Regulatory compliance is a minefield at the best of times. Enter the digital age, where ‘data is the new oil’ and global industries live and die on the strength of their cybersecurity protocols, and the minefield becomes a whole lot more dangerous. Unless, of course, your CFO navigates regulatory compliance with the help of tailored digital solutions. In recent times, rapid technological advancements have brought about a transformation in the regulatory compliance landscape where enterprises are using automation to drive a data-driven approach ensuring that they’re following all laws, regulations and industry standards.
Why is regulatory compliance so important? The corporate world depends on the security and privacy of user data and increasingly governments are concerned about how information related to its citizens’ data is getting stored, where it is stored, and how well it is protected from malicious actors. As organizations opt for more data-driven strategies and decisions, the management and privacy of that very data must naturally concern not only the legal team and privacy officer but also the CFO and the entire leadership team.
In fact, a recent Deloitte report highlighted the value of RegTech as an entire suite of offerings that is aimed at making the CFO’s life easier as well as those of the finance departments. Companies operating in this domain use a multitude of technology innovations to perform all data-led functions – from acquiring to storing and massaging the data for insights to creating digital dashboards. What’s more, these technologies can help enterprises demonstrate adherence to regulatory requirements via audit reports compiled with as little human effort as possible. With the growing impact of artificial intelligence and generative AI, enterprises could easily market themselves as transparent and trustworthy brands.
Since the advent of Industry 4.0, the increasing pace of digital transformation, and the extensive global supply and value chains, companies need to keep track of laws and regulations (and the ongoing developments around the same) across multiple geographies and focus areas: standards, tax regulations, ESG norms, etc. Compliance must be taken as a priority, particularly by companies in fields such as banking and digital health tech that handle sensitive data. The ‘Global CFO Survey 2020’ conducted by Everest Group and supported by WNS showed that 47% of CFOs said reviewing compliance and controls was a priority area in the ‘new normal’. In a post-COVID world, this has become even more crucial.
“With data breaches on the rise, data protection and privacy are at the top of the agenda for many organizations. At the end of the day, the damage that unprotected or unsecured data can cause – from strategic losses, and regulatory penalties, to reputational damage – will make a dent in a company’s finances.” Says Anna Russell, worldwide VP of sales and strategy for Voltage at Micro Focus. She also notes that the CFO’s role in ensuring compliance is all-encompassing – “[f]rom anticipating the cost of a data breach to supporting the design and implementation of a privacy framework across the organization, CFOs today have a greater responsibility that encompasses data privacy and compliance.”
The Rise of RegTech
According to the Cost of a Data Breach Report 2023 by Ponemon Institute and IBM Security, the global average cost of a data breach in 2023 was $4.45 million. The report also found that 51% of organizations planned to increase security investments after having experienced a data breach; these included incident response (IR) planning and testing, employee training, and threat detection and response tools. Furthermore, the average savings for companies that deploy digital tools for data security is $1.76 million.
While using technology for compliance is not exactly new, RegTech, or Regulatory Technology, goes beyond ye olde spreadsheet logs and data entry. RegTech refers to new-age digital solutions built on artificial intelligence, machine learning, big data, or biometrics technology that make compliance more efficient and effective.
Some of the most important digital technologies used in RegTech are:
- AI and ML solutions can be used to automate compliance tasks such as risk assessment and compliance monitoring. This can free up human resources to focus on more strategic tasks. They can also help in converting regulatory knowledge into actionable insights and information.
According to Peter Bouda of APIAX, “Regulatory AI will provide support for repetitive tasks when digitizing compliance rules. It will be especially useful to improve coverage of regulatory contexts and keep compliance up-to-date. A modern Regulatory AI needs to be transparent and explain its decisions so that humans will be able to collaborate with it in a meaningful way.”
- Data analytics can be used to identify and assess compliance risks. To mitigate new risks, compliance teams should thoroughly evaluate and understand data, and how it is created, stored, and shared across the organization. Behavioral analytics can help data security teams detect fraud and other potential threats faster and take swift remedial action. By driving the adoption of advanced analytical solutions to help with compliance, CFOs can also significantly improve the organization’s bottom line as a result.
- Natural Language Processing (NLP) is an AI tool that is becoming rapidly more popular for organizational data security and compliance; research by Chartis and IBM showed that 11% of institutions were opting for NLP as a core component in their RegTech solutions. It provides a powerful mechanism for industrializing the conversion of unstructured data into actionable, structured data in many data management systems. For example, Finreg E has developed an NLP tool that maps regulatory compliance obligations to existing internal governance, risk, and compliance data, such as policies, risks, and controls. This helps organizations understand which compliance obligations are already being met and where new controls are required to comply with the regulations.
The CFO’s Role in Driving RegTech Adoption
Businesses worldwide spend about $436 billion each year on compliance, and this number looks primed to rise given the increasingly complex web of regulations and laws that need to be met. These costs can be significantly reduced by deploying RegTech solutions to stay on top of the organization’s regulatory obligations. This is a job for the data-driven, informed, forward-thinking CFO.
The CFO plays a critical role in ensuring regulatory compliance in the digital age. They must create a strong compliance strategy, ensure that internal stakeholders are aware of the financial implications of non-compliance, and embrace and support the implementation of RegTech. Here are some specific things that CFOs can do to navigate regulatory compliance in the digital age:
- Develop and implement a robust and responsive compliance program – This should include clear guidelines, best practices, and procedures around data security, tax norms, ESG standards, legal requirements, and any and all topics that fall under the purview of regulatory compliance. This includes staying abreast of the latest regulatory developments. The regulatory landscape is constantly changing, so CFOs must stay informed about the latest compliance requirements.
- Invest in RegTech solutions – CFOs should explore the RegTech industry for the most appropriate, cost-effective, and applicable solutions for the organization’s needs. Solutions that leverage AI, automation, and ML, can significantly reduce the chance of human error in data and regulatory reporting and enhance efficiency, allowing compliance teams to focus on more strategic goals.
- Leverage RegTech data for insights to improve productivity – As CFOs grow into their new roles are organizational value drivers, a significant opportunity lies in the area of RegTech and its ability to capture important data that can be converted to actionable insights. Businesses can analyze the captured data to unearth patterns, trends, and potential issues. Using these insights, CFOs can then align teams to proactively address each insight and thereby reduce risk, engage in more value-adding activities, and improve the bottom line.
- Spearheading regular auditing exercises – CFOs should work with legal and IT teams to ensure that the organization’s systems and processes are compliant with all applicable regulations. Regular audits to assess the organization’s compliance posture will help to identify any areas where improvements are needed.
By taking these steps and proactively addressing modern compliance needs, CFOs can help their organizations navigate the complex regulatory landscape and drive greater value for their organizations.
According to White & Case LLP and KPMG’s ‘2021 Global Compliance Risk Benchmarking Survey’, more and more companies are adopting data analytics solutions in their compliance programs. Cybersecurity is the primary compliance concern for businesses globally. The key challenge will be to protect sensitive data and proactively tackle digital threats.
CFOs are no longer merely concerned with financial functions; they are key strategic leaders who are responsible for driving change across the business. While compliance has traditionally been a CFO function, navigating the myriad requirements, often in multiple countries with very different data and tax regulations, has become a major challenge.
PET and RegTech make the CFO’s traditional compliance responsibilities easier and helps them streamline regulatory compliance processes such that the business derives significant benefits. A company that can demonstrate not only a strong adherence to all the required regulatory requirements but also a proactive approach to protecting customer data is one that engenders trust in its existing and prospective customers.