Reducing the cost of compliance

Transcript

Tessa Norman: I’m delighted to share findings from a new report from PwC and TheCityUK on reducing the cost of compliance in UK financial services. This report explores what's driving the rising cost of compliance, and looks at how smarter and more proportionate regulation, as well as strategic transformation of the compliance function, can strengthen UK competitiveness and support growth and innovation. The report draws on in-depth interviews and surveys with chief compliance officers across leading financial institutions, and sets out practical recommendations for both regulators and firms to reduce the cost burden of compliance.

As part of our research, we set out to estimate the true cost of compliance and what we found is that end-to-end costs across the three lines of defence are not systematically measured. Typically, firms measure costs relating to the compliance function itself, and that means that true end-to-end costs tend to be significantly underestimated.

We've estimated that these end-to-end costs represent 13% of a firm’s annual operating costs on average, and that equates to a total cost to the industry of £33.9bn. And while some of these costs are clearly essential to maintaining strong oversight and risk management, we believe that there are significant opportunities to reduce that number by streamlining and better targeting the effort of both firms and regulators without compromising standards.

The report sets out a series of recommendations for regulators across three key areas. The first is a more accessible and proportionate framework, so we recommend that the regulators review the rule book systematically, and take a more proportionate approach to certain firm types, such as wholesale firms, and strengthen cost benefit analysis.

The second area is a smarter, more supportive supervisory approach. So we believe that there's opportunity for regulators to reduce burdens and more effectively support innovation by embedding proportionality within day-to-day supervision, by better coordinating data and information requests, and by providing clarity on what it means for firms to be doing the right thing under the FCA’s new supervisory model.

The third and final area as part of our recommendations for regulators, is embracing technology and data analytics. So whilst we recognise that the regulators have made progress in this space, we'd like to see the machine-readable FCA handbook delivered at pace, and steps to support shared utilities such as KYC.

We believe that these changes would build on the initiatives which are already being progressed by government and regulators through initiatives such as the Leeds Reforms package, and the intention is very much for these recommendations to build on that existing progress and momentum.

In the report we also set out how firms can take action, so our recommendations for firms include embracing a holistic approach to optimising compliance costs, which really looks across all lines of defence, and adopting a business case mindset. By that we mean treating compliance transformation as a strategic enabler and not just a cost-cutting exercise. The final example of one of our recommendations for firms is embracing technology and AI. So we set out some clear ways that firms can use tech and AI to drive efficiencies, but also improvements in risk management.

Overall, we think this report comes at a really opportune moment. It's a time when firms are facing rising costs and rapid developments in technology, and when government and regulators are very much focused on delivering the regulators’ secondary objective for competitiveness and growth. Therefore we think there's a really great opportunity for all parties to work together to optimise regulatory compliance, to reduce costs and create opportunities to support innovation and growth. To find out more, you can read the full report by clicking on the link below.