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The challenge of ensuring effective regulatory compliance

04/09/2018

Ensuring effective regulatory compliance has become one of the prime challenges facing the modern banking industry in the wake of the global financial crisis. Heightened scrutiny has become a fact of everyday banking life, affecting both the payments we initiate and those we receive to ensure compliance with, for example, regulations governing financial crime, from know your customer (KYC), fraud and anti-money laundering to sanctions and embargo legislation.

 

Ensuring effective regulatory compliance has become one of the prime challenges facing the modern banking industry in the wake of the global financial crisis. Heightened scrutiny has become a fact of everyday banking life, affecting both the payments we initiate and those we receive to ensure compliance with, for example, regulations governing financial crime, from know your customer (KYC), fraud and anti-money laundering to sanctions and embargo legislation.

There is no denying that this latter process has in particular become increasingly difficult as macropolitical changes taking place around the world has an impact upon the already lengthy list of names that are affected. The changing environment places a high premium on the adaptibility of all international financial institutions, and their clients, suppliers and partners. Increased automation is no longer just an option, it is an absolute must. The cost of manual processing, in human and financial terms, is high and unsustainable.

Part of our own adaptation as an institution has been to devise and put in place a screening tool to filter the flow of millions of payments making their way into and out of the Societe Generale systems.

As such, payments are expected to be made almost immediately in most instances, such a screening tool is vital to successful, timely and regulatorily compliant processing. The ability to segregate possibly problematic payments is essential. We are on a constant fishing expedition and the mesh of the net is becoming ever finer. If a payment is rejected because the name of the beneficiary appears on a blacklist, we need to ensure that it is in fact the right name and not a namesake. If it is a ‘false hit’, we have to continue with the processing of the payment, within a tight timeframe for acceptance or rejection.

We are on a constant fishing expedition and the mesh of the net is becoming ever finer.

The system today remains heavily dependent upon human intervention to handle any rejection of a payment. We, and others in the industry, are investigating the possibility of an automatic way of handling ‘false hits’. At the early experimentation stage, humans and machines are already working alongside one another, devising solutions to the same problems. Only when regulators accept that the machines can reach decisions that are better in quantitative terms than their human counterparts, will full-scale automation become a genuine possibility rather than a vague industry ambition.

To put it another way, human involvement will at that point become more qualitative.

A key balancing element of the process is that the machines will be required, as is common practice in mathematics, to show their workings as well as the result. They will need to demonstrate not only that they have achieved a right industry, but to show how they did so. And a human must understand the reasoning behind the machine’s decision.

Robotics will help to deliver the necessary scale to cope with the sheer volume of modern payments processing and transform the industry landscape while doing so. When we succeed in automation of the process, it will remove human error meaning that the process itself will not only be quicker, more efficient and more cost-effective, it will also free staff to focus on ‘real hits’. To put it another way, human involvement will at that point become more qualitative.

Automatic delivery will also deliver benefits to clients, the most obvious of which is that payments are made more quickly. While this major challenge is easy to identify and articulate, it would be foolish to pretend that meeting it will be simple. It needs investment. It needs research. It needs finance. It needs technological development.

But, as a certain Communist leader whose name has gone down in history once noted in reference to the Long March from Kiangsi Hunan in the south of China to Shenzi Yenan in the north of the country, a journey of a thousand miles starts with a single step. Many of us in the international financial services industry have already started out on our own journey of a thousand miles.