The rising cost of non-compliance

Enforcement fines are on the rise, especially within AML. We explore the cost of compliance and consider global trends over the past 15 years.

Our recent report, in collaboration with Burnmark – RegTech for Regulatory Change – explored how RegTech and Regulatory Intelligence is transforming the face of financial services and enabling efficient, effective compliance by automating regulatory compliance.

In Chapter 5 of the report, we explore the cost of compliance and consider global trends over the past 15 years. It comes as no surprise that the cumulative number of fines paid by global financial institutions rose from $0.1bn in 2001 to $30bn in 2010. During that time period, the global financial crash took hold and, in 2010, regulators were beginning to get to grips with the idea of implementing genuine and effective compliance processes.

Fast forward five years and, between 2010 and 2015, global fines rose astronomically by £249bn. Enforcement action following the global fallout was inescapable – financial regulators tightened their grip in an attempt to ensure that pre-2008 mistakes would not be repeated. In 2018, global fines stood at $330bn and continue to rise.

AML – a recurring challenge

One area of recurring misconduct is anti-money laundering (AML), which often amasses large fines year on year. In April 2019, AML fines stood at $6.4bn in Europe alone, with the UK accounting for $1.2bn. Surprisingly, the US fell behind with fines of $45.6mn.

A recent report by Duff & Phelps noted that Europe appears to be making significant gains on the US in terms of fines issued by financial regulators. In 2018, for instance, the US issued $1,909m in AML fines (58% of global fines). In 2019, the US issued $199.09m, which only amounted to 45% of the market share. Countries such as the UK are beginning to catch up ($127.94m issued in 2019).

Why do fines continue to rise?

It has now been 12 years since the global crash and, while historical remedial action will now have been taken, fines continue to rise.

Is it that the regulators are stricter and less forgiving of regulatory failings? Is it that financial institutions continue to flout the rules? Most likely, it is a combination of both.

Another theory is that current financial institutions simply aren’t equipped with the practical tools to manage the constant evolution of regulatory obligations. The financial landscape is digitising – regulations are quickly moving to capture and monitor new, digital platforms – but often financial instructions are unable to move quickly enough to catch up, let alone stay ahead.

The solution – or at least a solution – a RegTech platform that will automate regulatory compliance at scale.