The obsession of governments with terrorist finance and a series of money laundering scandals are ensuring that the fight against financial crime remains at the top of the international agenda, while at the same time HNW clients are growing increasingly intolerant of being interrogated and inconvenienced, no matter how good the regulatory rationale.

This was the message that emerged from a recent report on artificial intelligence (AI) in wealth management, issued by WealthBriefing, Finantix and EY, the accountancy firm.

Greg Davies, the head of behavioural science at Oxford Risk, said in the report that AI might act as a kind of “cognitive prosthesis” for advisors, allowing them to bring far more information about the client to bear when recommending investments and financial plans. It will also be able to ensure that they can comply with regulations with the help of machine learning.

Perhaps more importantly, he conjectured, ‘automated reasoning’ will also ensure that proposals are always compliant with both the relevant external regulations and the institution’s internal policies.

Iron Man, not the Terminator

Relationship managers are responsible for much of the upfront compliance work required to ‘onboard’ a client and offer him only permissible products. This is unlikely to change in the near future; the old adage that “people buy from people” seems to remain true. Alessandro Tonchia, the co-founder of Finantix, wrote: “The non-reduceable part of the human work in private banking is really representing the client’s perspective, unpicking their philosophy and attitudes to life and risk, so while more and more of their ‘menial’ work will be eaten up by increasingly intelligent systems, the relationship manager will still remain central as the advocate of the client.”

To this Davies added: “The value of AI is less in the computer ‘giving the answer’ to the client and more in it acting as an advisory support tool helping the relationship manager make decisions. When it comes to advice, we should be thinking about AI in terms of Iron Man, rather than the Terminator.”

The rules that affect cross-border business can be incredibly complex. This can make the compliance process quite risky and it can also make onboarding unduly arduous for both client and advisor. AI, particularly when combined with such other technologies as dynamic forms (which expand or contract depending on the answers clients give to regulatory questions) can streamline things.

Wendy Spires, the head of research at WealthBriefing, wrote that the “digital detective work” that AI can do will make 'client due diligence' (CDD, another term for ‘know your customer’ or KYC controls) a very much more efficient – and far less risky – affair for wealth managers.

The report concluded that wealth management advisors should be looking forward to AI helping them in their work instead of worrying that it is going to replace them. However, it seems certain that AI – in tandem with other new technology – will indeed cut a swathe through compliance. Since 2011, according to the report, US and European banks have been hit with US$150 billion of litigation fees and 'conduct charges,' whatever they might be. As regulation has become ever more onerous, the scramble to avoid censure has seen many institutions double their compliance headcount. Financial institutions now have to dedicate 10-15% of staff to governance, risk management and compliance [source: BBVA, “Digital Economy Outlook,” February 2016] and regulation is now believed to cost the industry an eye-watering $270 billion per annum [source: Citigroup, “Digital Disruption – Revisited What FinTech VC Investments Tell Us About a Changing Industry,” January 2017] and as much as $1 billion per firm [source: Institute of International Finance].

Only the beginning

Valiant efforts have been made with outsourcing and labour arbitrage, but we are only at the beginning of a huge wave of regulatory automation that will sweep the sector. Dr Anthony Kirby, an associate partner at EY, said: “Industry observers agree that more compliance functions will become automated over the next 3-5 years as regulations themselves become more complex, multi-modal and extra-territorial in outlook.” He thought that the potential to slash costs and business risks simultaneously through regulatory IT or ‘regtech’ is too compelling for institutions to ignore – particularly since it can improve clients’ experiences.

Compliance by numbers

The report contained many statistics, most of them gleaned from various recent WealthBriefing and EY surveys. Wealth managers were asked the question “How concerned are you about clients dropping out during the onboarding process?” Their replies were: very concerned 29%; moderately concerned 42%; and unconcerned 29%. They were also asked how many man-hours of work it took them to screen low-, medium- and high-risk clients at their institutions. The mean figures were 1.6 hours for low-risk clients; 2.5 hours for medium risk; and 5.4 hours for high risk.

Predictions for CDD-related expenditures over the year 2017 (the report came out in December but many of the figures were evidently collected some time before) were revealing. The percentage of people who expected to see an increase stood at 63%, while 33% expected expenditures to remain the same and only 4% expected a decrease.

The ‘focus’ of CDD-related expenditures during 2017 was: headcount 44%; technology 44%; outsourcing 11%. When asked which element of the client screening process caused the most frustration at their institutions, wealth managers replied in the following proportions.

• PEP/watch list screening 29%
• Source of wealth/source of funds 29%
• Capturing data and collating documents 17%
• Negative impact on the client experience/relationship 11%
• Adapting to regulatory change and jurisdictional differences 9%
• Trusts and ultimate beneficial owner issues 6%

Looking to the future

The obsession of governments with terrorist finance and a series of money laundering scandals are ensuring that the fight against financial crime remains absolutely top of the international agenda, while at the same time clients are growing increasingly intolerant of inelegant consumer experiences – no matter how good the regulatory rationale. Combined, these factors make compliance – and client due diligence in particular – among the areas most ripe for AI amelioration. And this must surely be right around the corner.

Regtech software is still evolving but, according to EY’s Dr Kirby, the main barrier to its adoption is that “the IT environments at regulators, central banks and governments are not yet at the point where they can readily interoperate with the industry as a whole.” Kirby, however, sees this changing rapidly as regtech algorithms and ‘smart’ or self-executing contracts become more common (these are computer programming codes that facilitate or enforce the performance of an agreement using blockchain technology).

Kirby added: “Machine learning, AI and natural language processing will quite soon be widely applied to the ‘second line of defence’ [compliance and risk management] skills in legal, compliance and risk management. This will start with day-to-day monitoring in activities such as surveillance and AML and extend over time to filing reports of trades and transactions to meet regulatory conduct-of-business and prudential obligations in each jurisdiction.”

Regulators and governments are thought to be warming to the idea of “utility technologies” (this is where service/technology providers offer a centralised outsourcing point for important tasks, potentially throughout the entire financial sector). In an AML context, this would mean institutions and authorities sharing KYC, transactional or other data through a third-party ‘utility’ - an approach that, in turn, will probably have to draw on distributed ledger technology.

Compliance is undeniably the area that is most fraught with complexity when it comes to the adoption of AI. For many institutions, the compliance burden has become unbearably heavy and AI has huge potential to help lighten the load.

Cross-border compliance

An investment that might be deemed suitable in one country may not satisfy standards in another; wealth managers know this and are constantly battling to find out the facts in each case. The job of keeping on top of a patchwork of regulatory tests and requirements is a tough one for even the cleverest manager; the report expects AI to help massively. Alessandro Tonchia of Finantix enthused: “There will still be a need for traditional compliance for the hard cases, but 90% of the workload is just routine questions like ‘can I sell this product to this client? That’s something that you don’t want to bug the compliance guy with every ten minutes.”

If AI can perform the heavy lifting involved in finding out which products and services are suitable, this frees up advisors to do what humans do best – giving strategic guidance to clients.