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Beware the cost of compliance: Survey reveals frightening rise in 2020 compliance costs

2020 has seen a frightening rise in the cost of compliance, according to LexisNexis’s ‘True Cost of Financial Crime Compliance’ Survey.

The Survey, which focuses on the US and Canada, has revealed costs to have increased by a nail-biting 33% over the year.  With Halloween just around the corner, CUBE extracts the scariest elements of the Survey.

A Frightening Rise in Compliance Costs

In 2019, the combined cost of compliance for US and Canadian financial institutions (FIs) was an estimated $31.5bn. Fast forward to 2020 and the cost has risen sharply to $42bn, a spooky 33% increase. Broken down by region, this amounts to:

Country Cost of Compliance by Year
2019 2020
Canada $5.1 billion $6.8 billion
US $26.4 billion $35.2 billion

It’s no secret that 2020 has been a challenging year for all. In many ways, it is unsurprising that the cost of remaining compliant has soared. Of the 150 respondents, 24% attributed their increased costs to Covid-19. Broken down, these costs went chiefly towards the cost of labour. However, while a small number of compliance teams expanded in size, taking on more staff to cope with the challenges of the pandemic, the majority of these labour costs were attributed to extra hours taken for heightened due diligence and Know Your Customer (KYC) procedures, as well as alerts resolution.

When the pandemic first hit, there were horror stories of employees working from home without laptops, phones or the equipment needed to fulfil their roles. We even heard of traders making calls on landlines, recording them on their mobiles due to issues with signal. What appeared to simply be ‘scary stories’ at the time are potentially evidenced in the Survey’s findings.

Many respondents noted that, as well as increased labour costs – a significant proportion of budget went towards the cost of unexpectedly setting up remote networking and technology systems. Of course, all of this was in addition to existing regulatory pressures, including increased scrutiny and expectation from regulators in both Canada and the US.

Skeletons in the Closet?

The increased costs presented by the challenges of 2020 are only just becoming apparent. As the Survey is keen to note, the pandemic is still ongoing – as is a potential political shift in the US – it is therefore too early to assess what the true cost of 2020 will be on financial services.

Interestingly, the cost of 2020 is not only a monetary one – there has also been a cost to efficiency, processes and working hours. More than 50% of US and Canadian firms said that their financial crime compliance challenges had negatively impacted their productivity across 2020.

The majority of respondents, (60%) said that the ability to assess customer risk and KYC for account onboarding has been negatively impacted by Covid-19. Of course, identification checks, face-to-face meetings and many other standard due diligence procedures were foregone in a bid to quell the virus. We can only hope that organisations will have put procedures in place to mitigate and manage the situation – but it’ll remain to be seen whether banks onboarded clients with unseen skeletons in their closet.

On a positive note, however, 52% of respondents said they faced minimal or no impact on their resource efficiencies across 2020.

Technology – Trick or Treat?

Despite the frightening results of the Survey, the findings aren’t all ghoulish – especially where technology is concerned. The Survey found that larger US and Canadian FIs, that committed more than 50% of their compliance budget to technology, have experienced less severe impacts to compliance operations and costs during 2020.

There are lessons to be learned here, companies that are investing heavily in smart compliance technology are better equipped to manage instances of business or economic disruption. This will likely come as no surprise to many, computers are predictable resources that are not affected by external events – be they political, financial or caused by a pandemic. Moreover, computers reduce the chance of human error in processes that are easily automated.

The Future

Looking to the future, it is becoming clear that the perfect compliance system is a modern-day “Frankenstein’s Monster”. A beast which sees human and machine work in tandem, with computers carrying out labour-intensive tasks, while humans commit valuable time and resource to implement rules and regulations and ensuring watertight compliance.

Find out how CUBE is the future of compliance