The Cost of Non-compliance

As the regulatory environment evolves and fines increase, banks cannot afford to de-prioritize compliance management efforts 

Since the financial crisis, compliance costs have increased by over 60% for retail and corporate banks, according to Deloitte, and nine out of 10 compliance executives believe costs will continue to rise.

Meanwhile, the cost of non-compliance has never been higher. As examples, the DOJ recently announced a $31 million redlining settlement with City National Bank – the largest settlement in department history. Last year, Trident Mortgage Company was ordered to pay over $22 million and Lakeland Bank paid $13 million, also both for redlining.

These settlements are a result of the Justice Department’s 2021 Combating Redlining Initiative, which promised increased oversight. But this is only part of regulators’ commitment to increased scrutiny. 

To manage rising compliance expectations, most financial institutions expect the cost of compliance to increase as much as 30% over the next two years, yet only six out of ten expect an increase in operational funding.

Banks nationwide are facing a growing challenge of remaining compliant while evolving in an ever-increasing, cost-pressure environment. Record inflation and ongoing rate hikes are putting enormous pressure on institutions to remain competitive while the cost to operate skyrockets.

Financial institutions looking to cut costs must do so without sacrificing compliance efforts, or else face the potential of severe fines and penalties, not to mention irrevocable damage to their reputation.

Fortunately, there is a solution that won’t break the bank.

Outdated, manual processes must first be removed.

Banks have continued to rely on manual processes and spreadsheets to manage compliance. This is time-consuming, inefficient and prone to errors that open banks up to greater risk – a cost they cannot afford.

Manual processes are also costly. Financial institutions are required to maintain an internal staff dedicated to tracking all laws and regulations. This is an impossible task and one that takes away from higher impact responsibilities that drive revenue.

Finding and retaining in-house compliance experts is also difficult, especially in non-core banking markets. Even if they find the right talent, what happens when an employee leaves? Can that position be easily replaced? Can the bank continue to manage compliance efforts while evaluating candidates?

Banks must apply innovation to stay ahead.

Most compliance executives believe technology can help, but 37% say their companies are not prioritizing compliance technology. In a new study from Cornerstone Advisors, banks are instead prioritizing conversational AI, commercial digital banking, CRM, real-time payments and APIs. As the regulatory environment evolves with more promised changes ahead, banks must invest in technology and automation to stay ahead and avoid costly fines.

Banks can enhance their compliance management efforts by taking manual work done on paper spreadsheets and automating it across the enterprise. As a result, they improve accuracy and efficiency, reduce costs and regulatory risk, and expand coverage.

Automation also allows teams to reallocate time to high-value activities that drive business growth. For financial institutions with leaner teams, automation offers greater support and may help retain compliance staff.

Deloitte recently argued these points, citing that “organizations can tap into the power of AI and machine learning technology to help reduce unnecessary tasks and shift workloads from routine to high-value which could ultimately boost organizational collaboration, free up time for strategic thinking, and drive greater employee engagement.”

Transforming compliance with full-population testing. 

To stay ahead of regulatory change without requiring exorbitant costs, banks must transform how they manage compliance.

Once manual processes are eliminated, banks can fully automate and manage compliance efforts across the enterprise and leverage full-population testing versus sample-based testing.

Compliance teams can quickly and efficiently test entire portfolios in minutes, eliminating any unknowns, ensuring adherence with all requirements, and delivering a fair and equitable experience for all customers. 

Financial institutions also benefit from comprehensive coverage of the entire portfolio and all regulations. With automation and technology, banks can test entire portfolios against all laws and regulations. With thousands of laws and requirements to know, understand and comply with, teams can better manage their compliance efforts with confidence.

Furthermore, banks can increase the frequency of testing. Instead of testing for a regulation every few years, compliance teams can test each month or even daily, ensuring they are always compliant in a constantly evolving environment.

The cost of compliance is high; the cost of non-compliance is higher. As banks look to trim operating expenses, compliance should not be overlooked or sacrificed. They must leverage an innovative automated approach to sustainable compliance management: full-population testing. Otherwise, they risk fines and massive reputational damage.

About Ahuthor:
Rohin Tagra is the Founder & CEO of Azimuth GRC. Rohin has 20+ years of experience in the financial services, banking regulatory, and technology space. Rohin founded Azimuth GRC to develop an innovative approach to a very manual and costly industry. His vision came to life helping businesses demonstrate compliance with laws, increase the accuracy of regulatory exam responses, reducing the cost of preparing for the exam, and automation of regulatory change management. Prior to founding Azimuth GRC, Rohin was a Managing Director at JPMorgan Chase in their Mortgage and Oversight & Controls Divisions. He was responsible for leading many of the regulatory efforts and settlements post the financial crisis. Rohin built out the Risk and Compliance functions at Lender Processing Services (Black Knight). He managed the execution of their Consent Order to closure. Rohin also held executive level positions at Bank of America in Operations and Technology. He led the execution team to integrate the Risk and Compliance functions of Bank of America and Merrill Lynch.

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