Is Compliance Automation the Possible Solution to Europe Over-Regulation?

The EU economy is currently grappling with slow GDP growth and escalating compliance costs, primarily attributed to overregulation. This situation is adversely affecting innovation and profitability across various sectors. Compliance automation, leveraging AI-powered tools, emerges as a potential solution to optimize workflows and enhance regulatory monitoring in heavily regulated industries.

The Gloomy Outlook for the European Economy

The European Union's economic landscape is facing significant challenges, with GDP growth stagnating at a mere 0.3% in 2023. Projections for 2024 indicate a continuation of this trend, with growth rates hovering between 0.2% and 0.4%, placing the EU on the brink of recession. In stark contrast, the U.S. and Japan reported GDP growth rates of 2.5% and 1.9%, respectively, highlighting the EU's underperformance.

Germany and France, the EU's economic powerhouses, have both experienced a decline in momentum. Germany, in particular, narrowly avoided recession with a minimal growth rate of 0.1% in the third quarter of 2024, exacerbated by mass layoffs in the automotive sector and other economic pressures.

Why Does Europe’s Once-Strong Economy Perform So Poorly?

Experts attribute the EU's economic malaise to overregulation. French President Emmanuel Macron has warned that excessive regulation could jeopardize the EU's future, while Ericsson's CEO, Börje Ekholm, has stated that overregulation is pushing Europe towards irrelevance.

European businesses are compelled to allocate substantial resources to navigate the complex regulatory landscape, which not only inflates operational costs but also stifles innovation. Since 2019, the EU has enacted approximately 13,000 pieces of legislation, compared to just 3,500 laws and 2,000 resolutions in the U.S. during the same period.

The Harm of Overregulation to the European Financial Industry

The financial sector exemplifies the detrimental effects of overregulation. A study by the European Banking Authority (EBA) revealed that compliance costs for European financial institutions exceeded 4% of their total costs in 2017. With the introduction of significant regulatory measures such as MiCA, MiFIR, and SFDR, these costs are projected to rise to over 6% and potentially exceed 7% in the future.

In contrast, compliance costs for U.S. financial firms are estimated to be less than half of those in Europe. This regulatory burden has led to a stark disparity in performance metrics between EU and U.S. banks, with EU banks reporting a pre-tax return on assets (ROA) of approximately 0.6%, significantly lower than the 2.1% recorded by their U.S. counterparts.

The Challenges of AI-Driven Compliance Automation

The emergence of large language models (LLMs) has accelerated the push towards automating compliance tasks. While these technologies hold promise for enhancing compliance processes, many corporate clients have reported dissatisfaction with LLM AI solutions from RegTech providers, leading to low retention rates.

Common concerns include the propensity for LLM AI to generate hallucination errors—plausible-sounding but incorrect information. Given the critical importance of accuracy in legal compliance, such errors pose significant risks. Although technologies like retrieval-augmented generation (RAG) can mitigate these issues, they cannot entirely eliminate the risk of hallucinations.

Proper Use of AI in Compliance Automation

Despite these challenges, LLM AI can still play a valuable role in compliance automation when used appropriately. Rather than replacing human oversight, AI should be viewed as a transformative tool that enhances existing workflows. Organizations should leverage AI to improve efficiency while maintaining human verification processes to ensure accuracy.

Grand Compliance’s Approach

At Grand Compliance, we focus on integrating AI to optimize workflows within traditional Governance, Risk, and Compliance (GRC) software, particularly in heavily regulated industries like finance. Our approach includes:

• AI-powered search and compilation of relevant financial regulations, creating a customized compliance library.
• Automated monitoring of regulatory updates, alerting clients to new requirements.
• Automatic generation of compliance document summaries.
• Extraction of obligations from regulatory texts to create comprehensive obligation checklists.

Throughout this process, we emphasize that AI serves as an auxiliary tool, enhancing human capabilities rather than replacing them. By ensuring traceability and verification of information sources, we effectively mitigate the risks associated with AI-generated content.

Beyond Basic Functions: Integrating LLM AI into Traditional GRC Software

We have successfully integrated LLM AI into various modules of traditional GRC financial software, simplifying workflows and significantly improving efficiency. This model allows us to leverage the strengths of LLM AI while addressing its limitations, enabling organizations to navigate the complex regulatory landscape more effectively.

In conclusion, as regulatory challenges mount and the need for streamlined compliance processes intensifies, the time to embrace compliance automation is now.

Ce que vous devez penser à mettre en place dans votre dispositif compliance :

Il est essentiel d'évaluer l'intégration de l'automatisation dans vos processus de conformité, en tenant compte des outils d'IA disponibles et de l'importance de la supervision humaine pour garantir la précision et la fiabilité des informations.