Compliance Costs Continue to Rise - Expected to Double

Thomson Reuters' "Cost of Compliance 2018" white paper is useful because it gives the reader a true sense of what banks, credit unions, and other financial institutions are up against. Specifically, it calls out the challenges they face related to regulatory compliance.

"I don't believe most people working at financial institutions are aware that there's a new regulatory alert/change every seven minutes" ~ Christopher Bisson, CEO, Value Connect USA, Inc.

Regulatory Changes on the Rise

Some reports predict that changes related to regulatory compliance are expected to almost double by 2022. It's like Moore's Law, but for regulations. Moore's Law was observed by Gordon Moore (one of the Founders of Intel), that the number of transistors per square inch on an integrated circuit board would double every year.

Recent reports by International Banker, Deloitte and others, estimate the costs of compliance to range anywhere from $270 to $500 billion per year before factoring in penalties and other costs. These are direct costs that typically account for upwards of 10% of all costs to "run the bank."

More compelling that something has to be done top curtail this trend is the expectation that costs associated with compliance are expected to rise in the coming five years. Some analysts predict that they'll double in a short time period unless regulatory changes diminish significantly or new technology makes it easier to cope.

The Other Costs of Compliance

Besides the above mentioned direct costs that banks face, there's the indirect costs that get lost in the calculations. Things like the effects on other teams in the organization, such as sales, spend more time time to get the same tasks done. In the property appraisal space, for example, lenders and their related staff (sales, credit, QA, etc.) spend an average of 35% more time on each file. And whether that means less revenue or higher "adjacent" costs, it chews into profits.

The other costs are costs born by the end customer. Property appraisals often cost more, because there are 3rd party providers who are supposed to ensure a separation between "sales" and the appraiser. These appraisal management companies have to make money too, so they strong-arm appraisers to take less fees and add their fee to come up with a cost to the borrower, which is often higher than the original fee that the appraiser would have charged had the lender ordered the report directly from them.

Integration is Key

The only way to eliminate "adjacent" costs of compliance is to embed the compliance and risk rules into the systems that users interact with on a daily basis. There are several examples of how to accomplish this, enabling automated quality control and eliminating friction in the system. One example is to embed a mortgage lender's property and appraisal risk rules (terms of reference) right into the software that appraisers use to build the report. And take this a step further - integrate every part of the lender process (all systems) with one another to eliminate duplicate entry and associated keying errors.

Better Times Ahead?

Eventually there will be a slowing of regulatory changes. Coupled with an increased adoption of new technologies that integrate compliance across "systems" to eliminate manual (wasted and inefficient) effort, it's likely that the cost of compliance will flatten in 2025. It's important that companies proactively seek out ways to integrate systems and embed compliance right into the software used by their teams. Taking several of the repetitive, manual steps out of the process will yield the best results in the short-term.

Christopher Bisson is an expert in mortgage lending and appraisal reporting. He can be reached at [email protected] or toll-free at 844-383-2473 ;4250.