By now, you might have heard of IBM’s proposed deal to acquire Promontory Financial Group, a risk management and regulatory compliance consulting firm. With this acquisition, IBM gains the knowledge and expertise of Promontory’s 600 global professionals, who will train IBM’s Watson to help Financial Services firms better manage financial risk and compliance. While this is a significant development for IBM, and the first example of a new capability from IBM’s Industry Platforms business that was launched in August, it’s also important for the risk and compliance market as a whole. In this blog post, we’ll share some of our thoughts on this topic.
Validation of RegTech
First, the IBM Promontory deal validates and “makes real” the nascent trend of regulatory technology innovation – otherwise known as RegTech. In the past year, there’s been increased media / investor / customer interest in software companies that provide innovative solutions to regulatory compliance challenges. This interest is warranted, as recent innovations in FinTech require a regulatory “wrapper,” and most existing technologies in the space are decades-old and simply not up to the task. Further, existing providers of regulatory compliance solutions are in disarray, as evidenced by Symantec’s 2015 spin-off of its Veritas business unit, and similar, more recent, moves by HP and Dell/EMC. The IBM Promontory deal acknowledges this disarray and perhaps underscores that the customer pain – and market opportunity – is substantial enough for a big player such as IBM to get involved. Moreover, the fact that IBM has chosen risk and compliance as the first vertical-specific focus of their Industry Platforms business is further evidence that the RegTech market is in fact real.
Simplifying the Complex
Second, this move by IBM acknowledges the complexity of the global regulatory landscape. In fact, IBM indicates that more than 20,000 regulatory requirements were created in the last year alone. For Financial Services firms, making sense of these requirements – and complying with them – is an extremely difficult task that warrants significant time, resources and capital. As a result, the first use case for which Watson will be trained is helping firms better manage these diverse regulatory requirements. Firms have been struggling in this regard for quite some time and IBM intends to come to their rescue.
AI for Surveillance
Third, a critical component required to comply with such regulations is the ability to perform surveillance on firm employees and their data. Surveillance software helps firms identify regulatory compliance risk and violations and provides subsequent means to manage and respond to those issues. Traditionally, firms employed surveillance software from the likes of HP, Symantec and EMC (see “disarray” above), but these solutions employ violation identification methods that often result in a significant amount of false positives, and tend to examine only one type of information in a silo (e.g. electronic communications only), and handcuff compliance teams to a reactive approach at a time when regulators are demanding proactivity. IBM’s application of Watson to this problem reinforces the notion that there are other technologies – artificial intelligence to be exact – that can perhaps better identify regulatory compliance risk and violations across people and datasources. To date, firms have been toying with this concept either through in-house developers or software vendors, but Big Blue’s backing of the technology further validates its use in this context. One thing to note; however, is that in order to replace incumbent surveillance tech, next-gen surveillance providers must include the proven and required workflows that compliance teams expect and that regulators demand. Anything short of that just adds another point solution to an already fragmented market.
In summary, IBM’s pending acquisition of Promontory means a lot for RegTech and for the risk and compliance market in general. The Promontory team are experts in regulatory compliance and should be well equipped to train Watson in this context. While it remains to be seen whether or not IBM will be able to execute on these plans, one thing is for certain: Big Blue intends to push RegTech forward.