What Is Compliance Cost?

The term “compliance cost” refers to all of the expenses incurred by a company in order to comply with industry regulations. Compliance costs include salaries for compliance personnel, time and money spent on reporting, new systems required to meet retention requirements, and so on.


The repercussions to the cost of non-compliance

Data collected on global financial institutions show that the anti-money laundering (AML) bank fines in the first half of the year 2022 account up to USD$224 million. According to Kyckr, the fine was contributed by the failure and breach of AML compliance. This unnecessary loss of money could have been put to better use in training new compliance officers. 


Uncovering the cost(s) of compliance 

The total cost of compliance in Asia Pacific is projected to be $50 billion in 2022, the highest figure in market history. The primary reason for this is heightened AML regulations, particularly criminal regulations. Banks make up the lion’s share in the APAC region, accounting for $41 billion, followed by investment and insurance firms. Of the thousands of financial institutes in the region, China ($22 billion) and Japan ($18 billion) contributed the most to the cost in Asia Pacific.

Annual financial crime compliance costs per organisation averages to $11.3 million. The difference between small and large organisations is significant, with small organisations budgeting $2.6 million, and large organisations budgeting $18 million.

Increasing geopolitical risks, increasing AML regulations and regulatory expectations, and evolving criminal threats, are some of the top drivers driving up compliance costs. Employee salaries and training costs account for approximately 50% of total costs, with technology costs accounting for 41%.


What are the challenges faced by companies regarding compliance?

According to Thomson Reuters Regulatory Intelligence, a cost of compliance report was carried out recently. The report focuses on the challenges that risk and compliance functions at financial service firms can expect to face in 2022. 

One of the challenges that businesses face is a lack of talent and manpower in the workforce. According to Thomson Reuters, compliance officers are dealing with a shrinking budget, and a scarcity of skilled professionals.

The volume and breadth of regulation has grown, as has the stacking of new technologies, products, and solutions. This means that the layering of new investment strategies, products, and asset classes will increase, requiring compliance teams to monitor even more data sources in the future. As firms consider digital assets and crypto, for example, teams will need to collect data from more sources (venues, counterparties), normalise that information, and create a single source of ‘truth’. All of this complicates the setup, integration, and maintenance of the surveillance data inputs.

Most jurisdictions have similar requirements for KYB measures. However, getting these done correctly – and in full compliance with all applicable laws – can put a significant strain on businesses’ resources. Outsourcing to third parties may help companies to reduce time and cost on meeting compliance requirements. They can then instead, focus on what is important to their core business. However, choosing a third party that is compatible and suitable may not be easy and should be considered seriously. 


The Future of Cost(s) of Compliance:

Compliance is expected to be fully integrated throughout the organisation in the future. Furthermore, organisations should place a greater emphasis on talents and experience, as increasing automation of compliance operations will continue to be a top priority in 2023. Financial services firms and their compliance operations are embracing digital transformation and moving toward a more automated environment. The shift in time spent watching regulatory developments – a crucial area where regtech solutions might be deployed – is an indication that regulatory technology may be coming into its own.