Cost of Compliance 2019 — Laying the Groundwork for RegTech Innovations

It’s been 10 years since Thomson Reuters Regulatory Intelligence published its first Cost of Compliance report. Thus, the conclusions of the Cost of Compliance 2019 are not surprising to those who have been paying attention: the costs and complexity of compliance continue to increase.

While the broad strokes may seem apparent, the true value of the report comes from the details that point to better solutions. Ten years have seen many developments in regulations, but arguably more changes have occurred on the technology side. The concept of RegTech did not even exist 10 years ago, and by 2020 it will make up 34 percent — $76 billion — of all regulatory spending.

While early proponents of RegTech thought it would immediately lead to decreased spending, costs continue to rise. Part of the issue is the expansion of regulatory requirements; there are now an average of 220 regulatory alerts per day, which is up from 201 in 2016. The firms surveyed for the report expect no slowdown, with 71 percent anticipating an increase of regulatory information published by regulators and exchanges.

Successfully implementing RegTech is usually more than a simple one-time integration. It requires strategic planning, process changes and ongoing optimization of new procedures to deliver the full potential. As the report writers state, “the successful deployment of technology and the ability to automate future compliance activities is seen as one of the greatest potential innovations for the next 10 years in compliance.” The RegTech implementations of today are laying the groundwork for a future of automated, scalable, adaptable compliance that enables smoother, more efficient operations and more value-added services.

Making sense of data

Effective reporting, wherein operational insights are delivered to senior staff and the board, is crucial to enable proper oversight and performance of fiduciary duties. Reporting is also at the heart of the relationship with regulators. Thus, the costs of reporting are a substantial piece of the overall cost of compliance, and gains here will provide cost benefits as well as improve insights and, ultimately, confidence in the overall regime.

One potential RegTech solution, Digital Regulatory Reporting (DRR), calls for regulatory rules to be made machine readable, allowing automated access to a firm’s database to collect reports. A report by the UK’s Financial Conduct Authority (FCA) regarding the concept found that “the cost of interpreting and removing ambiguity from regulatory rules and the collation of relevant data, were the most commonly referenced costs associated with the current reporting regime.” The use of multiple systems, which often require updating for new regulatory rules, is a major contributor to reporting complexity. Another significant factor is lack of clarity in the information requests, which leads to misreporting and subsequent fines.

While DRR is only at the trial stage, the FCA states that it “has the potential to fundamentally transform how the industry understands, interprets and then reports regulatory information.”

Increasing budgets

While compliance budgets are increasing, the days of mass hiring of personnel to perform manual checks seems over. While 38 percent of companies report that their compliance team will grow, a majority (59 percent) believe that their team size will remain the same.

What is changing, though, are the roles and responsibilities of the teams. As the field becomes technology based and complex, there’s increasing demand for compliance staff with deep understanding of technology and data science, as well as senior staff who have in-depth knowledge of financial services. The adequacy and availability of these skilled resources is at a premium, making finding the right staff a challenge.

Looking forward, the rapid advancement of technology promises to require even more skilled and knowledgeable staff. As one respondent stated when asked about the biggest change for compliance in the next 10 years, “changing skillsets and profile of compliance officers (fintech/Big data, cybersecurity, data protection and other emerging risks to cope with) while being replaced by robotic-advisory and AI for compliance monitoring.”

To improve the ability to hire and retain the necessary talent, firms are starting to recognize the value in enhancing the role that compliance has. Their technical savvy and ability to deal with complexity, uncertainty and large amounts of data will help them perform well in this age of digital operations.

Compliance is now getting a seat at the table, as evidenced by more senior positions within firms. This is, perhaps, the biggest change in compliance over the last 10 years and something that can drive progress. Coming from a perspective that can manage risk, implement technology and create an ethical culture, compliance can help create better organizations and, as a result, a better world.