Cost of Non-Compliance

Stacey English & Susannah Hammond recently published a paper in which they wrote (and it bears repeating as they are so right):

The costs and consequences of non-compliance within financial services firms are greater than ever before. The cost for firms of endeavoring to be compliant has been growing in line with the rapid rate of regulatory change but it is the widespread and myriad costs of failing to be compliant which are now taking center stage. Regulators have lost patience and in a world where super-size fines no longer either shock or deter have moved on to using a wider range of measures to ensure compliant behavior. The wider impact can result in the firm or the individual suffering multiples of the cost and pain of the penalty itself. The ramifications of which will be felt by all stakeholders.

• Monetary fines, while huge and still growing, can be the least of the “costs” imposed on a firm or individual. Financial implications are much wider than the actual fine levied. They can include the end of a business line, the curtailment of the ability to sell specific products or ultimately the end of the business itself. Regulatory action can have a negative impact on the share price of a firm and damage its relationship with investors. Additional regulatory powers could also now result in firms being required to increase liquidity or capital, putting them at a disadvantage to their more compliant peers.

• Senior managers are in the regulatory firing line. As a deliberate international regulatory approach senior managers are increasingly being held to account for their own behavior, with the potential for claw-backs on bonuses and a career-ending criminal conviction. All of which is in addition to being significantly distracted by having to spend increasing amounts of time on remedial actions rather than focusing on the business itself.

• Expensive and disruptive operational consequences of non-compliance include the increased cost of recruiting and retaining high-quality compliance resources and implementing past business reviews and customer redress programs through to needing to engage and use costly third parties or skilled persons.

• Increased regulatory scrutiny, complexity, regulatory change and customer distrust are set to continue as a result of the widespread compliance failures.

• Action needs to be taken at the most senior levels not only to be compliant but also to avoid the growing costs of noncompliance.