By Steve Elliot, Managing Director at LexisNexis® Risk Solutions for the UK and Ireland
At LexisNexis® Risk Solutions, we know all too well the importance of the financial services sector having the right tools, data, and insights to be able to effectively fight crime. That’s why, since 2020, we have commissioned two ‘True Cost of Compliance’ reports, with the aim of measuring and tracking the UK financial services sector’s response to detecting and preventing financial crime.
In our recently released report, we discovered that UK financial services organisations such as banks and fintechs are collectively spending a staggering £34.2 billion every year on financial crime compliance (FCC).
For context, the figure of £34.2 billion is the equivalent of almost three quarters of the UK’s defence spend[1] for 2021/22, meaning financial services organisations are spending nearly as much protecting themselves and their customers against the risks of fraud and financial crime, as the entire UK is against threats to its national security.
With more than 900 UK firms generating revenues of over £5 million, this puts the mean annual cost of compliance for a UK financial services firm at an equally eye-watering £194 million. On average, financial services firms are spending over half-a-million pounds (£533,150) every day on FCC, equivalent to around £22,200 per hour, or £370 a minute.
More worryingly still, this spend represents an increase of 19% since 2020, showing that the cost of compliance is not only eyewatering, but also rising. So, what is driving this increase, and how can fintechs and other financial services organisations find efficiencies in 2023?
Related content: KYC Verification: How it is Done?
The drivers behind the rising cost of compliance
Growing regulatory expectations remain the greatest external driver of compliance costs, though other factors, including an evolving criminal threat and the cost of doing business are also important.
The report reveals that Customer Due Diligence (CDD) activities are still consuming the largest portion of FCC budgets, rising from 53% to 67% of all costs since 2020.
On one hand, this apportioning of budget is not altogether surprising. CDD processes can benefit hugely from investment in technology and software, with automated ‘Know Your Customer’ (KYC) and Identity and Verification (IDV) processes not only strengthening fraud and financial crime checks, but also improving overall customer experiences.
Most firms expect FCC costs to increase over the next three years by an average of 8%, largely to meet demand for CDD activities including KYC/IDV and fraud checks at onboarding, and transaction monitoring.
The push for greater automation was highlighted as the biggest internal cost driver. Technology spend as a share of the total amount spent on FCC increased from 25% in 2020 to 30% in 2022. Combined with technology-related employment and training costs, total technology spend now represents half of all FCC costs (50.9%). Does this mean technology can start to help find efficiencies?
Can technology provide an answer to the problem?
Technology is being most readily utilised throughout Customer Due Diligence (CDD) activities, which continue to consume the largest portion of overall FCC budgets and represent 67% of all spend.
Typically, when organisations invest in technology, software, and training, they do so to enhance performance. These are transformative investments designed to streamline processes and improve ways of working to deliver efficiency and productivity gains.
In one sense, the report makes for encouraging reading. It shows firms are investing hundreds of millions of pounds on transformative technology and training in the hope of streamlining and improving processes to deliver efficiencies and productivity gains.
But in reality, according to our latest findings, financial services organisations are yet to see this return on investment. So why are organisations not realising these cost savings? Could the issue instead be end-to-end processes not working in harmony?
A next-generation change in strategy is needed
One key reason (which needs resolving) for the increasing costs to financial services organisations could be that firms’ overall risk management strategies remain extremely fragmented.
Day-to-day processes are siloed, feeding inefficiencies, and failing to make the most out of the capabilities offered by new technology, software, and data sources that organisations integrate into their existing operations.
Risk orchestration technology could help banks to maximise their investments in FCC further by harmonising and optimising a myriad of fraud and financial crime prevention processes into one seamless, end-to-end journey. It reduces inefficiencies and duplication of processes and generates near real-time intelligence, analysis and actionable insights that are easily interpreted. And it can integrate the multiple systems and data sources that are typically employed in a financial crime screening workflow, with zero coding required.
A change in strategy to risk orchestration brings together all the various elements of fighting fraud and financial crime. It’s a more harmonious approach that reduces efficiencies and duplication of processes and effort. Firms we speak to are realising it’s a strategy that can save time, expense, and resource, while improving overall performance.
As FCC costs continue to rise to exponential levels, risk orchestration is looking increasingly like a next-generation solution.
To download the full True Cost of Compliance report, visit https://risk.lexisnexis.co.uk/insights-resources/white-paper/true-costs-of-compliance
[1] Departmental Resources, MOD, 2022: https://www.gov.uk/government/statistics/defence-departmental-resources-2022/mod-departmental-resources-2022#:~:text=Defence%20spending%20calculations%20are%20set,when%20compared%20to%202020%2F21
