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Auto-Compliance: Regulatory Analytics

The world of big data has certainly revolutionized the areas of marketing, promotion and customer fulfillment (see Google and Amazon respectively) and has also had significant impact in the areas of finance and insurance. Government and regulators, however, really haven’t been capturing the benefits of big data a great deal to date. All that is about to change.

Auto-Compliance

The new concept of Auto-Compliance is the regulatory nirvana of all participants in a market complying with all regulations because its the simplest, most efficient, lowest risk and most profitable thing to do. Its a state where all participants in a market evaluate the risk of non-compliance as too high to make pursuit of a non-compliant approach worthwhile. Sounds great but how can this be achieved?

To illustrate, lets imagine you are a manufacturer who can (i) choose to dispose of industrial waste compliantly at significant cost or (ii) choose instead to dispose of the waste non-compliantly at next to no cost. The temptation is there to decrease costs by disposing waste non-compliantly. What’s worse is that if your competitors are all disposing of their waste non-compliantly, they can cut their costs & their prices and then put you out of business. You may be almost forced to violate the waste disposal regulations. The only (ok, major) disincentive is the risk of getting caught… known as compliance pressure. But if there’s little risk of getting caught, then not only will you not get caught, but neither will your competitors!!

Many regulators only receive data and information provided to them by the participants in the market themselves. This means that regulators only know about things in detail based on data they’ve been provided (and what they find out about the individual entities they conduct expensive investigations upon). Most importantly, participants themselves know what data they have given a regulator, and also what they have not given. This puts participants in an ideal position of knowing what regulations they can safely violate and what regulations they cannot safely violate. Indeed, they also know that their competitors know this information as well. If the Regulator has no further sources of detailed information and/or any ability to undertake sophisticated analytics, then there is little compliance pressure. Participants are almost forced to violate the un-monitored regulations, just to stay competitive.

But Regulators can’t simply keep asking for more participant data. Onerous regulations such as these increase the regulatory impact on the industry, and eventually the cost of compliance overcomes the ability to turn a profit. Another impact is the artificial barrier to market entry such onerous regulation creates for startups. Regulators need to exert compliance pressure on all, without penalizing the compliant and the small with onerous regulatory burdens.

The response: Big Data & Analytics

Some regulators are now beginning to build sophisticated analytics capabilities and looking for opportunities to get data from other sources (e.g. other regulators, other government agencies or even 3rd party data providers). These Regulators can begin to use sophisticated big data and other analytical techniques to predict and detect non-compliance far more accurately and efficiently. A few key busts of non-compliant behavior with their shiny new Regulatory Analytics capability and suddenly market participants can no longer be sure what their regulator knows and what it doesn’t know.

Indeed if the regulator vaguely announces that the Analytics capability is “continually improving” and that new sources of data are being continually attained and deployed (without being too specific), participants can’t even be sure they can continue to violate regulations they previously violated safely. Participants may have gotten away with breaking a rule last week, but the Regulator’s analytics capability is improving and might get them if the participant tries it again next week.

Ubiquitous compliance

Interestingly, even the regulations that are not being actively monitoring are enforced, because the participants don’t know which activities are being monitored or predicted. It becomes rational to simply just comply with the entire regulatory regime. And, most importantly, all competitors are in the same boat…there’s no strong competitive pressure to cut corners to gain competitive advantage. Congratulations, the Big Data & Analytics Fortified Regulator has now achieved “Auto-Compliance“.

Generalized cost effective compliance of all participants with the entire portfolio of regulations is the dream of regulators the world over. Overseeing a level-playing field where competitive advantage has been achieved only through innovation and industriousness and not through covert regulatory avoidance is possible with Auto-Compliance. Indeed many complex and onerous regulations are in place purely to encourage compliance with other more fundamental regulation. Auto-Compliance allows the regulatory landscape to be simplified back to core compliance goals, saving significant overhead for both market participants and the regulators themselves.

If you’re a regulator and have started the journey toward Auto-Compliance (I know some of my clients have begun the journey) make a comment below. If you want to join this latest wave in regulation, let me know.

https://www.linkedin.com/pulse/auto-compliance-regulatory-analytics-jeffrey-popova-clark/

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