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28 January 2020

Third of banks spending more than five per cent of revenue on compliance, report finds

One in five respondents in global survey of financial services executives identify compliance costs as number one concern

By Dr David Cowan

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A global survey of financial services executives has highlighted the growing costs of compliance, with 20% identifying it as their number one concern and a third spending more than 5% of their revenue on it. The poll of 245 senior executives by consultants Duff & Phelps, which also identified a surge in New York's popularity as a global financial centre at London's expense, reveals that financial institutions are fighting a losing battle to keep compliance costs down.

Just 6% of the respondents who took part in the annual Global Regulatory Outlook Survey said they expected to spend less than 1% of their 2020 revenue on compliance, compared to 21% who took the same view in the 2018 survey. A third of the respondents in this year’s survey said they would be spending more than 5% of their revenue on compliance. 

There was nevertheless an acceptance among the respondents that much of the regulation was ‘necessary, if unpleasant’, according to the report. ‘Investors demand tough regulatory regimes and, for the most part, prefer those jurisdictions that provide them,’ it argues.

Competition

But the report warns that the regulatory burden was dampening competition given the costs of compliance for smaller institutions. 

‘The decline of small community banks and closure of thousands of branches in the decade following the last financial crisis is perhaps the most visible manifestation of this already taking place,’ it argues.

The report also highlights scepticism over whether the regulations are actually working, with one in five respondents describing them as ineffective as a means of stamping out financial crime. 

When the respondents were asked what regulations they would like to see scrapped, ‘the answers covered practically every major regulation introduced in the past decade’, the report reveals.

GDPR

These included the EU’s GDPR regime, which came into force last year, and is estimated to have cost UK banks an average of £66m to comply with. One respondent complained that GDPR made it harder for banks to identify fraud and money laundering.

‘EU legislators and data privacy regulators have not always proved as understanding of the sector’s particular needs,’ says the report.

However, it says that the wave of regulatory reform after the financial crisis had now ‘slowed to a trickle’ with legislators now taking an opportunity to look to the challenges of the future, not just past mistakes.

It notes that regulators such as the UK’s Financial Conduct Authority are keen 'to strike a balance between protecting consumers and encouraging innovation'.

New York surges

Meanwhile, more than half (56%) the respondents said they considered New York to be the world’s preeminent financial sector, against just a third (34%) opting for the London, representing a sharp decline in London's popularity from 53% last year. The respondents did, however, put London ahead of New York in terms of the favourability of its regulatory regime.

“It is difficult to avoid the suspicion that three years of uncertainty since the Brexit vote has contributed to London’s fall,” said Monique Melis, managing director at Duff & Phelps. 

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