Rising Compliance Cost: The Need for a Renewed Strategy

In an era marked by geopolitical uncertainty, economic instability, banking failures, sustainability challenges, crypto-assets, and technological innovations, the importance of a robust and accurate compliance function within organizations cannot be overstated. Financial services firms, in particular, must navigate through a complex maze of regulations and requirements to stay afloat. However, these essential compliance functions are increasingly burdened by limited resources, high costs, and operational challenges. This article explores the current state of compliance costs and delves into the need for a renewed strategy to address these pressing issues.

1. The Compliance Landscape: Greater Responsibility and Challenges

Recent surveys of compliance professionals reveal a sector that holds greater responsibility within organizations but also faces practical operational challenges that could potentially undermine their ability to provide adequate compliance support. One such survey, conducted by Thomson Reuters Regulatory Intelligence, highlights these issues in its 2023 Cost of Compliance Report. The survey included more than 350 practitioners from various financial institutions, regulators, broker-dealers, and payment service providers across the United States, the European Union, and the United Kingdom.

1.1 Key Findings

The report unveils several noteworthy insights, including:

• A predicted increase in the volume of regulatory changes, posing a significant challenge for boards and compliance officers.
• Cost pressures and balancing competitive and regulatory demands as key challenges, with nearly half of the respondents not monitoring compliance costs across their organizations.
• Approximately one-third of respondents expecting compliance teams to grow, along with an increase in staff costs, while turnover rates and budgets remain at 2022 levels.
• A rise in outsourcing compliance functions to external providers.
• The need for retaining skilled resources to handle a growing range of subjects, with recruitment costs and potential personal liability reducing the appeal of becoming a compliance officer.
• Low staff morale emerging as a significant conduct risk, potentially leading to noncompliance issues due to errors or manipulation, and the increasing prominence of cybersecurity as a culture and conduct risk.

These findings serve as a guide for financial services firms in planning, resourcing, and benchmarking their compliance strategies.

2. Addressing Compliance Cost: A Renewed Approach

To tackle the escalating compliance cost and its associated challenges, organizations must adopt a comprehensive and proactive strategy. This renewed approach should involve the following key components:

2.1 Staff Augmentation

Given the importance of skilled resources in navigating the complex compliance landscape, organizations should consider staff augmentation to bolster their in-house capabilities. By leveraging external talent and expertise, firms can ensure access to specialized skill sets on a flexible, as-needed basis, without incurring the long-term costs of hiring full-time employees.

2.2 Streamlining Processes and Leveraging Technology

Embracing technology and streamlining compliance processes can help reduce the burden on compliance teams and enhance efficiency. By automating routine tasks and implementing advanced data analytics, organizations can facilitate faster, more accurate decision-making and free up resources for more strategic initiatives.

2.3 Outsourcing Compliance Functions

As the report suggests, an increasing number of firms are turning to outsourced providers for their compliance needs. Outsourcing can help organizations access specialized expertise, reduce costs, and scale their compliance efforts in response to changing regulatory requirements.

2.4 Investing in Training and Development

To address the skills gap and retain talented compliance professionals, organizations must invest in ongoing training and development initiatives. By fostering a culture of continuous learning, firms can ensure that their compliance teams stay abreast of the latest regulatory developments and best practices.

2.5 Promoting a Culture of Compliance

Organizations should strive to create a culture of compliance, where all employees understand the importance of adhering to regulations and internal policies. By fostering a culture of accountability and transparency, firms can minimize the potential for noncompliance issues and enhance their overall risk management capabilities.

2.6 Monitoring and Managing Compliance Costs

As compliance costs continue to rise, organizations must adopt a proactive approach to monitoring and managing these expenses. Regularly assessing the cost-effectiveness of compliance initiatives, benchmarking against industry peers, and leveraging data analytics can help identify areas for improvement and optimize resource allocation.

3. The Path Forward: Embracing Change and Innovation

To navigate the ever-evolving compliance landscape and address the growing challenges of rising compliance costs, organizations must embrace change and innovation. By adopting a renewed strategy that incorporates staff augmentation, technology, outsourcing, training, and a culture of compliance, firms can better manage their compliance obligations and mitigate risks in an increasingly complex regulatory environment.

In conclusion, the rising compliance cost necessitates a renewed strategy that is adaptive, proactive, and focused on leveraging resources effectively. As financial services firms move forward, embracing change and innovation will be key to staying ahead in the compliance game and ensuring long-term success in an uncertain world.

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