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Cost of Compliance Expected to Hit $181bn

Complex regulations and required manpower are pushing costs higher, but fraud attempts are rising

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Cost of Compliance Expected to Hit $181bn

Global financial services companies will pay $180.9 billion in compliance costs this year, according to a new report from LexisNexis Risk Solutions.

Completing processes such as sanctions monitoring, ‘know your customer’ remediation, anti-money laundering measures, and transaction monitoring are among the costliest elements of compliance, the report found. Worldwide, costs have increased by 7% annually in the past two years.

The US and Europe face the highest compliance bills, the research found. This was driven in part by the larger number of financial institutions in these two regions – more than 6,000 in the US, for example.

Average annual financial crime compliance costs were the highest for mid- and large-sized financial institutions in the UK, Germany, France, Italy  and  the Netherlands.

The European Union has implemented a string of new regulatory measures for banks since the global financial crisis. Due diligence in particular was a high area of spend for European firms, the report found, as companies have more regulations to navigate to bring new clients on board.

However, while the volume and complexity of regulations was a factor in compliance costs, LexisNexis reported that the largest driver of higher costs was the level of skilled labor required.

The global average split of compliance costs, according to the research, was 57% for labor costs and 40% technology, with 3% assigned to “other” factors.

The rising cost of financial compliance and other associated challenges can affect productivity and staff retention, according to the LexisNexis report, due to the amount of time and effort required to meet all requirements.

In addition, the report found that “compliance teams are stressed to a degree where managers worry about retaining skilled professionals – 67% of compliance decision-makers are concerned with job satisfaction within their workforce”.

Daniel Wager, vice president of global financial crime compliance strategy for LexisNexis Risk Solutions, urged financial institutions to invest more in technology to relieve the pressure on compliance teams.

“As criminals become more sophisticated, a multi-layered solution approach to financial crime compliance is crucial to facilitating a more cost-effective, efficient compliance approach, as well as one that provides benefit to the larger organization,” he said.

“Financial institutions should investigate both the physical and digital identity attributes of their customers, leveraging data analytics to assess risks and behaviors in real time.”

Using technology to strengthen compliance teams can also reduce labor costs, with a positive knock-on effect on profitability, Wager added.

Fraud attempts on the rise

Meanwhile, separate studies have indicated that fraud attempts targeting financial services companies are increasing.

The Association for Financial Professionals (AFP) reported that 81% of companies it surveyed said they had been targeted by attempted or actual payments fraud attacks during 2019. This marked the second-highest figure in a decade, the AFP said.

Of the companies affected, 61% said the source of the attack was “business email compromise” (BEC).

“Payments fraud and business email compromise in particular have been thorns in financial professionals’ sides for years, but this recent surge is especially concerning,” said  Jim Kaitz, president and CEO of AFP. “Organizations can better contain BEC scams by educating and training their employees, as well as adopting processes to validate payment requests internally.”

In addition, merchants are experiencing “dramatic increases” in phishing activity related to the COVID-19 coronavirus pandemic, according to a study by payments firm ACI Worldwide.

The company’s report into payments activity in March as the pandemic took hold in the US found that the average value of attempted fraudulent purchases increased by $36, or 13%.

“Fraudulent attempts are on the rise, and consumers must be vigilant as fraudsters are using the current situation to obtain and use their financial data and information,” said ACI Worldwide’s executive vice president Debbie Guerra.

ACI Worldwide urged merchants to “maintain security and deliver a great customer experience” in order to keep pace with the changing behaviors of consumers, “both genuine and fraudulent”.

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