Updated September 9, 2016 to reflect the latest industry news, trends and insights.
When it comes to anti-money laundering (AML) and countering the funding of terrorism (CFT) compliance, banks are facing increasing pressure on two fronts. On one hand, there are regulators that have raised the bar and their expectations when it comes to the measures used by financial institutions to prevent and detect suspicious transactions. On the other hand, there are investors that are ever-mindful about profit margins and their return on investment. Both parties share a common interest in ensuring that banks remain compliant with global AML and CFT laws and regulations. However, they don’t necessarily see eye-to-eye with regards to the best approach for banks to do so.
Without a doubt, the cost of compliance is growing around the world. A Financial Times report revealed some surprising numbers. In 2013, JPMorgan added 4,000 employees to their compliance team and spent an additional $1 billion on controls. Citigroup reported that of the $3.4 billion in costs that they had saved in the past year through greater efficiency, 59 percent of that was then being consumed by new compliance spending. UBS spent nearly $1 billion in 2014 in order to meet regulatory requirements. HSBC grew their compliance department from 2,000 to 5,000 in 2013, and it currently stands at over 7,000.
How has higher compliance spending affected banks’ profits?
KPMG revealed in its recent annual report that the Hong Kong banking sector has been deeply affected by greater regulatory scrutiny. A significant finding in this report is that although assets have grown by 8 percent for the banks surveyed, their profitability has dropped by 20 percent compared to 2013.
“Regulations – and the continued intensity of regulation – continue to loom over banks, with a potential need for investment to be directed towards regulatory rather than growth projects,” said Paul McSheaffrey, Partner, Head of Hong Kong Banking, KPMG China.
A recent survey released by the American Bankers Association found that small banks in the U.S. have been deeply impacted as a result of tougher measures such as Dodd-Frank. As a result, more than 46 percent of American small banks surveyed said that due to regulatory compliance burdens, they had to reduce their product offerings, including loan and deposit accounts. The survey also found that customer service had suffered because of higher compliance costs, as community banks struggle to comply with fewer staff and much smaller budgets.
Bain & Co. in a September 2016 RegTech article, state "We estimate that governance, risk and compliance ([tweet_dis excerpt="(GRC) costs account for 15% to 20% of the total run the bank cost base of most major banks. — @BainAlerts"]GRC) costs account for 15% to 20% of the total "run the bank" cost base of most major banks[/tweet_dis]."
Finding greater efficiency with compliance spending
With global banks being hit with multi-billion dollar fines in recent years, there has certainly been a lot of pressure from regulators for greater spending on compliance. Some believe that the surge in demand for bank compliance officers is a hasty, reactionary response as financial institutions scramble to quickly fill a huge gap in knowledge, expertise, and manpower.
“It can be a bit chaotic and certainly there is a bit of inefficiency in this,” a bank compliance consultant told the Financial Times. “That’s an inevitable consequence of the fact they have had to sort this stuff quickly.”
As banks find themselves caught in the middle between regulators that expect them to apply wisdom and focus on the quality of compliance expenditures and cautious investors that raise concerns about controlling costs, how can they strike the right balance? There is a growing need to look at optimizing compliance spending by finding greater efficiencies. One example that the Financial Times gives is that of a large U.S. investment bank that had initially used unskilled staff to screen 200 messages per day and then discovered that skilled people could process 1,000 per day without costing five times more.
There are other ways to find cost savings as well. By automating manual processes, such as know your customer (KYC) due diligence, financial institutions of any size can be both more efficient and cost-effective at the same time.
“In an industry where regulatory enforcement has become a big concern, banks have to find innovative ways to get more value for their money,” said Jon Jones, President of Trulioo. “Chief compliance officers need cost-effective advanced solutions that enable them to keep up with the demands of continually evolving AML and KYC requirements around the world.”
Learn More: AML Automation
The best way to mitigate risk is to detect and manage problematic accounts before they become a risk. Performing a comprehensive identity verification check reduces risk from fraud, risk of breaking compliance rules, and risk from dealing with dirty money. Once a bad customer passes the initial checks, they are past the gate and can start testing your fraud prevention systems.
Watchlist checking should be accessible during the onboarding of new customers and in batch to examine an FI’s existing client base. Collecting, normalizing and validating data needs to be part of the process to ensure the screening runs smoothly and accurately. Data enrichment also enables the highest level of AML compliance.
To improve the efficiency and effectiveness of KYC processes, reference data utilities are gaining in popularity as a means of providing a centralized repository to streamline due diligence checks. RegTech solutions that leverage different forms of online identity verification, where personally identifiable information (PII) is not stored in a single storage location but rather queried from the original data source only as needed.