Are technological developments becoming a threat for compliance?

As technology has advanced, it has paved the way for collective business progress, increased efficiencies and generated cost savings which were not previously possible. However, as with any revolutionary disruption, opportunities bring challenges and potential pitfalls which have further implications. These negative ripples can appear in any shape or form, as recently seen by the airport drone fiasco.

When Elon Musk, the rather candid CEO of Tesla and founder of Space X, warned of an imminent attack by drones last year, he probably wasn’t expecting that within just two months two unmanned aircraft would ruin the Christmas plans of hundreds of thousands of passengers.

In December, two unmanned aircraft disrupted travel plans of 140,000 people at London Gatwick airport for two days. When Chris Grayling, UK’s transport secretary addressed the incident, he stated that as technology progresses, such challenges will become the norm.

The pitfalls of progress

The last decade witnessed tremendous technological innovation which not only improved the range of services available but also significantly increased the accessibility to information and knowledge. It made the experience of internet browsing and knowledge sharing more seamless and accessible globally, whether it be a Silicon Valley professional or someone casually browsing from a remote part of the world.

Whilst this has highlighted the role of human and business growth in facilitating international collaboration, it has also opened the door for new challenges and ultimately generated threats to the holistic progress of businesses.

In November 2018, police in India arrested more than 20 people on suspicion of defrauding individuals globally. The plaintiffs were the FBI, Interpol and Microsoft. Only now, years after such cells have been set up, are the legal and regulatory bodies succeeding in finding illegal activities of this sort. This wouldn’t have happened a decade or two ago. This type of fraud is just one example of the pitfalls of fast technological advancement, but there are unintended consequences to it as well.

Another example of this is high-frequency trading. Even though the financial sector is heavily regulated, there were instances like the 2010 Flash Crash, Knight Capital losing $440 million due to a trading error in 2012 and more recently, an innocent login glitch at the Tokyo Stock Exchange. In the case of Knight Capital there was no mal-intent on the computer’s part, yet its actions wiped out 75 per cent of the firm’s equity value within days. The authorities have since introduced stricter regulations in the form of MiFID II (in Europe) to manage these risks, but uncertainty over what algorithms can do remains.

Adopting transformation

As fintech continues to flourish, shape and disrupt the traditionally rigid processes, Blockchain, AI and robotics are dominating the sphere, both in terms of innovation and level of investment, and on the media and political fronts. As a result, we need to ensure our existing compliance and operational departments are ready to deal with this technological disruption, and that their tool sets are adequate to address the challenges ahead. While big financial institutions themselves have generally been conservative in their adoption of new technologies, they now face unprecedented disruption.

Fintech has also revolutionised payment services. Digital payment firms such as Venmo and Revolut, are continuing to take market share from the incumbents, while Apple IPay and Google GPay are additional threats which didn’t exist a decade ago. With Open Banking for instance, traditional banks have now come to rely on integrating with newer entrants who already offer more innovative technology as their core offering.

Impact on the workforce

With the continual emergence of new technological developments, it is crucial for the banking and fintech sector organisations to take stock of how their workforce is being impacted and how can they remain compliant while adapting to the changes.

As the increase in automation reduces the need for repetitive jobs, so the focus will shift to the ability to innovate and disrupt. With more millennials joining the workforce, this will be their opportunity to design the structures of organisations for faster innovation with security and regulation at the centre. The controls will need to be predictive with a focus on the root cause of the problem unlike the current end-of-day reconciliations that fix the issue afterwards.

Financial institutions will also need to work closely with regulatory and legal authorities, as well as their counterparts, to build a global standardised framework in order to take the pressure off once new regulations are introduced. The current regulatory requirements comprise a myriad of requests for data in various formats that is not easy to decode for either the firms or the regulators. Simpler outcome-based standards with foundations based on the ‘right’ behaviour will better serve the goals of being compliant.

Like the proverbial double-edged sword, disruptive technology, if used incorrectly, can be damaging when in the wrong hands. However, with the right behaviour and conduct, it can form a protective force to herald the transformation of centuries-old financial institutions into the future. There is no doubt that compliance can’t compete with technological innovation, but it can certainly adopt it. After all, in the case of the incident at Gatwick Airport, it was technology at the end that came to the rescue of the passengers.

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