Vantage: ClauseMatch

If you don't evolve with compliance, you're at significant risk

  1. Tell us more about ClauseMatch, including what makes the company and its vision unique!

ClauseMatch was born out of my personal frustration when working at compliance departments of global banks and energy companies where negotiating contracts or dealing with regulatory issues all came down to lots of admin work on high-value documents.

So, at ClauseMatch, where we’re coming from is how banks and other regulated industries address regulation from the point of view of internal documentation. Whenever there is a change in regulation, the implementation of that regulation involves a lot of people. And it usually comes down to writing new policies and procedures or updating them and then communicating them to the employees. And then ultimately being able to show to the regulator that a policy, a procedure or an internal risk control which is related to a particular regulation or an obligation has been implemented properly, communicated to employees and then checked for effectiveness.

ClauseMatch believes that the successful financial institutions of tomorrow will be built upon a constant flow of smart, connected and real-time knowledge. The company exists to help global financial institutions bring digital transformation to compliance and help digitise their corporate memories.

  1. Global investment levels in RegTech reportedly more than tripled between 2017 and 2018, causing a proliferation of start-ups operating in this space. Do you think this trend will continue?What types of RegTech firms do you think will see the most success?

Remember, some 2-3 years ago, every time you used the word ‘RegTech’, you needed to explain what the meaning was. Things have increasingly changed over the course of recent years. Now regulatory technology is one of the major trends and many people are familiar with RegTech terminology.

The same thing is happening now with investments in RegTech. Some investors foresaw the trend and were ready to invest money in RegTech startups from the very beginning.  Now with regulatory technology becoming not just a nice to have but a must-have, investment levels are breaking all records. According to RegTech Analysts, it has reached record levels just in the first six months of 2019.

In order to succeed you need to be mature. For instance, many younger RegTechs are not ready to be a solution provider to a bank. To bring a solution into a bank, you need to do more than just address data privacy or security.

  1. While FinTechs often struggle to scale globally, ClauseMatch is successfully expanding its services throughout South East Asia. What have been the main challenges of this global expansion and how did you overcome these?

London-based ClauseMatch expanded into the Asia Pacific at the end of March 2019.  Within the first 3 months after starting operations in the region, we signed our first engagement with Ingenia, a consultancy firm who provide consultancy services to nearly 70 small and medium-sized financial firms in the region. With the onboarding of the CM platform, they are able to provide SME’s with the latest RegTech solutions.

ClauseMatch was recently selected out of 100+ global startup solutions for the first IMAS Digital Accelerator Programme (DAP) and now mastering our solution for the Investment Management industry with the cooperation of our mentors – Aberdeen Standard Investments.

It’s been a successful move so far. The Asian market is indeed very unique. The degree of separation and difference between each country in Asia is much wider as opposed to countries in Europe or the US. Each country is moving at its own pace. And we see the challenges as actually our opportunities. For instance, Singapore is one of the most challenging countries in Asia in terms of regulations: it is a very well-developed market, but also a highly regulated market. Singapore is presently in a transition phase. Local regulators are in the process of consolidating the country’s various rules and regulations. This actually gives a green light for RegTech firms planning to offer their solutions in the country.

The speed of tech adoption is really fast in Asia, as there is no legacy technology as such there. This gives a huge potential to RegTech firms to penetrate the market, speed up the sales cycles and have faster adoption of RegTech products by the companies.

  1. Regulatory discrepancies amongst jurisdictions (across and within regions) are seen as a major obstacle for financial service providers looking to expand internationally. How does ClauseMatch help to overcome this?

Regulatory discrepancies amongst different jurisdictions are indeed one of the major obstacles for financial service providers working cross-border, or internationally.

For instance, most big banks in Singapore have operations across Asia. They expanded by acquiring local banks. Many times, integration of local entities into a group is not done perfectly. What ClauseMatch can offer to banks and financial services companies working across multiple jurisdictions is actually a way to manage their internal compliance in a central way and see where they have discrepancies with local processes with different countries in Asia, allowing them to make sure that they don’t have any inconsistencies. Digitising regulatory rules, policies, and procedures and mapping them is fast becoming a regulatory requirement, so the use of technology has become a must.

ClauseMatch uses AI-based algorithms to automate regulatory change management processes mapping internal policies, standards, procedures and controls across corporate structures, i.e. legal entities, geographies, products and services, as well as supervisory authorities. For instance, at the beginning of 2019, we partnered with Revolut prior to its global expansion plans to help the bank manage its compliance procedures and controls across Asia (Singapore), Australia, and the US. Being able to manage all the compliance documentation on a single platform is certainly a competitive advantage for a company growing so fast.

  1. Regulation is top of mind in most industries, perhaps none more so than financial services. What challenges do financial institutions face when it comes to compliance? How do you feel these challenges will change in the next 2-5 years?

The financial services industry is one of the most regulated ones. Since the global financial crisis in 2008, the number of regulations has been constantly growing. Financial institutions today face ever-evolving regulatory requirements. The number of regulations is increasing year-by-year. And the pace of regulatory change has been only accelerating since the GFC, showing no signs of slowing down. Managing the new wave of regulation, such as PSD2 or GDPR, while also considering third-party risk management requirements and data protection frameworks, has become a significant challenge for financial firms.

In particular, this year a big theme is SM&CR regime which is coming in full force in December 2019. The FCA (Financial Conduct Authority) solo-regulated firms are obliged to move towards the new regime from 9 December 2019 and are expected to comply with all aspects of the SM&CR after a one-year transitional period.

We now see that the fines issued to financial services companies triple compared to previous years. FCA fines trebled in a year, hitting £227m in the year to March – up from £69.9m in the 12 months before. The total number of enforcement cases jumped 31% to 650, with misconduct across retail financial services climbing 29% to 101.

The UK watchdog issued 521 warnings about unauthorised firms, up from 328 the previous year. FCA chairman Charles Randell noted that the last 12 months have also seen the regulator make decisions on over 4,000 applications for authorisation.

Large global banks and not only them are experiencing continuous and exponentially growing fines for compliance failures. The biggest fines that are now coming through are actually the fines for failures in conduct.  And conduct is primarily communicated to employees via policies and procedures and enforcement of those. That’s what we help banks with ultimately.

  1. AI has been adopted across many areas of financial services, for example in intelligent treasury management solutions, however, it has not seen quite the same embrace from the compliance business function. Why is this and will this change in the future?

AI is not a new area of technology. Actually, it has been developed since the 1950s. However, it has advanced significantly in recent years, and newer algorithms are now able to process vast amounts of data and closely imitate human thought processes.

If there was one specific area of technology that has the ability to make a huge impact on compliance, it’s AI, the latest technology to play a key part in the digital transformation of the financial services industry. Its possibilities within compliance are almost limitless.

As a result, there are now some very interesting AI/ML projects going on in the compliance field, with analysts looking at how AI can solve real-world compliance issues.

A number of banks are currently using the ClauseMatch AI compliance platform, which combines machine learning and NLP capabilities. AI-based algorithms analyse the content of the documents to find and suggest relevant regulatory text, policies, and controls. This way nothing gets missed or amended in a contradictory manner.

Recently we had a chance to test our work on the concept of “whistle-blowing” and the results were quite impressive, significantly outperforming traditional statistical-based approaches. Even when paragraphs had absolutely no words in common but simply discussed the same topics, our system managed to detect relationships, since the machine learned to represent text in a semantic multidimensional space, where phrases such as “whistleblower” and “anonymous report” were close to each other.

  1. Ireland is increasingly recognised as a key hub for RegTech. Will this continue or do you think Ireland will lose out to other countries?

Ireland is certainly recognised as one of the major technology hubs and one of the financial centres in Europe along with Luxembourg and London.

The same regarding RegTech. We see that there are potentially several places of significance, with London securing its position despite all the conversations around Brexit and some degree of uncertainty. London-based  RegTech companies predominantly choose to develop in the UK and open a second office at some location within the EU.

  1. Finally, what is the one pearl of wisdom you would share with financial institutions who are sceptical about the potential of RegTech?

One of the speakers at our events was using this phrase to illustrate the current state of urgency for implementing the technology.

“Either you automate compliance or you die”.

This probably sounds a bit pathetic but actually very close to the truth.

Evgeny Likhoded
Founder & CEO at ClauseMatch

Evgeny Likhoded is the Founder and CEO of ClauseMatch, which helps financial institutions to implement robust governance and legal documentation processes as part of the first and second line of defense. Having worked in the legal profession for several years in Morgan Stanley and Gazprom, Evgeny sought to improve the current ways of how legal and compliance departments manage high value and high-risk documentation. He then went on to found ClauseMatch in 2012.

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