AI and Legislation Are Shaking Up Bank Operations

Technology developments within the financial sector are boosting both customer and investor expectations of new services and products. At the same time, the sector faces increasing legal requirements from the EU in the wake of the financial crisis ten years ago. The development is a challenge to the entire industry, and not least to the traditional way in which banks compose their boards of directors.

According to a global KPMG survey of financial sector CEOs, most companies in the financial sector use or plan to use AI. Many organisations, however, are not properly managing the risk: One small error generated by uncontrolled AI can have significant consequences if repeated countless times in a lightning-fast automated system. This can be difficult to stop and control. The challenge is exacerbated by the ease with which bots are developed and used, which has also made the use of them more widespread. Most financial companies don’t know how many bots are being used at their company. Without this knowledge, it is virtually impossible for management to assess the risk associated with technology.

Technology assists in compliance

At the same time, it is becoming increasingly more challenging for financial institutions to keep up to date with the latest legislative requirements. This explains the increased use of intelligent monitoring technology in the industry. Via the use of SupTech (Supervisory Technology), legislators can quickly detect non-compliance and issue millions in fines for breaches.

Being up-to-date and compliant with the flood of new legislation has thus become a competitive parameter. Moreover, since the requirements are extensive in scope, the use of regulatory technology, RegTech, is needed both for implementation, monitoring of company compliance with legislation, and subsequent documentation and adjustment where required by legislation. Some global investment banks are already using RegTech as part of a long-term development strategy in which they transition to being a data company. At KPMG, we believe that this is the way forward for financial companies.

Technological reality versus traditional management structures

Legislators and customers impose new requirements on companies to demonstrate well-defined strategies for handling a wide range of risks, both the classic, financial types of risks but also other types of risks, for example, governance, ethics, data security and GDPR. This changes not only the bank’s approach to compliance but the entire management structure.

Financial companies today, therefore, find themselves at a crossroads where new technologies alter procedures and strategies. This places new demands on not just the organisation, but also on the boards of directors, which may not necessarily have the competencies required to understand the algorithms. There will be a greater need for board members and managers who can assess where risks may occur and how to address them. Many problems can be avoided by having the right competencies, and by making sure that companies can control the regulatory technology intended to keep them compliant when developing AI, algorithms and bots.

The combination of a broadly composed board of directors and the right technology solutions and automation can enable financial institutions to develop in line with the technology development, customer and investor expectations and the flood of new legislative requirements.