Digital compliance in the financial market: trends and challenges

The compliance function is becoming more and more digitally oriented. The main motivation is, once again, regulations increasingly aimed at regulating the use of digital in financial business. In fact, investigating the impact that major regulations have on financial products and processes, the market believes that GDPR and ESG are the two regulations that have most impact on intermediaries in 2023, while Artificial Intelligence Act and DORA will engage the control and operational functions in 2024.

But the strong push to digitize the business also requires compliance functions to undergo a major transformation in processes and skills, in order to be able to increasingly, on the one hand, nimbly and effectively support the business and, on the other, efficiently monitor process compliance on an ongoing basis.

The first visible effect of this change is on compliance resources, which are changing skills and roles, although a strong heterogeneity of organizational choices persists in the market. On the size front, it is observed that the financial market employs an average of 1.78 resources per 100,000 clients for compliance functions, with a marked difference between banks and insurance companies. In fact, the former employ 4 times more resources than the latter, covering a wider perimeter, due mainly to regulations AML. For the same reason, banking compliance resources have on average broader competencies than insurance compliance resources. For the former, although audit and control skills prevail, IT and digital-related skills are also beginning to emerge. The skills of the latter, on the other hand, are still very traditional, mainly in regulatory analysis, POG and insurance distribution. The distribution of resources by gender is fairly even; however, as job classification increases, the number of male employees increases proportionally. In fact, among management positions, there is still a high gender gap, with men coming in at nearly 75 percent of the total.

Analyzing the structure of the function, it appears that the Compliance of each individual institution typically performs the activity for several legal entities referable to the same group (on average, each function performs the activity for 4.4 legal entities). For this reason, it is necessary for Compliance to be organizationally well structured, with a properly formalized model. In this context, preferences between banks and insurance companies diverge, with insurance companies preferring a centralized model, while banks converge on a mixed model . Moreover, the dimensional growth of the function goes hand in hand with the digitization of the function's processes. Indeed, digital transformation requires the creation of internal organizational units dedicated to innovation, such as IT Compliance and an organizational unit that monitors the development of digital compliance and data management solutions.

In the process of digital transformation, the adoption of new technologies for compliance is still ongoing. In recent years, the trend of investment in innovation has been growing steadily, with the banking sector advancing at a faster pace than the insurance sector. Specifically, in the current year, 40 percent of banking institutions and 27 percent of insurance companies plan to invest more than 25 percent more in innovation, compared with the previous year . The difference in the level of investment between the two sectors, is also reflected in their level of technological maturity. Enterprises in the insurance sector have accumulated a significant technology gap, but they seem intent on closing it in the coming years, planning to further increase their investment in digital. In addition, it is noted that the degree of adoption of Advanced Analytics techniques correlates with the level of investment in innovation in past years. In essence, the institutions that have invested the most in Digital Compliance in the past two years are also those that have a higher level of maturity of Advanced Analytics techniques.

With respect to how Digital Compliance projects are carried out, on the other hand, the market prefers to develop new technology solutions through external partnerships with third-party entities, or by using internal (in-house) resources. In the past two years, only a marginal portion of projects have been carried out with the collaboration of FinTech or RegTech (8 percent), due to some critical issues that have emerged, such as integration with legacy systems, the low technological maturity of available Fintechs, and the lack of plug & play products for the compliance function.

In conclusion, the digital transformation process for the Compliance area is fully underway. Institutions are converting some traditional processes to digital through the use of new technologies, the most widely used of which is certainlyAdvanced Analytics. Despite this, several critical issues persist that slow down or prevent the development of new Digital Compliance projects. Among others, a fragmented and constantly evolving regulatory framework, a difficult collaboration with FinTechs, as well as an objective difficulty in finding new and adequately trained resources represent some of the most relevant critical issues that the market is called to address.

Edited by the team Cetif Research

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