Complying with regulators is costing my firm a fortune

money and forms

Why should I bother?

There are questions that we all ask ourselves in our career. Why do I bother doing what I’m doing? Especially on those days when we can’t see any return. So looking at the all the rules that the regulators throw at us, one key question comes to mind:

Complying with all the regulations relating to running a financial services firm, especially AML, is costing my firm a fortune with no return on the money spent.  Why should I bother?

If you have a car, do you pay for car insurance?  If you own a property, do you pay for building insurance? Does your firm pay for public liability insurance?  We pay these costs in order to avoid the consequences of certain risks crystallising in the future.  None of that money spent will ever make you a return. However, it will save you potentially crippling costs if you ever need to make a claim.  At a very basic level, compliance costs could be looked at in the same way.  If you don’t comply then the regulator could fine you millions of pounds and remove your authorisation to trade, thus shutting your business. 

A more mature way of thinking about this issue is to think of our moral duty to society.  On an individual level, 99% of people are honest and most have an in-built sense of justice. We want to live in a society that is fair and where injustice is not tolerated.  So why do we need regulations if 99% of people are honest and hate injustice?  Surely, we would do everything we could to prevent our company from being exploited by the 1% who are committing these injustices on the 99%? 

The main issue is that everyone has a different idea of what “justice” is.  Ask any random selection of football fans if thought the referee was fair to both teams and you understand what I mean!  At the more extreme end of the spectrum, you have issues such as abortion, immigration policy and the death sentence. As a result of these differing views, enforceable rules need to be set to prevent anarchy. So, who gets to decide what is, and is not, allowed? 

The financial regulators

The evolution of financial regulation. First there was the FSA (2001 - 2013), now there is the FCA and PRA
Image by the Bank of England

The UK has a democratically elected government, whom we empower to make rules on our behalf.  That means we, the voting public, get to choose who sets the rules we must live by.  A Labour government created the Financial Services Authority (FSA) in 2001 to be accountable for the regulation of the financial services industry. The Conservative government then disbanded the FSA in 2013, in favour of the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).  At their core, the regulator’s remit is to protect the public from harm.  We only have to look at the harm caused by the 2008 banking crash.  Innocent people lost their homes, others lost their life savings, pension funds crashed in value. And when those impacted tried to claim on insurance policies they had been sold, it was found they were worthless.  

The above happened with rules in place.  Imagine what the financial sector would have been like if there were no rules to stop shady business practices? Complying with the ever-changing regulatory landscape should be an accepted part of running a firm in the financial sector. I would argue good firms who put protection their clients at the heart of their business aren’t those complaining about the costs.

Let’s be brutally honest here, the cost of compliance is ultimately paid by your clients in the fees they pay.  If the cost of compliance dropped to zero, would you keep your fee structure as was or drop your fees to try and achieve a competitive edge?  So if your clients are paying your compliance costs, is the question we should be asking not “how do we get the best value for the money spent on compliance?”

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