COST OF COMPLIANCE IBS Journal January 2018 17
Three imperatives to manage the cost of compliance
The cost of compliance can prove to be prohibitive unless managed pro-actively, and efficiently. What are the imperatives for a bank to watch out for?
V. Ramkumar
Senior Partner, Cedar Management Consulting International LLC
T
he top 20 global banks have reportedly paid more than €211 billion in fines, while there have been at least 40 new measures that were proposed by the European
Commission since the 2008 crisis. Now, that is a number the banks need to sit up and note. Either the regulations are likely to come down, or the need to comply will become more compelling. And the tight-rope walk of managing shareholder expectations while being fully compliant with changing regulatory norms can be quite an ask. More importantly, the emerging competition for banks from market forces, is not necessarily constrained by the same regulatory compliance costs.
General Data Protection Regulation (GDPR), EU-US Privacy shield, Anti-money laundering directive (AMLD), Comprehensive Capital Analysis and Review (CCAR), FATCA, Dodd-Frank, Basel III, OFSI, International Financial Reporting Standards (IFRS) – the list of regulatory guidelines that need active monitoring and compliance has been on the rise. Banks increasingly need to watch for both the effectiveness and the efficiency of the resources deployed for compliance management. It is a delicate balance between minimising violations and fines on the one hand, versus reducing the cost associated, and the potential business opportunity loss. The cost of compliance – be it in terms of technology or people resources, or the sheer investment of time and effort – can be quite steep, if one considers the capital investments required and the costs associated with it. Here are three key imperatives that would be critical for banks to be increasingly sensitive to, as we move ahead.
Imperative #1. Embed compliance into the process framework
The most significant cost that is incurred by banks, besides fines
which may be quite hefty, is not in the investments of technology or data management, but in the staffing of the compliance function focused on audit validation and reporting. More successful banks have found a way to minimise this by integrating compliance and risk management as an integral part of the operating model.
When compliance is seen as an independent function, narrowly focused on a centralized set of risk reporting activities, without directly being engaged with the channels or customer, and focused on a select few areas of high impact, the entire framework tends to get siloed and seen as someone else’s responsibility. And that is a recipe for a massive duplication of effort and resultant compliance costs. The trick here is to embed the compliance requirements as a part of the business-as-usual (BAU) norms of the process, then make it an extra activity that’s outside the routine. This is not about just having a few checklists in every process, but ensuring that the risk and compliance consciousness is part and parcel of the operating and delivery model. This is quite akin to the health-conscious making a visit to the gym a habit - a part of the daily schedule.
Imperative #2. Manage, harness and leverage data
An industry estimate pegs the number of pages of regulation that global banks need to comply in 2020 at a whopping 120,000 pages. Now if we think about it, the single biggest factor that can make or break the ability to comply with any regulation is being able to record, retrieve and review data – be it that of the customer or the transaction. Non-standard data architecture and sub-optimal use of reporting applications results in reporting challenges. The granularity of the data and the ability to
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