What is often missing though is a quantified, industry view on how much theses costs are, where in a business they are, and who is bearing them.
At the end of February, Compeer produced one such survey that estimates 10% of total costs in 2010 were spent on compliance. This is a staggering figure and for private banks is the equivalent of nearly half of their profits for the same year.
And these figures can only increase given the raft of EU and FSA-led regulation and legislative changes in the pipeline that include but are not limited to:
- RDR: In 2010 most of the industry was still getting to grips with RDR as a concept given the lack of any detail;
- Ucits IV was only implemented half way through the year;
- Some of the Basel III (banking regulation) transitional processes kicked off at the beginning of 2011;
- Solvency II (capital adequacy requirements) will be looked at by the Economic and Monetary Affairs Committee of the European Parliament later this month;
- FATCA anyone?
One interesting thing that Compeer found was the huge difference between the cost of compliance departments and the true costs of compliance. The latter includes “hidden costs” of the impact on, and work carried out by, senior managers, front office staff, marketing teams and so on that in effect practically double the true costs of compliance to a firm.
These hidden costs have increased hugely year-on-year, up by 32% for senior managers and 50% for front office staff, for instance. To illustrate the point further, over the past five years compliance staff numbers have increased by 2% yet staff costs have grown by 18% – year-on-year a compliance director’s total package has increased by 29% when that of a compliance administrator has grown by just 9%.
The estimate for 2011’s industry-wide costs is £416m, with £211m in direct costs and £205m in hidden costs.
Perhaps the most worrying of all the comments and figures that come out of Compeer’s ‘Effectiveness of UK Financial Regulations’ report is the one that says: “Wealth managers lack information about their own compliance costs”.
Another worrying conclusion is the mismatch between what the industry is doing in terms of all the new regulation being worked on and the view of the impact of the regulation by the people it affects, the customer.
Looking at all this from their side of the fence and it is clear that individual high net worth clients, unsurprisingly, do not seen any benefit to them, with 26% of 300 HNWIs surveyed thinking the recent regulatory changes mean they are being treated more fairly. Nearly 70% of the same group fully expect the increased compliance costs to be passed on to them.
Thankfully, the Treasury Select Committee chairman Andrew Tyrie has all of this on his agenda because if compliance costs continue to rise as they are, the cost to an investor will outweigh any benefits at all.