AI and Regulation
The Royal Commission in Australia has highlighted the failure of regulators to properly supervise the financial service industry, especially for major financial institutions such as AMP and others.
In the case of financial planning, a typical monitoring and supervision program historically would be to audit 2 files a year per adviser, often not picked at random. It’s been surprising that Australian Financial Service Holders (AFSL), and the federal regulator ASIC, have not engaged further in technology that can help the monitoring process to reduce the changes of significant consumer detriment.
Perhaps the biggest issue is the volume of data to be audited. There are hundreds of thousands of advice statements produced each year for clients without hundreds of data points, and the resources and costs required to manually audit a sufficient number of files to gain insights into the quality of advice in the industry makes this auditing volume unfeasible.
Several fintech companies have recognised this and are now scrambling to try to develop technologies to help automate the regulation process, many using artificial intelligence and machine learning and the power of big data, to try to provide the necessary grunt and accuracy to provide a first level defence against poor advice that is not in the best interest of clients.
It’s not just financial planners that are looking at such technologies, online loans providers are also looking to help their compliance by producing AI system to help clients to lend to where repayments are not likely to cause undue financial hardship. This is another area that has come under significant scrutiny and the perception of the industry could be changed with the use of technology. The Royal Commission is yet to hear from the payday lending market, but it’s surely not gong to make for pleasant viewing.
It won’t be too long before regulations start adopting this sort of technology world-wide as there has been a significant amount of criticism as to the role that the regulator has played in poor advice for Australians. The use of technology could significantly scale up auditing ability and catch issues before there is significant consumer detriment and lengthy court battles well and truly after the damage has been done.
One of the issues is that individual companies, unless they are of significant size, don’t have the necessary data or expertise to build large scale big data models. Those companies that have the size and scope often develop the products for in-house use, so the wider business community don’t get to use it. With increasing focus on the privacy of data, there are ethical dilemmas as well around using customer records and big data, even if the purpose is to improve consumer outcomes.
The next few years should see a spike in the number of fintech regulation software that is rolled out around the world as regulators and businesses alike grapple with the increased scrutiny around compliance in the financial services sector.