The Power & Promise of AI in Financial Services

In the dynamic world of financial services, where firms navigate the complex waters of SEC regulations while ensuring business needs are met, Artificial Intelligence (AI) and related tech advancements are transforming operations, compliance, and legal strategies. As the GC and CCO of a forward-thinking venture capital platform, I’m at the forefront of dealing with the profound impact AI has started to have — and will continue to have — on our industry. This exploration dives into some of the current capabilities of AI and its future potential, as well as the impacts on in-house counsels and their relationships with outside law firms.

AI Capabilities in Financial Services

Following is a discussion of three broad needs of financial services firms ripe for the use of AI: Regulatory Compliance, Document Management, and Due Diligence. For each of these needs, we’ll review the

• NOW: How AI can actually help today
• NEAR: Where short-term enhancements can be expected or are already underway
• FUTURE: Uses that we can anticipate could be available given the rapid rate of improvement in AI functionality.

Regulatory Compliance

Regulatory Compliance encompasses a wide area of needs in financial services depending upon the firm’s business, but it is often regulations issued by the SEC, as well as other US and foreign agencies, covering areas ranging from privacy to reporting, conflicts, and others. Keeping up with all the potential regulations and structuring and monitoring firm activities for compliance requires a material component of in-house counsel and compliance personnel responsibilities.

Typically, financial services firms have augmented in-house capabilities with other third parties, such as law firms and other service providers, and have developed both internal bespoke tools and acquired commercially offered products to deal with these requirements. However, as any in-house counsel knows, the battle is never-ending with constantly new and changing regulations and high-cost service providers with limited areas of expertise. With this backdrop, following is a discussion of the significant potential of AI.

NOW – Automated Regulatory Compliance Monitoring: New tools are assisting in real-time monitoring and analysis of SEC regulations, which can significantly reduce the risk of compliance infractions. These tools can be used to help firms remain compliant with existing regulations, streamlining the compliance process and alerting them to potential issues before they escalate.

As an example, at Alumni Ventures we’ve been training a compliance bot for the use of content creators to review marketing materials they produce — before sending them to compliance. The bot is not expected to be foolproof, but obvious errors can be corrected before materials even get to compliance review and content creators can learn how to better generate compliant material in the first place. Moreover, through use and training, the compliance bot itself improves, and it can be tailored for use in other types of communications.

Commercially available tools have additional capabilities, with an overall impact of helping mitigate risk — but without replacing internal legal staff. Rather, internal staff can be expected to have more coverage monitoring and better handle issues that arise.

A further example of the breadth of potential needs and potential AI-related solutions is Boundless — a modern immigration company — in which AV funds have invested. Boundless has made significant strides in simplifying the immigration process, including immigration solutions for financial services firms. Leveraging technology, Boundless has streamlined applications, offering comprehensive support, including unlimited live assistance at a flat fee.

The company has approved over 100,000 visas and is committed to easing the immigration journey through proactive case management and by adapting to changes in immigration policies, such as USCIS fee increases and H-1B program adjustments. Boundless has also incorporated AI so that it can offer pricing, time, and reporting efficiencies to clients versus what is typically provided by law firms. Given the complexity of immigration law, internal firm personnel are going to need expert advice — and previously this advice had to be provided by law firms. Now Boundless erodes law firms’ traditional position and can take these clients for themselves.

NEAR – Predictive Compliance Analysis: Industry specialists are touting that AI will be able to predict future regulatory changes by analyzing trends in data and enforcement actions. Certainly, both in-house counsel and external experts seek to stay on top of these trends in today’s environment, but much of the analysis that can be done by any given individual is limited and judgments need to account for a range of possible futures. AI can potentially conduct these analyses with much more data and without emotion. As with many of these applications, much will depend on the training quality of the AI and the judgment of decision-makers as they evaluate information and make decisions.

FUTURE – AI-driven Regulatory Strategy Formulation: Future AI might actively participate in formulating regulatory strategies, using predictive analytics to forecast trends and advising on strategic responses. How this could play out and the level of utility for individual companies and personnel is uncertain. At some level, it seems likely that AI could assess the situation and suggest strategies for ultimately achieving regulatory changes. But given the level of politics involved in these changes, it seems less likely that it would be fruitful to pursue them at an individual level.

Document Management

Document management covers both entering into new agreements and managing existing agreements. As with regulatory compliance, there is a range of specific activities that could benefit from AI tools.

NOW – Streamlined Document Review and Management: AI is already capable of providing material efficiencies for document review and management, including contracts and other types of regulatory and customer documents. There exists a relatively broad range of tools and use cases in this category. On the one hand, AI tools can track contract provisions for agreements already in place while also helping ensure new contracts meet consistent standards as determined by in-house counsel and business leaders. Moreover, the ability to navigate and access documentation is necessary for operational efficiency – especially when contrasted with the time and tedium required by in-house professionals without these tools.

An example of the use of AI in document management is EthSign, a recent investment by AF Funds, which is pioneering the integration of blockchain technology into e-signature processes and positioned as a Web3 equivalent of DocuSign. This innovation is aimed at enhancing transparency and trustworthiness in digital signatures by leveraging the immutability and security features of blockchain. EthSign has successfully raised $12 million in a funding round from leading VCs such as Sequoia Capital and Web3 leaders including Animoca, Mirana Ventures, and Circle. The company’s integration into Telegram and Line allows users to sign documents using their crypto wallets, adding a layer of authenticity and non-repudiation to digital contracts. EthSign is exploring further expansions to become a service platform for attestation, verification, and other user activities.

NEAR – Intelligent Contract Negotiation: AI’s potential to draft, review, and negotiate contracts based on learned parameters and previous negotiations could revolutionize contract management. There are strategic and efficiency gains here. My point of view — which I think many firms generally share —is that for many vendor and other types of agreements, we want mainstream, middle-of-the-road provisions that don’t particularly favor one-side over the other. Certainly, there are key business terms and requirements to focus on. But the potential is there for AI tools to help quickly bring parties together, or at least narrow the focus for discussion, removing the completion of contracts as a material roadblock for getting business done.

FUTURE – Ultimate Document Management: Could future AI tools proactively identify documents, then pull and organize data for review and analysis based on in-house counsel’s daily meeting calendar?  The optimist in me foresees a world of future efficiency freed from the historical bonds of never being able to find the documents and information you’re looking for — oh, happy day!

Due Diligence

Due diligence involves not just conducting research and analysis on potential investments. It also includes understanding potential partners, customers, and competitors.

NOW – Enhanced Due Diligence: AI-driven tools offer comprehensive risk assessments by processing vast datasets to evaluate the financial health, legal standings, and regulatory compliance of potential investments, partners, and clients. This capability allows for more informed decision-making, reducing the risk of unforeseen legal or financial problems. At Alumni Ventures, we’ve already incorporated AI tools into our due diligence process, improving efficiency and helping to identify positive and negative factors for review.

Patlytics is a recent investment of the AV Funds demonstrating the power of AI in due diligence. Patlytics is an end-to-end workflow solution for patent search, analytics, and competitive insights powered by artificial intelligence. Similar to Boundless, it can be expected to take clients directly from law firms.

NEAR – Deep Learning-Driven Due Diligence: The integration of deep learning algorithms will enable AI tools to analyze unstructured data, such as news articles and social media, providing a more nuanced view of potential investments and partnerships. We expect the ability of AI to collect and interpret to grow quite rapidly, improving capabilities and functionality in short order.

FUTURE – Holistic Risk Management Systems: Emerging AI technologies promise comprehensive risk management systems that integrate financial, operational, and regulatory risk analysis. It does not seem a great stretch that future AI tools will interpret disparate sets of information to provide comprehensive analysis of potential risk – with the ability to recommend and take mitigation steps. A powerful tool like this could be indispensable to the user and create a preferred relationship for the provider.

Benefits for In-House Legal Counsel

In addition to the AI benefits for in-house legal counsel mentioned above, here are some others to watch.

• Advanced Legal Research Tools: AI-powered legal research tools are changing the game for in-house counsel, providing fast and accurate access to relevant legal information and ensuring that advice and compliance strategies are grounded in the latest legal knowledge.
• Predictive Legal Analytics: These tools forecast legal trends and litigation outcomes, offering insights into the likelihood of different legal scenarios. This enables in-house counsel to proactively advise on risk mitigation strategies.
• Contract Lifecycle Management: AI-enhanced systems automate the entire contract process, alerting legal teams to potential issues before they escalate and allowing them to focus on strategic negotiation and risk assessment.
• AI-driven Compliance Training: Customizable AI programs offer interactive compliance training, adapting to the learning pace and style of each employee. This ensures more effective compliance education and a culture of compliance throughout the firm.
• Ethical and Bias Detection Algorithms: These tools are essential for ensuring that AI applications are fair and equitable, analyzing algorithms for potential biases and allowing legal teams to address these issues proactively.
• Enhanced Data Privacy and Security: AI-powered systems detect and respond to data breaches in real time, ensuring compliance with data protection regulations and minimizing the risk of data loss.
• Fraud Detection and Prevention: Current AI systems identify transactional anomalies indicative of fraud, improving over time to better detect sophisticated fraud schemes. This early detection is crucial for mitigating financial losses and protecting the firm’s reputation.

And some potential future AI tools might provide additional assistance:

• Cross-Platform Fraud Detection: Future AI tools will incorporate data from various platforms and systems, enhancing their ability to detect complex, cross-platform fraud schemes. This will lead to more accurate and faster fraud detection.
• AI Judges and Arbitrators: The concept of AI judges and arbitrators could transform dispute resolution within the financial sector, offering unbiased, efficient decision-making in regulatory disputes.

The Transforming Dynamic with External Law Firms

For law firms, AI presents both risks and opportunities. As AI assumes greater responsibility for routine tasks, the role of external law firms is evolving towards offering specialized expertise in complex legal strategies, litigation, and regulatory advice. This shift signifies a move from transactional service providers to strategic partners, where law firms are valued for their strategic insights and creative legal solutions.

We can expect pressure on traditional legal billing methodologies where firms were able to upcharge for routine work to help build profitable bottom lines. With that work undertaken internally or through cost-efficient service providers incorporating AI in their offerings, law firms will only be able to charge for true value-added services. It’s likely that they’ll need to bear the cost internally of incorporating AI solutions, and they are likely to even lose clients to new types of service providers.

The Broader Implications of AI in Financial Services

The integration of AI into financial services is not just about operational efficiency; it’s about redefining market dynamics, creating new business models, and establishing competitive advantages. Ethical and governance considerations, the future of employment in financial services, and the regulatory response to AI are all critical factors that firms must navigate as they integrate AI into their operations.

Conclusion

AI’s integration into financial services promises a future of enhanced efficiency, compliance, and strategic insight. For in-house legal counsel, AI offers tools that not only streamline daily tasks but also provide deep analytical capabilities for better decision-making.

As technology evolves, so too does the role of legal counsel, expanding to include oversight of AI ethics, governance, and strategy. The future of financial services, underpinned by AI, demands a collaborative approach, marrying technological innovation with legal and ethical integrity. The relationship between technology and legal expertise will be more critical than ever to steer firms through the financial landscape with foresight and responsibility.

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