In the aftermath of the 2008 global recession, fast and furious regulatory mandates put the compliance function in the spotlight at banks and financial services (FS) firms. Uncertainty around the sheer number of ever-evolving domestic and international regulations spurred a paradigm shift, higher compliance costs, and even steeper penalties for non-compliance. As per a recent survey, anti-money laundering compliance costs US financial services firms $25.3 billion per year – around a quarter of the revenue of the largest bank in the US. It is no wonder then that banks today are actively strategizing ways to avoid penalties and reputational damage while retaining customer trust.
Regulatory cost drivers
As non-traditional financial services players enter the industry and introduce disruptive technology-based business models, regulators are attempting to mitigate potential new risks. The result? More regulations and higher compliance costs for firms.
With landmark regulations such as Dodd-Frank, the second Markets In Financial Instruments Directive (MiFID II) and the revised Payment Services Directive (PSD2)– as well as the General Data Protection Regulation (GDPR) – concerns over compliance are keeping finance executives up at night.
Estimates say that by 2020 more than 300-million pages of regulations from myriad agencies and jurisdictions will be in play – with fines for non-compliance likely to rise accordingly.
As the breadth, depth, and staggering pace of new regulations increase, financial firms must absorb growing operational costs to monitor and report possible fraud, money laundering, insider trading, and other anomalies – all while ensuring customer privacy.
While the regulatory environment may be in flux, the pressure on financial services is ongoing and taking a toll on margins.
How can firms control the cost of doing business?
So many regulatory issues originate from transactions or behaviors that remain undetected by existing risk-and-controls frameworks. Therefore, many FS institutions are proactively turning to network analytics to standardize data management infrastructure so that information may be accessed, analyzed, and shared with key stakeholders while maintaining accurate records and building customer profiles that identify risk potential.
Some banks are outsourcing back- and middle-office compliance processes to stem growing costs and offset a lack of internal staff trained to handle regulatory directives. Outsourcing compliance functions can reduce risks and costs, improve profitability, and ensure compliance competence.
Service providers with expertise in regulation technology (RegTech) can automate procedures that were formerly done manually to streamline difficult compliance processes and reduce both business risk and staff workload.
Like FinTechs, RegTech firms are leveraging emerging technologies such as robotic process automation (RPA) and AI to streamline reporting processes and provide better oversight over data. Agile and customizable RegTech applications can automate the interpretation and execution of compliance in near real time to significantly reduce costs through greater efficiency and accuracy. Dublin-based RegTech firm Fenergo uses a rules-based workflow platform to support end-to-end cycle time for know-your-client (KYC) remediation case handling. The company reports a 37% improvement in case-handling time and efficiencies. Intelligent automation can also enable firms to keep track of regulatory updates in a timely and efficient manner, resulting not only in lower risk of non-compliance but also in time savings to focus on more value-adding tasks. Bank of Marin leverages Compliance.ai’s machine learning-based automated compliance platform to gain an easy, one-stop access to the latest updates on regulations.
Emerging techologies, too, are showing potential for use in streamlining the regulatory compliance function. Blockchain is beginning to play a role in the KYC process and for anti-money laundering (AML) compliance. London-based RegTech startup Coinfirm claims that AML compliance effectiveness could increase from the current 2% catch rate to 90% or more by leveraging blockchain solutions to streamline compliance into a more automated and efficient process.
Estimates say that blockchain technology for AML and KYC compliance mechanisms can save financial institutions from US$6 billion to $8 billion per year.
With so much at stake, firms must have a plan in place to implement cost-effective compliance solutions. Through a combination of outsourcing, implementation of RegTech applications, and digitization of legacy compliance frameworks, financial services firms are steadily improving processes to meet compliance requirements, while delivering cost savings and further reducing risks.
The author would like to thank Rohit Sharma and Tamara Berry for their contributions to this article.