Compliance: Cost Saver or Cost Center
As financial institutions look to rein in costs to compete effectively in today’s economic environment, one critical area where they must be extremely careful about is compliance.
There is no doubt that compliance is expensive. Deloitte estimates banks’ compliance costs have risen more than 60% since the financial crisis. Additionally, a Competitive Enterprise Institute report says that large firms are spending up to $10,000 per employee to stay in compliance.
Looking ahead, nine out of 10 compliance executives forecast that the cost of compliance will surge as much as 30% during the next two years, yet only six out of 10 expect an increase in operational funding during that period, according to a survey from Accenture.
However, non-compliance can be even more expensive. Consider the two following examples:
The Financial Crimes Enforcement Network (FinCEN) fined Capital One $390 million for failure to implement and maintain an effective AML program. It didn’t file timely and accurate Suspicious Activity Reports (SARs) for millions of dollars in transactions, allowing organizations related to organized crime, tax evasion, and fraud to launder money into the U.S. financial system. It also didn’t file currency transaction reports (CTRs).
The Office of the Comptroller of the Currency (OCC) reprimanded Cenlar FSB for failure to maintain adequate internal risk controls. As a result, the bank was ordered to take several steps to implement a series of controls, all to be completed in 30-60 days.
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Compliance Scrutiny Expected to Tighten
Regulators are expected to increase their compliance scrutiny as new risks take center stage.
For instance, ransomware attacks doubled last year as more organizations shifted to remote work options, opening up opportunities for cybercriminals. There were over $2.2 billion in money laundering fines last year – five times larger than 2019's total, according to a report from Kroll. Additionally, financial sanctions prompted by Russia’s invasion of Ukraine are posing regulatory risks.
Still, Accenture’s survey revealed that organizations are trying to cap expenses related to compliance. Nine out of 10 survey respondents said they have shifted compliance operations to lower-cost locations, with 41% moving activities abroad.
Meanwhile, the OCC recently warned banks of the dangers of cutting costs. To ensure sufficient risk management, the OCC says financial institutions should ensure oversight for Audit, Compliance, Risk management, and Staff development.
How to Save on Compliance Costs
While it is unwise to indiscriminately reduce your compliance budget, there are some ways you can save on expenses while still maintaining compliance integrity.
First, look at staffing. Banks should leverage experienced staff for tasks that require specialized knowledge, experience, and judgement: The amount of experience had by compliance personnel is valuable. Ensure that it is used for compliance work needing their expertise; not for repetitive or other tasks that can be automated.
Additionally, invite compliance staff to strategic meetings. They can quickly inform you about any potential compliance issues for new products, services, or strategies before you make any investments in them. And prioritize training. This will save money in the long run by ensuring that compliance staff doesn’t misinterpret compliance or guidance rules.
- Automate Processes
Financial institutions should also shop for compliance-related disclosures that require regular updates. A solution that automatically provides those updates can save thousands over updating such disclosures manually. It can also cut down on errors resulting in manual processes.
- Team Up
You can also save costs by leveraging resources already paid by one department or team to help another department or team. There are many situations in which multiple departments or teams can share compliance solutions. For example, the marketing team may be able to obtain market insight from the compliance department’s redlining analytics tool.
- Utilize a Compliance management System (CMS)
Financial institutions must also ensure they are fully utilizing their compliance management system (CMS). A small investment in additional training can help ensure anyone using the system takes advantage of its full capabilities.
By taking advantage of these tips, you can help ensure that compliance is a cost saver for your financial institution, helping to avoid costly penalties and fines for non-compliance while putting dollars in the right places. Institutions don’t necessarily need to increase spending, but they do need to make sure they’re spending wisely to avoid regulatory compliance violations.
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