SMARTS as regulatory compliance technology

on March 21, 2022

So far, we’ve covered how to use SMARTS for decision management, micro-calculation, and data transformation. In this blog post, we show how you can use it to implement regulatory technology (regtech).

Regtech

Regulations, from Basel rules on bank capital requirement to Sarbanes-Oxley Act on corporate financial statements, to MiFID on pre- and post-trade transparency requirements across EU financial markets, have forced regulated companies to develop processes to find, assess and mitigate risks. To comply, investment firms, retail bankers, and insurance companies have turned to regtech for help.

Regtech is an acronym for governance, risk, and compliance management technologies in companies, more particularly those working in highly regulated industries such as financial services, insurance, and healthcare. They allow the implementation of legal requirements in the nervous system of companies, in front-, middle- and/or back-office.

All regulations being prescriptive, it was natural that rule-based systems were among the first technologies used, with varying degrees of success which we will detail here, before showing how SMARTS overcame them.

SMARTS as regulatory compliance technology

Your data is uploaded and transformed in the same tool
Highly regulated companies must deal with continuous growth in transaction volumes and a massive accumulation of data that they must ingest or produce daily while constantly complying with ongoing regulations. They could do it, but they had to use other tools besides rules-based systems and they either had to connect them or transfer the data back and forth. With SMARTS, they don’t have to, since it allows data to be uploaded and transformed into rules or calculations in the same tool.

Your data is turned into insights and your insights into decisions
Before the widespread use of big data and analytics, investment bankers relied on complex analysis of information using statistical learning. Today, the entire financial services and insurance industry has integrated advanced data analytics into its artillery to detect market signals and predict market trends. The most advanced want not only to transform data into insights, but these insights into decisions. SMARTS was one of the only tools if not the only tool to offer an integrated solution to transform such companies into lifelong learning organizations where data helps find opportunities and risks, machine learning turns that data into knowledge and rules transforms this knowledge into decisions, thereby closing the virtuous circle that data promises.

You limit your risk for noise, errors, and biases
Since the advent of data, regulators have been closely monitoring the bias issues of automated decision-making systems, particularly those that rely solely on data and use machine learning to calculate scores and then decide instead of a human. In SMARTS, users implement decisions in the form of business rules, decision trees, decision tables, decision flows, and lookup models. All these intuitive representations make decisioning self-explainable so that they can test decisions individually as well as collectively. So, at any time, they can check potential noise and errors before they translate into biases.

Your data and transactions are tracked in real-time
A key need of the financial services industry is real-time responsiveness to suspicious events such as unusual transactions that may show fraud, money laundering, insider trading, or may not be unusual in themselves but nevertheless exceptional in relation to other transactions before or after. Based on their experience in the earlier generation of decision management systems, the founders of Sparkling Logic decided to integrate real-time decision analysis from the ideation of SMARTS. The product has always integrated a dashboard that tracks data and transactions so that the user can react by changing rules in real time.

You react very quickly before an error, an anomaly, or a fraud spreads
Companies must make thousands of complex risky decisions – monetary, reputational, and legal risks. For example, in every decision they make, there are tiered combinations of terms and conditions, legal constraints, eligibility criteria, and levels of risk involved. Rule-based systems allowed them to implement these decisions in the form of tables or decision trees, or rules, but at the expense of side effects on the business. With SMARTS, they graphically define KPIs and drag and drop them into a dashboard to visually check the impact of each decision or group of decisions on business performance. Users can also set thresholds and define patterns which if reached will trigger notifications and alerts. This way, the users will be able to react very quickly before an error, an anomaly, or a fraud spreads and results in enormous damage.

Your system is easy to maintain and upgrade
Prior to the emergence of regtech as a hot technology, highly regulated companies used rules engines to encode the directive logic of laws, regulations, and internal policies. Additionally, they could implement complicated decisions with tens of thousands or more if-then rules. All went well until they discovered that, like any hard-coded software, rule-based systems could be complex to maintain. With SMARTS, they don’t code and hope the code is correct. They create, test, deploy, run, monitor, and change graphically through web forms and point-and-click. Therefore, systems developed with SMARTS are easy to maintain and upgrade.

Wrap-up

The SMARTS is not strictly speaking regtech in the sense that it does not come with all the code of financial and insurance regulations, but it allows them to be implemented quickly and explicitly in the form of rules, trees or graphs. This makes the code easier to change if regulations change as they often do, such as Basel which is in its third version and MiFID in its second version.

SMARTS not only eases the implementation of governance, risk and compliance rules, but it also facilitates their monitoring in real-time. SMARTS not only eases the implementation of governance, risk and compliance rules, but it also facilitates their monitoring. KPIs, dashboards and metrics were fundamental from the start of the product and not an afterthought once the product was released.

If you envision modernizing the implementation of a regulation, be it Basel, Sarbanes-Oxley, MiFID, GDPR, or any other regulation, SMARTS can help. Just contact us or request a free trial.

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ABOUT US

Sparkling Logic Inc. is a Silicon Valley-based company dedicated to helping organizations automate and optimize key decisions in daily business operations and customer interactions in a low-code, no-code environment. Our core product, SMARTS™ Data-Powered Decision Manager, is an all-in-one decision management platform designed for business analysts to quickly automate and continuously optimize complex operational decisions. Learn more by requesting a live demo or free trial today.