As someone with a penchant for engineering, I have always looked for ways of making working processes more efficient and outcomes more consistent. Being a lawyer, I have found plenty of room for improvement in the legal and compliance fields.

In the aftermath of the 2008 financial crisis, I found myself involved in a number of working groups tasked with coordinating how regulatory compliance was to be tackled. Along that process I had an epiphany: expecting front office/middle office and other non-legal/compliance personnel to acquire all required regulatory knowledge and methodically and without fail execute all steps required to comply with their regulatory obligations is wishful thinking. But even if that were possible, it would be an incredibly inefficient use of everyone’s time. And yet, that is exactly how many (probably most) financial entities approach compliance.

That realisation spurred me into developing an AI + robotic process automation solution to ensure that the people required to comply with regulatory obligations would be automatically compliant, without prior regulatory knowledge required on their part. That’s how RegBot was born.

But even with great RegTech tools available, change is generally slow to take and is fraught with systemic inefficiencies.

The lingering question is: why are financial entities in general so slow to adopt more efficient, automated solutions to their compliance problems and persist instead on largely manual, inconsistent and inefficient methods? This is not a rhetorical question: the inefficiencies of manual compliance carry with them massive price tags in terms of capacity cost, opportunity cost and operational cost. Just the opportunity cost of bottlenecks that result in lost deal opportunities, as well as that of having to jettison businesses that can’t be adequately controlled, would cost a typical tier 2 bank 450 million euros each year. That’s 450 million euros the bank won’t be making due to manual inefficiencies in their client-facing compliance strategies.

So why don’t financial entities rush to plug such a significant hole through which so much money keeps draining away? The answer is a combination of factors, but you are pretty likely to find all or some of the following ones among them:

  • Current inefficiencies have not been quantified: it might seem like basic common sense, but the fact remains that although many entities would agree that their approach to compliance is less than ideal, few have actually analysed just how far from ideal it is from a quantitative standpoint. The case for change becomes pretty compelling once you (a) get a clear view of all the areas impacted by these manual inefficiencies, (b) calculate in monetary terms how much those inefficiencies are costing the entity, and (c) understand that those inefficiencies are not unavoidable.
  • Inertia: basically, people are sucked into their day-to-day tasks to the point that there is an inability to see the need of a gap analysis to take the steps towards optimising processes and developing the tools to do so. It is an “it is what it is” approach where it is recognised that working practises are inefficient and inconsistent but kind of tick the “compliance” box. So, even though it is recognised that compliance tasks are a nightmare, there is little or no drive to change the situation.
  • IT stakeholders’ defensiveness: it is not uncommon for the incumbent IT personnel to feel threatened by outsider RegTech providers. In fact, the resistance of in-house IT stakeholders is the reason behind a good deal of great solutions not being implemented.
  • Lack of leadership/bureaucracy: good solutions require for a number of stakeholders to be on board, agree on their implementation and work towards it. Such alignments across the board are usually rare, which is why it is common to see half-baked tools in place that, rather than solve the problem, shift it elsewhere. Another problem, which is in fact a massive barrier for the implementation of RegTech solutions is procurement time. Procurement times stretching between one and two years can be a massive disincentive inside and outside a financial entity. I have heard cases of startup companies going bankrupt waiting to clear the pipeline.
  • Disconnect between Digital Transformation and business needs: A large number of entities have put in place digital transformation departments with the stated objective of ushering in digital solutions and keep their entities competitive from the technological standpoint. It is not unusual, however, for the digital transformation department to act autonomously, with little or (in some cases) no coordination with the business stakeholders. As a result, solutions that address real, urgent business needs are overlooked whilst the “wrong” solutions are sometimes implemented. It is fair to point out however that it takes two to tango and that often coordination is not instigated by either side. This is likely due to factors such as inertia, lack of ownership and/or internal politics.
  • Lack of ownership: This is a problem that becomes the more acute the larger the entity is and the more reporting lines overlap in the organisation. Large working groups and collegiate decision making, though necessary in certain scenarios, may dilute the sense of ownership and internal accountability. This tends to result in inaction or in minimal action, where decisions are not taken for fear of taking the wrong one. In that spirit, when decisions are taken, they may be in favour of uninspired, sub-optimal solutions that, albeit ultimately known not to work, are regarded as safe and uncontroversial from a political point of view.

How to tackle effective change then? Change management. True optimisation requires a deep cultural change in the organisation not just in terms of gap analysis, internal coordination, procurement and initial implementation, but also in terms of how work is carried out. Without people changing the way they work, new technologies cannot yield their full value and might even fail to take hold in the entity.

Watch this space for part 2, where I will be discussing some fairly obvious, yet often overlooked points about culture change.