Financial services firms braced for spiralling compliance costs

A survey of asset managers, brokers and banks from Duff & Phelps finds that 89% believe that regulations are increasing costs and most believe that compliance spend could more than double in five years.

The professional services firm canvassed opinion from 183 senior financial services executives, compliance professionals and investment managers operating in the US, Europe and Asia. The responses show that firms typically spend 4% of their total revenue on compliance, but many expect that this could rise to 10% of revenue by 2022.

Despite this, firms are struggling to properly resource and comply with today’s financial regulation. For example, only 36% of firms subject to Europe’s new Markets in Financial Instruments Directive (MiFID II) are confident that they are on track to comply with the regulation by the introduction date of 3 January 2018.

In addition, with new regulation increasing levels of personal accountability for compliance staff across the globe, the way compliance departments allocate their budget has changed. They are now not just counting for the costs of implementing financial regulation, but for the costs of hiring a replacement compliance officer or interim staff; for regulatory penalties and remediation in cases of failure; and for their own personal liability if things go wrong.

With financial regulation continuing to mount and the need for tighter cybersecurity rising on the agenda, firms are reassessing how to effectively allocate their resources to comply with financial regulation over the next five years. In a previous survey, the firm found that 86% of financial services firms said they intend to increase the time and resources they spend on cybersecurity next year in anticipation of incoming regulation.

“The way that financial services firms allocate compliance budgets is changing,” commented Julian Korek, global head of compliance and regulatory consulting at Duff & Phelps. “The pendulum is clearly swinging away from spending simply on financial regulation and moving towards the fight against cybercrime.

“Skyrocketing costs mean that firms have had to decide which regulations to prioritise, meaning that some will miss the already extended MiFID II deadline. More guidance is needed from the regulator about how firms should allocate their time and money when complying with regulation, especially as the cost of Brexit, changes in US policy and cybercrime continue to emerge.”

The survey was conducted in conjuncture with Duff & Phelps’ fifth annual Global Regulatory Outlook report and respondents were contacted in Q1 2017.

 

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