Nicknamed the ‘little brother’ of fintech, regtech aims to minimize or solve regulation complexity issues by relying on innovation and disruptive technologies. One of these is Artificial Intelligence, AI, which has found its application in several fields: from surveillance of trading relationships and internal communication to stress tests and simplifying regulations. Almost all players in financial markets could see the benefits – including on the Swiss market.
Regulatory compliance and control costs financial institutions more than $270bn a year1, and it was just a matter of time when innovative and disruptive technologies would emerge within the regulatory area. On top of fintech, there is now regtech, regulation technology, that employs recent technological and scientific innovations, such as artificial intelligence (AI), robotics, cryptography, blockchain, cloud computing and biometrics, just to name a few.
The Institute of International Finance (IIF) highlights AI, among others, as it has a range of applications in regulatory compliance and reporting2. It can be used in analysing complex trading relationships, trading schemes, patterns and communications between banks, exchanges and other market participants. AI can also be employed to monitor internal conduct and communication to clients, comparing it to quantitative metrics such as supervisory input. As AI relies on computer-based modelling, scenario analysis and forecasting, it can also help banks in stress testing and risk management. Another field for AI in financial regulations is to simplify the regulations themselves: there are a multitude of different jurisdictions, products, institutional differences and enforcement mechanisms and it is hoped that AI systems are better in collecting and categorizing them according to rules. When AI algorithms are supported by human consultants, AI systems can ‘learn’ faster, representing a unique synergy of competences.
Several large global financial institutions are already participating in pilot programmes, but smaller local banks are also expected to benefit from AI, as it can help them handle regulatory requirements without expensive legal experts. Lastly, regulators can benefit as well, as they are often perplexed by their own policies and rules.
Switzerland has a unique role in the global financial market and regulations here are as complex as anywhere. So far, there have been few regtech companies that work specifically on regulatory topics. This is something that could be part of the government’s Strategy for a “Digital Switzerland” (Strategie “Digitale Schweiz”)3 and earlier this year there was some discussion in the Swiss parliament about providing more support for regtech. So far, regulators around the world have been reluctant to give any kind of official green light to AI – including in Switzerland. Therefore, the Swiss financial market requires a coordinated approach of unlikely partners – financial institutions, technology start-ups, consulting companies and regulators, to come out of this start phase. This is a niche market, but its benefits for the entire financial community could be large.
1Watson and financial regulation: It knows their methods, The Economist, 22 October 2016, https://www.economist.com/news/finance-and-economics/21709040-new-banking-rules-baffle-humans-can-machines-do-better-it-knows-their-methods
2RegTech in Financial Services: Technology Solutions for Compliance and Reporting, Kristen Silverberg, IIF, March 2016, https://www.iif.com/publication/research-note/regtech-financial-services-solutions-compliance-and-reporting
3„RegTech“: Digitale Wende für Aufsicht und Compliance, Franca Contratto, Jusletter, 15 August 2016, https://www.rwi.uzh.ch/dam/jcr:9d4ef99d-04c5-4533-b25d-8ba0c58c65c4/Jusletter_RegTech.pdf