Costs of Compliance for FI's Expected to Double in Next 3 Years

People in the financial industry will tell you that the only department that has grown in their organizations is Compliance. And while that's probably not true (with banks and credit unions becoming more digital, their software development and operations teams have grown), it's obvious that the costs of compliance are rising.

There are a number of reasons why "compliance" is a growing industry.

Rate of Change on the Rise

Some experts believe that financial institutions are having to cope with alerts related to compliance every 7.5 minutes. That's 60 alerts a day. Obviously, some alerts are clarifications about previous alerts, and some alerts are for "information only" purposes, but someone has to go through each of them. At 60 alerts per day, some requiring significant implementation effort, it's impractical that one person can handle the workload. It's likely the work of 3 people.

As the number of alerts continues to increase (it's expected to hit 50,000 alerts/year by 2023), the costs are going to increase.

63% of respondents to the Thomson Reuters Cost of Compliance Survey indicate they expect compliance costs to increase or significantly increase in 2020. READ THE SURVEY

Fines for Non-Compliance

We've only mentioned the staffing and implementation costs associated with the alerts. There are also costs related to non-compliance. Fines are expected to increase as financial institutions and lenders struggle to keep up up with the changing environment.

Since 2009, financial institutions have paid over $345 billion in fines and penalties for non-compliance. While the amount varies from year to year (it's averaged more than $34 billion a year), MEDICI claims 64% of it is being levied against US financial institutions. MEDICI wrote a great article on the topic that you can access HERE.

RegTech can Help

Regulatory Technology will play a pivotal role in how financial institutions deal with compliance in the future.

Mortgage lenders, for example, can use technology to execute their compliance needs directly into their lending process.

Taking a sample of loan files after or just before they've funded will be a thing of the past when they can quality control every file. Finding the right RegTech to start with is as simple as finding the parts of the process that are repeated most often. Things like income verification and obtaining property appraisals will save hours of staff time, not to mention a decrease in files that "slip through the cracks."

RegTech to Reduce Costs

Imagine the following:

• The amount of times that files are manually reviewed decreases by 95%.
• That the number of times the QA process uncovers errors requiring files to be sent back for re-work is reduced by 95%.
• That non-compliance is reduced by 99%

With the right implementation, RegTech can do all three! It also reduces penalties for non-compliance. It's estimated that RegTech can reduce the costs associated with compliance by as much as 75%, making it a worthwhile topic to research for your firm.

Afterthought

The Phoenix Project, by Gene Kim, is a great book for companies trying to get more out of the Development and Operations teams. It's extremely helpful and provides several insights from advances in manufacturing in a way that is easy to understand. One of the most insightful that may get overlooked because it is near the end of the book, is how workplace safety needs to be designed into the process instead of as an afterthought (or separate from production).

Compliance should be thought of in the same way ~ it needs to be built into the lending or banking process.

Constantly auditing completed work isn't productive. Why send an appraisal report back to the appraiser for rework because they didn't build the report to the lender's requirements when those requirements could have been built into the process of developing the report? (As an aside, some mortgage lenders report that they return as many as 70% of reports done for them back to the original appraiser for re-work because the QA process happens after they receive the report.)

The Future is Here, and Puts You in Control

RegTech is a fast growing sector in the tech industry that will benefit financial institutions around the world. You no longer need to rely on a third party to be responsible for completing compliance checks on your "files." You can do it yourself, update your company's policies anytime you want, and have them implemented in real-time instead of relying on someone else (with hefty change costs).

Christopher Bisson, Founder and CEO, is an expert in compliance technology focused on property appraisal compliance and logistics. He can be reached at [email protected] or toll-free 844-383-2473 ;4250.