The Compliance Clock Is Ticking

Regulatory deadlines used to be distant events—something to plan for “next fiscal year.” But in 2025, mandates like FedNow adoption and HIPAA Stage 3 compliance are landing fast and hard. And for organizations still running mission-critical operations on legacy systems, the clock isn’t just ticking—it’s sounding the alarm.

These mandates aren’t theoretical. They require:

• Real-time payment capabilities (FedNow)
• Granular patient data access and exchange (HIPAA Stage 3)
• Full audit trails, traceable logic, and system-level transparency

Legacy systems, especially those built decades ago in COBOL or PL/I, were never designed for this. They were built for batch processing, siloed storage, and closed networks—not real-time APIs, interoperability, or dynamic compliance reporting.

As a result, many banks and healthcare providers are now facing a stark choice:

• Modernize in time to meet the mandate
• Or risk penalties, reputational damage, and systemic outages

Regulators are no longer willing to accept “legacy limitations” as an excuse. The expectation is clear: if the law requires it, your tech must deliver it.

Legacy Infrastructure and the Risk of Noncompliance

Legacy systems were built for a different era—one where nightly batch jobs, paper trails, and manual oversight were the norm. But modern regulations demand speed, transparency, and traceability that these systems simply weren’t designed to deliver.

The risks of noncompliance in this environment are significant—and growing:

1. Inability to Meet Real-Time Processing Requirements: FedNow, the U.S. government’s instant payment infrastructure, requires systems that can process, clear, and settle transactions in real time. Legacy COBOL systems that depend on nightly batches or mainframe job schedulers can’t adapt without major architectural changes.
2. Lack of Interoperability: HIPAA Stage 3 mandates greater data sharing across providers, payers, and patients. Systems that store data in proprietary formats or lack modern integration interfaces can’t support required data exchange—even if the information exists internally.
3. Audit and Traceability Gaps: Regulators now demand clear, traceable documentation of how systems make decisions—whether it’s how a claim was adjudicated or how a transaction was prioritized. Legacy code often lacks documentation, and changes made over the years are rarely versioned or traceable to source.
4. Security Exposure: Aging systems often lack encryption, access controls, or update mechanisms needed to meet today’s cybersecurity standards. This exposes institutions to breaches that can trigger regulatory investigations and fines.
5. Human Bottlenecks: Many compliance processes still rely on a shrinking pool of experts who understand the legacy logic. When those experts retire—or are unavailable during an audit—the organization is effectively blind.

Noncompliance isn’t just a technical issue. It becomes a legal, financial, and reputational crisis when regulators come knocking and the system can’t answer.

FedNow, HIPAA Stage 3, and Beyond: What’s Changing?

Modern compliance mandates aren’t just incremental upgrades—they represent a fundamental shift in how financial and healthcare systems are expected to operate.

Let’s break down what’s driving urgency in 2025:

FedNow (U.S. Federal Reserve) – Real-Time Payments Infrastructure

Launched to modernize the U.S. banking system, FedNow requires that participating institutions:

• Support 24/7/365 real-time clearing and settlement
• Maintain instant transaction visibility for customers and regulators
• Integrate with modern APIs for secure and traceable payment processing

Legacy banking systems built around COBOL and batch windows struggle with this model. Without refactoring core transaction systems or building composable front-ends, they risk falling out of compliance or being unable to support critical services.

HIPAA Stage 3 – Enhanced Interoperability and Patient Access

Under the HITECH and 21st Century Cures Act umbrella, HIPAA Stage 3 mandates:

• Real-time patient access to medical records
• Standards-based data sharing via FHIR APIs
• Transparent decision logic for clinical and billing systems
• Enhanced security and auditability

This pushes legacy EHRs, claims engines, and billing systems beyond their original capabilities. Hard-coded rules and undocumented workflows must now be exposed, traced, and secured—something nearly impossible without extensive reverse engineering or AI support.

Emerging Global Standards (ISO 20022, GDPR+, etc.)

Beyond FedNow and HIPAA, global banks and health systems must also contend with:

• ISO 20022 for richer, structured payment data
• GDPR and state-level privacy laws with real-time access and deletion requirements
• SEC and OCC rules mandating complete explainability for AI-assisted decisions

The direction is clear: regulators now assume systems are real-time, API-ready, and fully auditable. If your legacy stack can’t meet that bar, it’s not just outdated—it’s out of spec.

Where Legacy Systems Fall Short

Legacy systems weren’t built for today’s compliance environment—and their limitations show up across every dimension that modern regulators now care about. Here’s where they most often fall short:

1. No Real-Time Capability

Legacy banking and healthcare platforms were designed around batch processing—running jobs overnight or during downtime windows. They simply can’t handle the always-on, milliseconds-matter expectations of FedNow or modern patient portals.

2. Siloed, Non-Interoperable Data

Data in legacy systems is often:

• Stored in proprietary formats (VSAM, flat files)
• Locked in application-specific logic
• Tied to mainframe or local storage

This makes FHIR compliance in healthcare or ISO 20022 in finance incredibly difficult without costly extraction and transformation.

3. Lack of Explainability

In regulated environments, it’s no longer enough to get the right answer—the system must show its work. Legacy COBOL code often has:

• No documentation
• No visible logic flow
• No audit trail connecting code to policy or regulation

This breaks traceability requirements in HIPAA Stage 3, SOX, or OCC audits.

4. Security and Access Control Gaps

Older systems often lack modern authentication, encryption-at-rest, role-based access, or logging. These are non-negotiable in today’s compliance landscape—and are often flagged during audits.

5. SME Dependency and Fragile Change Cycles

When only one or two engineers understand how a core process works, every change becomes a risk. Without automated testing or impact analysis, compliance updates can break unrelated functionality, creating ripple effects that increase exposure.

In short, these systems weren’t built to be agile, transparent, or interoperable. And now, compliance requires all three.

Modernization Isn’t Optional—It’s a Compliance Requirement

For years, modernization was positioned as a “nice to have”—a way to boost agility, reduce costs, or attract talent. But today, regulators are making it clear: if your legacy system can’t meet mandated standards, it’s out of compliance. Full stop.

This shift reframes modernization as a regulatory imperative, not just a technical upgrade.

1. Regulators Expect Operational Readiness

Whether it’s FedNow in banking or HIPAA Stage 3 in healthcare, compliance now demands:

• Real-time capabilities
• Interoperable APIs
• Complete audit trails
• Explainable system behavior

If your system can’t deliver, it’s not “legacy”—it’s noncompliant.

2. Technical Debt Is Now Regulatory Risk

What used to be internal complexity is now external exposure. That undocumented COBOL routine? If it drives patient billing logic or transaction approvals, regulators want to see it—and understand it.

3. Exceptions and Grace Periods Are Shrinking

In the past, some industries received temporary exceptions due to system limitations. That leniency is fading fast. Regulators now expect proactive roadmaps, risk mitigation plans, and documented modernization strategies.

4. Audits Are Getting Smarter

Auditors are no longer satisfied with box-checking. They’re asking to see:

• Versioned logic
• Code provenance
• Decision path traceability
• Access logs and modification history

Legacy systems that lack this visibility are flagged for manual remediation or future phase-out.

5. The Cost of Noncompliance Is Rising

Penalties range from monetary fines to lost accreditation, halted transactions, or legal action. And the reputational cost of a public compliance failure—especially one traced back to an aging system—is difficult to recover from.

Using AI to Accelerate Regulatory Readiness

Legacy compliance gaps are fundamentally knowledge gaps—about what systems do, how they interact, and where risk hides. AI is closing those gaps, fast.

Platforms like Elliot are transforming how regulated institutions approach legacy modernization—not by rewriting everything, but by making the invisible visible, explainable, and auditable.

Here’s how AI helps teams get—and stay—ready for compliance:

1. Code Comprehension at Scale

Elliot can analyze millions of lines of legacy code (COBOL, JCL, PL/I, etc.) and produce:

• Plain-language summaries of business logic
• Dependency maps showing system-wide impact
• Data lineage for sensitive fields (e.g., patient ID, account balance)

This reduces the time to understand systems from months to days.

2. Documentation Where None Exists

AI generates traceable, structured documentation from raw code—filling in the gaps left by years (or decades) of unrecorded changes. This is essential for HIPAA audit trails, SOX compliance, and FedNow integration reviews.

3. Real-Time Impact Analysis

Need to change a rule to meet a new regulation? AI shows what will break, what depends on that rule, and where in the system the logic flows. This allows teams to make compliance-driven changes safely.

4. SME Bandwidth Expansion

With AI answering first-line technical and functional questions, subject matter experts can focus on validating high-risk areas—not re-explaining core logic. This is critical as veteran SMEs retire and talent gaps widen.

5. Proactive Compliance Mapping

Elliot can tag code with relevant regulatory domains (e.g., “FedNow SLA logic,” “HIPAA Protected Field,” “SOX-relevant calculation”), making it easy to align modernization tasks with audit requirements.

The Cost of Delay vs. the ROI of Modernization

When compliance deadlines loom, delay is rarely neutral—it’s expensive. Whether it’s reactive scrambling, regulatory penalties, or missed business opportunities, waiting to modernize your legacy systems comes with tangible costs.

The Cost of Delay

• Regulatory Penalties: Noncompliance with HIPAA, FedNow, or GDPR can result in fines ranging from thousands to millions of dollars per incident. And in sectors like healthcare and banking, regulatory reputational damage can lead to customer attrition and market devaluation.
• Last-Minute Firefighting: Scrambling to meet compliance deadlines without a clear roadmap increases consultant fees, consumes SME bandwidth, and often requires duplicated work under audit pressure.
• Inflexible Systems: Every quarter spent maintaining unmodernized systems limits your ability to adapt. You’re stuck in reactive mode, while more agile competitors roll out new services, integrations, and analytics.
• Lost Talent and Institutional Memory: As SMEs retire or leave, undocumented systems become even harder to modernize. Delay increases your reliance on vanishing expertise.

The ROI of Modernization

• Reduced Risk Exposure: Documented, explainable systems reduce audit flags, speed up incident response, and ensure you pass compliance reviews without drama.
• Faster Time to Implement Mandates: With AI-assisted understanding and clear architecture, you can update rules, processes, or logic in days—not months.
• Improved Developer Productivity: Engineers spend less time reverse-engineering legacy code and more time delivering value—translating to lower maintenance costs and faster feature delivery.
• Strategic Agility: Composable architectures and API-wrapped legacy systems enable faster integration with fintech, healthtech, and cloud platforms—turning compliance from a constraint into a competitive advantage.

In short: the longer you wait, the more you’ll pay—for less control, more risk, and diminishing talent.

Compliance as Catalyst, Not Constraint

Compliance often gets framed as a burden—a box to check, a deadline to dread. But in today’s environment, it can be something far more powerful: a forcing function for change.

The mandates driving urgency—FedNow, HIPAA Stage 3, ISO 20022—aren’t just about rules. They’re about readiness. They push organizations to confront uncomfortable truths about legacy systems that no longer meet the speed, transparency, or interoperability the world now expects.

But that pressure can be productive.

It’s a chance to:

• Document institutional logic before it’s lost
• Expose and reduce systemic risk embedded in aging code
• Equip your teams with tools to understand, change, and govern legacy systems
• Accelerate digital transformation with compliance as the business case

Modernization, in this light, isn’t a technical project—it’s a compliance readiness program that delivers both risk reduction and operational agility.

Let’s Talk About Your COBOL Documentation and Modernization Needs — Schedule a session with CodeAura today.