Regulators turn to artificial intelligence for market surveillance challenges

Regulators and policymakers exploring AI for market surveillance face their own challenges around unstructured data use and retaining relevant talent.

For nearly a decade, financial institutions have been warning policymakers that excessive, prescriptive regulation and the superfluity of reporting requirements – many of which turned out to be duplicative or arbitraging – risked overloading market supervisors with information, and would undermine their ability to monitor and spot systemic risks. These predictions did unfortunately happen, but technology is coming to the rescue at regulators.

As regulators have now been saddled with such large volumes of unstructured data, they are looking towards FinTech solutions such as artificial intelligence (AI) to interrogate all of this information.

Camille Thommes, director general at the Association of the Luxembourg Fund Industry (ALFI), said the CSSF (Commission de Surveillance du Secteur Financier) was developing AI solutions in conjunction with academic bodies to strengthen its internal market surveillance capabilities, having already successfully reduced its reliance on paper-based processing in favour of automation.

The application of AI in market surveillance is certainly a step forward, but regulators do face challenges. Mara Shreck, head of regulatory affairs – asset and wealth management at JP Morgan Asset Management, speaking at ALFI’s European Asset Management Conference in Luxembourg, said regulators urgently needed to employ individuals who are well-qualified in data analytics.

“The problem is that regulators are competing for the best talent in data with the financial services and technology industries,” she said.

Consequently, some regulators may find it hard to recruit and retain data specialists, especially as their earning potential in the private sector is likely to be far greater. Compounding the challenge even further is that there is a serious supply shortage of data specialists.

Analysis by McKinsey – for instance – found that demand for talent with data expertise will outstrip supply by a factor of 50% to 60% by 2021.

While data and AI are viewed as pivotal in regulatory enforcement, questions are mounting about the extent to which it will disrupt financial services. A study by MMC Ventures, a UK-based investment firm, found that 40% of enterprises purporting to be AI did not actually have any AI technology to speak of.

Despite a number of people having talked up the benefits of AI, more experts accept that similar efficiencies can be obtained at companies if they use existing, basic automation tools, which are typically the much cheaper option too.