Risk and compliance management must evolve at the speed of innovation: Three trends to watch

Technology innovation affects all areas of your institution. To keep up, operate efficiently and meet member needs, credit unions’ risk and compliance approaches—and the tools and technology used to support them—must also evolve at the speed of innovation.

A critical part of a successful overall business and growth strategy is prioritizing risk and compliance management. That requires investments in time, resources and money, including regular evaluation of your programs. It also means understanding what’s coming down the technology innovation pipeline and preparing early for the effects.

The following three trends related to the emerging technologies of cryptocurrency, artificial intelligence and cybercrime are a smart place to start when considering risk and compliance program changes and enhancements.

Trends Worth Watching

1. As emerging technology like cryptocurrency goes mainstream, more regulation is likely to follow.

Cryptocurrency is a significant trend with material effects on compliance and risk. Decentralized finance is gaining traction as cryptocurrency goes mainstream. Cryptocurrencies were initially designed to cut out an intermediary and avoid governmental control, but cryptocurrency activity has become a main focus of the Office of the Comptroller of the Currency.

Credit unions must develop thoughtful policies related to decentralized finance to meet compliance standards. Member identification requirements that prevent suspicious activity like terrorist financing and money laundering are now critical to manage risk. The use of cryptocurrencies calls for surveillance, but regulators are finding it difficult to keep up with the quick growth. The period for regulators’ joint request for information and comment on digital assets ended July 16, 2021. The National Credit Union Administration (NCUA) approved issuance of a similar request for information on digital assets and related technologies during its July open meeting, with request for comments due 60 days after publication in the Federal Register. Both of these information requests are likely to generate a great deal of discussion, including topics related to cryptocurrency, and we can expect guidance to follow soon from federal regulatory bodies.

2. Incorporating AI into regtech and compliance programs could save time and money.

Financial institutions often struggle to keep track of increasing regulatory changes. To help relieve the burden, many credit unions are exploring the incorporation of AI and machine learning into their regulatory technology (regtech) to efficiently meet changing compliance demands.

Regtech aids in the automation of compliance, lending and operational tasks, reducing the work of human experts. Additional benefits may include decreased operational costs and less human error, which can drive efficiency and reduce the risk of hefty non-compliance fines. With sophisticated AI technology, credit unions can automate tasks like due diligence while also protecting member data and driving down cost.

3. There is a growing need for regulatory reform to address financial cybercrime. 

With all the benefits of technology , there is also a corresponding and growing threat of changing trends in financial crime. As a result of COVID-19, more transactions moved online as institutions were forced to quickly shift and adapt to meet pandemic and lockdown restrictions. With the increased online activity, consumers saw their personal financial information become more vulnerable to data breaches and cyberattacks and were increasingly targets of fraud schemes involving account takeovers. As regulators work to keep pace with the speed of digital innovation, cybercriminals are using fiat and new currencies such as crypto to fuel activity like ransomware payments, money laundering and terrorist financing.

Recently, attention has centered on compliance mandates meant to combat financial crime. Under the Bank Secrecy Act (BSA), financial institutions are required to implement anti-money-laundering (AML) programs as part of their compliance programs. Within the industry, scrutiny has emerged over AML models and whether BSA/AML programs should be revised or reviewed with an emphasis on program effectiveness and output value over efficiency.

Suspicious activity reporting (SAR) makes up a large portion of AML programs, and these reports are beneficial aids to combat crime—if done accurately. Major drawbacks to SARs, though, are that they can be expensive, tedious and extremely time-consuming to complete. A growing consensus is that SARs may not have as beneficial an impact in fighting criminal activity. In the next few years, these efforts could result in a restructuring of AML compliance programs across the United States.

Find a Partner in Innovation and Risk and Compliance Management

Technology is a critical source of positive change for credit unions and their members. It empowers institutions to deliver solutions that meet the growing needs of members and increases efficiency. But it also necessitates taking a hard look at the effects on risk and compliance.

To do this, choose a fully accountable partner, not just a technology vendor, that will work with you to achieve your goals and understand the organization-wide effects of its solutions. Credit unions need partners that provide active regulatory and compliance support, especially as their technology evolves. Forward-thinking fintech partners don’t consider it sufficient to say regulations don’t currently apply to them and push through. They look forward and say, “We know it’s likely coming, we’ve built a program internally to address it, and we’re working with customers and regulators to demonstrate what we do.”

Collaborate with your partners to innovate. But also understand all the effects emerging technology will have on your credit union—well ahead of regulatory changes. That’s smart risk and compliance management for the future.

Michelle Prohaska

Michelle Prohaska

Michelle Prohaska is a risk management and compliance expert who brings firsthand legal expertise to the thorny regulatory issues of digital banking. Her legal and regulatory leadership is guided by ... Web: Nymbus.com Details

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