updated risk models
Insights for Financial Services
27
Regulatory Compliance Analytics (RCA)
Overwhelming and complex feeds: Regulatory information is received by
individuals and clients in not standard forms and different channels;
Manual process: Several information are not automatized, and managed manually
for updates;
High volume of alerts: Number of false positives alerts arises from non
standardization in information; and
Difficulty to search across regulations: Limited ability to provide ad-hoc Q&A
functionalities on clients side.
Risk Assessments transparency: Clients find challenging to guarantee completely
transparent solid assessment due to the difficulty in collecting and controlling
information that are not highly standardized;
High intensity, high-cost manual process: Existing tools do not have a mechanism
to link control requirements to regulatory requirements, and to the level of inherent
risk without manual effort and constant updates; and
Lack of deep insights: Information characteristics at the current status and their
process reduce the ability to produce reports and perform analysis of obligations,
controls and risk characteristics dynamically across the risk assessment process.
RCA
Challenges
Risk
Assessment
Challenges
Challenges in the current regulatory environment
Regulatory Compliance Analytics (RCA)
Single delivery channel:
Production and maintenance of
a standard library on regulatory
content (containing rules,
guidance, speeches, based on
the clients profiles and needs)
Change management: follow
regulatory releases and update
the library automatically with
regulatory changes, including
version controls
Customization: Provide
company-specific content and
taxonomies to the regulatory
library in order to support
alerts generation and Q&A
search and processes
Training: provide the client a
series of workshop on how to
detect and classify relevant
new information from
regulatory releases
Obligation identification:
Support in identifying and
categorize new and existing
obligations based on
applicable regulatory
library areas for the
compliance needs of the
clients
Obligations library: Manage
applicable obligations
tagged with company
Target alerting: Support in
the prioritization and
confirmation of alerts
based on the detected
obligations
Control identification:
Support the compliance
officers in the
identification and
categorization of new and
existing controls for the
defined obligations
Control library: Manage
applicable controls tagged
company identifiers; and
Integrate with GRC
RCA is designed to provide a simple, low-footprint service allowing
banks to manage obligations and controls
Regulatory Content
Acquisition
Obligation
Identification &
Management
Control
Identification and
Linkages
Dynamic risk
assessment: Recognize
gaps in the company’s
controls by porting
obligation and control
updates to OpenPages
Visualization Analytics:
Provide insights through
data analysis &
customized dashboards
Process improvement:
Manage the
implementation of new
controls tied directly to
regulatory requirements
for end-to-end coverage
Risk
Assessment
Regulatory Compliance Analytics (RCA)
Thank you
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