There were more than 56.000 regulatory alerts in 2019, with an average of 217 alerts daily. These statistics don’t include the additional regulatory obligations for Financial Service Providers around Covid-19, when we add these to the list over the past 2 years there is an even further increase.
Any list that extensive can be challenging to keep track of, let alone manage it and meet the communicated and committed deadlines. It is essential to filter out all the noise and to dedicate your time and effort to only those alerts or changes which are applicable to your organization.
This is where Regulatory Technology (RegTech) with automated horizon scanning can play a meaningful role. Gradually, more Financial Service Providers are starting to use (semi-)automated tooling to support their horizon scanning activities, specifically to come to an initial overview of which regulatory changes are to be implemented. In some instances, there are also more advanced solutions being applied that enables an automation of the corresponding follow-on activities such as performing an initial high level impact assessment based on the regulatory changes required and creating a workflow or obligations for implementation.
In the paragraphs below we will dive deeper into the topic of horizon scanning and explore what it is, its applicability in the financial sector, the technology behind automating this process.
Do we have a common understanding of what horizon scanning exactly entails?
Within the financial services industry there is no clear understanding of what horizon scanning should entail, yet we see numerous solutions being offered in this area. The challenge this brings along is that it is difficult to determine what solution will best address your needs.
From a business perspective horizon scanning is regarded as the study of future threats or opportunities, so that one can navigate that future more optimally. At ACT we see a few key elements that comprise horizon scanning:
- an exploration of future trends;
- the identification of uncertainties in the form of potential threats or opportunities;
- and the formulation of appropriate actions to either mitigate or exploit such uncertainties.
Horizon scanning’s application in the financial sector
To navigate the continuous increase in regulatory reporting requirements, and ensure compliance, it can be very helpful to get a clear answer to the question “What is next and by when should we deliver?”. Tools that are worth their licence fees help financial service providers to answer this question and in addition:
- Helps them focus on the regulatory change that is applicable to them
- Provides an indication of the gap between the status quo and the envisaged to-be situation
- Identifies the policies and standards that requires changing
- Helps to mobilise the necessary stakeholders to take decisive action
Within the financial services sector horizon scanning is often used in the context of compliance, specifically for compliance risks. Some examples of these risks include insufficient KYC activities, data privacy, and anti-money laundering (AML). Such risks could have a significant impact on Financial Service Providers, with regulatory fines totalling $10.6 billion in 2020. Impacts of non-compliance can, of course, be more than simply a financial one. Therefore, it is important to identify and process the impact of regulations on the future of the business, and to develop appropriate risk response strategies.
After the 2008 financial crisis Financial Service Providers are struggling to keep up with the amount of regulatory obligations coming towards them. Moreover, manually intensive processes and impact assessments of the regulatory changes are often major blockers in becoming compliant.
This is where Regulatory Technology (RegTech) and the automation of (part of) the horizon scanning process have gained an important role in the last few years. With the help of technology Financial Service Providers can anticipate and capture new regulatory changes automatically. This shortens the gap between the identification of a new regulation, its initial impact assessment and its implementation.
The resources that have been freed up by this automation can then be used more effectively for other priorities (e.g. the creation of obligations, and the impact assessments).
The technology behind the tools
To move away from manual scanning RegTech companies combine various technologies to make automated scanning a reality. In our review of numerous solutions we have come across three technologies being commonly applied:
- One of the important tools for gathering and understanding data is Natural Language Processing (NLP). NLP is extremely useful when dealing with large volumes of text since it can summarize and “read” that text in real time. Given the length of regulatory texts, NLP’s application in the financial sector is not a surprise.
- Optical Character Recognition (OCR) is equally important in gathering and processing data. This technology can recognize and extract information from a digital image. This can be used to read texts in cases where a document’s text is an image.
- Third and final, and most crucial, component is Machine Learning (ML). ML is the “brain” that makes sense of the unstructured data by tagging and categorizing the information. By tagging the information and creating links between referenced articles, a coherent overview of the key components of the text can be created.
It is often the combination of these technologies that allows horizon scanning service providers to automate the scanning for regulatory changes.
How ACT can help
The RegTech market can be difficult to navigate. There are numerous vendors in many different niches, one of which is horizon scanning, and they all have their own focus and version of a product.
With our proven experience across the regulatory change management lifecycle, and our knowledge of the RegTech market, we can help you navigate the complexity of this landscape and provide tailored advice in line with your business needs.
From assisting you in product evaluation through to helping you implement and embed these products into your organisation, we’re here to help. Contact us if you want to know more!
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