Compliance Costs Rising Faster Than Bank Income
The cost of complying with myriad accounting regulations designed to improve transparency and efficiency are expected to continue rising, but maybe at a slower pace than in recent years, a new survey by Deloitte finds.
Although there are some expectations that the pace of spending may slow, there is a widespread agreement that compliance competence will remain critical to the success of the business and that many financial institutions clearly see a reputation issue here at least in the minds of customers.
The results of the survey of Chief Compliance Officers, Chief Risk Officers, and other senior executives at 20 of the top 50 US financial institutions “shed interesting light on how financial institutions are coping with compliance and their expectations for the future.”
The key findings:
- Compliance costs grew significantly faster than net income. While compliance spending as a percentage of net income for the financial institutions surveyed was 2.83% in 2002, by 2006 it had grown to 3.69%.
- As costs have risen, financial institutions appear to have responded more by applying people resources to monitor compliance versus technology resources to manage it.
- Ninety-five percent of the financial institutions surveyed said their executives were much more involved in compliance management than in the past, with 40% saying that the time devoted to compliance had increased by more than 25%.
- Financial institutions have made considerable progress in implementing compliance management activities within the different parts of their business, but may have more work to do in reducing duplicative processes across their business units.
- Only 10% of financial institutions reported that compliance information was always effective and 15% that it was always timely.
- Measuring compliance performance remains largely a qualitative rather than a quantitative process.
Deloitte says one important reason for escalating costs is that many financial institutions have not taken advantage of the overlapping elements of the requirements they face, such as Sarbanes-Oxley, Basel, and the USA PATRIOT Act. “This fragmented approach has also made it difficult to develop clear and comprehensive compliance information.”
Financial institutions have an opportunity to mitigate rising costs by approaching compliance comprehensively — reducing duplicative processes, eliminating unnecessary procedures, and building the business case for more investment in technology solutions to improve efficiency and provide actionable reporting.
The report’s specific recommendations:
- Provide more clarity and consistency in interpreting regulatory requirements since currently many grey areas exist in such regulations as anti-money laundering.
- Create more consistency among regulators and reduce the frequency of different regulators examining the same issue.
- Focus on principle-based regulations rather than a statutory/transaction approach.
- Increase collaboration among regulators and with the industry.
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