The True Cost of Compliance - Jobs at Shield

If you do, you'll be damned if you don't. Financial institutions are mired in a seemingly unsolvable conundrum. Permission to operate necessitates adherence to regulatory compliance regulations and procedures established by the firms' governing national and global financial authorities. As Compliance Officers and regulators struggled to handle an overnight transition from dealers operating in safe environments – to working from their kitchens – the global epidemic drove up compliance costs. As is often the case with technological developments, the true cost of those advancements should be assessed in jobs rather than dollars.

Adding insult to injury

Despite the fact that authorities temporarily loosened reporting and some other parts of compliance following the implementation of COVID, all businesses realised that the day of reckoning would come, and enforcement would be unavoidable. When the coronavirus first appeared, Compliance Officers were taken aback by the unanticipated paradigm shift in how and where traders worked and communicated. However, nothing inspires innovation and change like a pressing need.

Those in charge of ensuring that operations followed compliance guidelines heroically rose to the COVID challenge, quickly enacting new policies and devising solutions to address the unexpected reliance on personal devices and unapproved communication modes such as WhatsApp, Facebook Messenger, and Instagram. The trend toward using robotics, software, and artificial intelligence (AI) to replace monotonous tasks had already begun in other industries, but it was just getting started in banking. Within less than six months of a worldwide pandemic, COVID expedited digital transformation, driving a workplace practise from an emerging trend to a best practise. Using software instead of human capital is on-trend now that we've entered "the new normal" phase as a civilization.

RegTech software improves accuracy and pinpoints probable breaches by interpreting nuance, even in long threads of multilingual texts punctuated with emojis. Here's the catch: Despite Compliance Officers' efforts to maintain their companies' operations during a COVID crisis, their jobs are now on the line. Over the next twelve months, experts predict a 25% loss in compliance staff in London's banks.

Banks are being compelled to decrease costs because to decreasing returns and growing compliance costs in the COVID era. Over the next year, HSBC expects to save $4.5 billion in expenditures, including a 35,000-person workforce reduction. In a double blow, banks aren't hiring either: employment postings in London have fallen by 55 percent year on year.

A closer look at the compliance costs

In a pre-pandemic era, KPMG reported on the hedge fund industry's issues in managing change and unpredictability in 2013. Increased institutionalisation at the time was putting pressure on risk management, due diligence, and openness in relation to operations, transactions, and those who brokered them, resulting in a stronger focus on risk management, due diligence, and transparency.

Deloitte has looked at how compliance expenses have changed in the ten years after the financial crisis. They discovered that compliance operational costs have risen considerably, by 60% from pre-financial-crisis spending levels. In their analysis, they explained how rising compliance costs, along with low interest rates, flat revenue growth, and a sluggish economy, put downward pressure on returns. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 alone increased compliance expenses by $50 billion per year. Many economies are in freefall now, unemployment rates are at levels not seen since the Great Depression, and many countries are in the midst of a recession as a result of COVID's increased pressure.

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LexisNexis released its compliance spending estimate earlier this year (April 2020), estimating that financial institutions will spend $181 billion on compliance globally. One of the most expensive components of compliance initiatives is communications monitoring. Compliance costs have climbed by 7% annually in the last two years alone around the world. The United States and Europe, unsurprisingly, have the undesirable distinction of spending the most on compliance, with an average of $10,000 per employee. The Netherlands, UK, Germany, Italy, and France have the dubious honour of spending the most on crime compliance.

Non-compliance is not a viable option. According to a 2019 analysis by Ponemon and Globalscape, firms who do not meet regulatory compliance requirements incur 2.71 times more costs. The annual cost of compliance for financial institutions of all sizes is on average $5.5 million for those that comply and $15 million for those who do not. Banks spent more than $321 billion on enforcement actions, including settlements and fines, between 2008 and 2018. Compliance accounts for 10 percent or more of a bank's operating budget, with that figure rising to 20 percent by 2022.

Getting between the cracks

Everyone believes in the value of technology - until it has a negative impact on them. Members of society have victimised others since the beginning of time, as far as we know. Someone, somewhere, always has malicious intents and works out how to manipulate the system to their benefit. Although some who have been displaced may perceive developments in RegTech, particularly around the increasingly complicated and used engagement practise including e-Comms, there is no doubting the benefit that it can provide to financial institutions in terms of managing compliance costs and minimising risks. Recognizing that the true cost of compliance is borne by those affected by RegTech developments, companies should undertake upskilling, training, and other activities to mitigate the impact.