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Compliance – An Opportunity, Not Just a Cost

Traders Magazine Online News, January 16, 2019

Andy Ross

In the decade since the financial crisis, governments have proposed and implements hundreds of new regulations. In the U.S., the Dodd-Frank Act alone created at least 243 new separate rules. Meanwhile, updates to the Basel Accords and the Markets in Financial Instruments Directive (MiFID) similarly impacted European institutions.

The costs to comply are great. A March 2017 Bloomberg article reported that global banks spent more than $321 billion on settlements, enforcement actions and fines – these fees piling on top of annual compliance costs. According to the Financial Times, those annual compliance costs amount to $270 billion a year and account for 10% of bank operating costs.

In other post-crisis trends, new nontraditional “fintechs” have entered the space, offering technology solutions to simplify and streamline processes for businesses and consumers users alike. With these new entrants, banks face increased pressure to innovate, but high compliance costs take away from innovation budgets.

Compliance teams or banks that lament this conflict fail to recognize the opportunity it presents. In fact, compliance teams canact as innovators in their own right, if they are able to adapt their mindset.

The challenges that banks and other capital markets firms perceive and seek to address are related to complying with (and, realistically, keeping up with) regulatory changes. While these responsibilities of course fall to the compliance team, this illustrates a reactive mindset.

This is problematic, as it means that banks are always one step behind regulations. This causes banks to spend more on unanticipated compliance changes, means that internal compliance and IT teams must continually build or buy disparate technology systems or patches that are expensive to maintain and create cybersecurity risks and information asymmetry risks.

This reactive approach ultimately threatens firms’ longevity in the marketplace as they try to juggle external regulatory pressures and fees, internal conduct changes and a growing web of disparate technology platforms, and ongoing competition with young, nimble and (comparatively) unregulated incumbents (Worth noting: Thompson Reuters’ 2017 Cost of Compliance survey found that a third of all firms expect more compliance involvement in fintech and regtech solutions in the coming year).

Banks are not – and, frankly, can’t afford to be – victims in a highly regulated environment. They must abandon their reactive approach to compliance. Instead of reacting to each regulation or test as it comes, bank compliance and technology teams should instead collaborate to build an agile technology-driven system that enables them to react with agility, shifting strategy or, e.g., compliance reporting methodology, without implementing an entirely new system each time.

This is what we call a design-led approach. Inherently proactive, design-led thinking involves collaboration across teams through every step of the development process: discovery and research, ideation, rapid prototyping and testing, and implementation. This method can be an effective and even enjoyable way to uncover technology solutions that work for a bank, long-term.

This proactive approach, driven by design and technology with agility as the goal, ultimately will allow firms to react more cost-effectively to new regulations and maintain longevity in the marketplace.

So compliance need not just be a cost. Done well, regulatory compliance can unearth synergies within internal teams, improving compliance, and reducing costs due to both reduced penalty fees and cost efficiency. These funds can then be reallocated to other priorities, including innovation. As a plus, because a design-led approach demands collaboration, it lays a foundation for future innovation initiatives.

 

Andy Ross is Avanade UK's Head of Capital Markets,

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