The Cost of Regulatory Compliance: current trends and challenges 

Regulatory compliance is a vital part of business operations, especially in financial services. However, as the regulatory environment changes along with regulatory frameworks and economic conditions, the cost of compliance continues to rise. A recent Deloitte report reveals that compliance expenses for retail and corporate banks have surged by over 60%.

The increasing burden of regulatory compliance

The volume of regulatory changes is expected to increase, adding pressure on compliance teams to stay updated and adapt quickly. In 2022, there were 61,228 regulatory events monitored, the third highest since 2008, a testament to the escalating regulatory demands on compliance teams. 

Regulatory compliance resource constraints impact 

Limited resources and hiring skilled compliance professionals remain major challenges. Moreover, budget constraints often prevent firms from expanding compliance teams, despite growing demand.

Outsourcing certain compliance functions to specialised providers presents a practical and effective solution for many firms. These providers bring not only deep expertise but also access to advanced technologies designed to improve compliance processes. Furthermore, outsourcing allows firms to allocate more resources and attention to their core business activities, which can drive growth and innovation. Over time, this strategy helps streamline complex processes, ensure regulatory requirements are met more effectively, and achieve better overall compliance outcomes.

Regional perspectives on compliance costs 

If we look at just the cost of financial crime compliance, as part of regulatory compliance, figures have been reported in one study as: 

• EMEA $85 billion.
• North America $61 billion
• APAC $45 billion.
• Latin America: $15 billion

Regulatory compliance costs by firm type 

Data on costs is available in a study conducted by EU on the cost of compliance by firm or institution type. 

Major cost drivers of compliance costs 

• One study found that salary costs are a major cost driver with about three quarters of respondents noting increases. 
• Increasing volume and complexity of regulations 
• Digital transformation – while digital banking offers growth opportunities, it also exposes institutions to higher risks of financial crimes, particularly through digital payments and cryptocurrencies. 
• Customer expectations are rising, embracing open banking with a seamless customer experience – compliance processes can hinder customer satisfaction and retention demanding more efficient compliance within banking institutions. 

Embracing advanced technologies including regulatory technology – RegTech 

Adopting solutions, including those with AI (artificial intelligence) and ML (machine learning) technologies, can help financial institutions stay ahead of evolving financial crimes. These technologies enable real-time monitoring and more accurate risk assessments, essential for effective compliance management. 

Third party providers of advanced technology solutions such as Corlytics regulatory risk platform, can help firms remain regulatory compliant and reduce regulatory risk. 

What next for compliance costs? 

The cost of regulatory compliance is a constant and evolving challenge for financial institutions. To tackle this, firms must identify the main cost drivers. Then, they can adopt practical strategies to manage expenses effectively. Investing in innovative regulatory technology is a key step. It boosts efficiency and helps with being compliance with regulations. Firms should also optimise resources to make processes more streamlined. At the same time, they must focus on delivering a smooth customer experience. This focus should not compromise AML, KYC, or other compliance requirements. By taking these steps, firms can better manage compliance and control costs.