Combatting the Rising Cost of Regulatory Change
The cost of regulatory change within the financial sector has increased massively in the past decade. In addition to huge fines hitting the sector for non-compliance, the cost of merely implementing and maintaining the more far-reaching regulations can run to millions.
Broadly speaking, these costs can be broken down into three distinct, but somewhat overlapping, areas:
- Cost of Implementation: this is the cost of the work and effort required to adapt BAU processes and reporting structure to implement the new regulation. Some banks estimate that up to 10-15 percent of their total workforce is now dedicated to governance, risk management and compliance. In addition, the increasing complexity and granularity of the regulations means the finance sector is looking for legal advice; law firms and consultancies advising banks cost the banking sector over $200 billion a year.
- Costs Imposed by the Regulation Itself: this differs from regulation to regulation. Some, such as Basel III, affect how much capital is available for investment, thus reducing an institution’s earning ability. Others, such as know your customer, require brand new practices and operations that increase the operating costs of the organisation. This is not insignificant; according to one Thomas Reuters survey, the average cost to meet KYC regulations is about $60 million.
- Cost of Maintaining Existing Regulations: key to this point is the enormous effort involved in proving and demonstrating compliance to the regulator. It should be noted that failure to demonstrate compliance is just as costly – in terms of penalty fines – as non-compliance itself. The penalty fines hitting the market in recent times are huge: McKinsey found that regulatory fines and settlements across 20 large U.S. and EU banks has increased by 45 times in only four years (between 2010 and 2014).
Although the motive for introducing new regulations is long-term financial stability for the greater good, the reality is that financial organisations are forced into putting a great deal of money into simply running their organisations, leaving less capital available for investment, growth or innovation.
Can These Costs be Reduced?
The costs imposed by the regulation itself is a given, albeit within the scope of company-specific interpretation. There might be general operational efficiency improvements that can be made to lessen the effect, but in the main, these costs are set. This means that the bulk of cost reduction needs to be found within implementation, maintenance and providing proof of compliance.
Sapiens DECISION clients have significantly reduced these ‘housekeeping’ costs around implementing and maintaining regulatory change by us helping them to:
Achieve compliance and provide evidence to the regulator with less resources, less rework and less time.
Sapiens DECISION is a system-level framework and methodology that takes the concept of the logic you’d like to implement, facilitates the testing against rigorous principles and business need, then translates that into actual code within your systems. Put simply, it enables you to put into practice the level of compliance that you need to achieve in your organisation. And, as the framework provides auditable code, written into your operational systems, you have a permanent record of compliance, plus a historic snapshot of why the decisions you made were the best at the time.
Reduce the effort and cost involved in implementation.
By adopting the Sapiens DECISION methodology and application as early as possible in a regulatory change project, you can significantly reduce the time – and therefore cost – of implementation. The DECISION framework enables a critical impact assessment of the effect of the ongoing regulations across your business. This helps you determine whether changes need to be made at a business level before you hand over to IT. Once you do hand over to IT, it’s much more likely that you’ll meet the deadline and be compliant during UAT.
Clients who have implemented DECISION have found the time involved in regulatory change projects has been reduced by up to 70 percent, resource requirements have reduced by around 70 percent and typical cost savings have been as high as 80 percent.
To discover how we can help you, contact us now.Share this blog post