B2B Payments

The Soaring Cost Of Non-Compliance

Although the fines and negative publicity of non-compliance for payments companies is well known, a new report from Thomas Reuters finds a laundry list of related—and far larger costs. Companies seeking to avoid additional government interference are finding non-compliance all but guarantees much more strict oversight.

Regulators have been “encouraging banks in particular to rebuild their balance sheets. While an instruction to a firm to hold more capital, liquidity or solvency is unlikely to be made public, regulators have been clear that they can and will use the powers or regulatory toolkits available to them to take early

action to prevent a firm from failing. Measures range from enhanced supervisory protocols, increased capital and solvency risk-adjusters in pillar 2 of either Basel or (in Europe) Solvency II, to the higher international capital requirements for global systemically important financial institutions,” the report said. “In other words, the (UK’s Prudential Regulation Authority) is drawing a direct line between non-compliance and the need to hold additional capital, liquidity or solvency.”

That’s not exactly music to a CFO’s ears.

Then there are the personal impacts of non-compliance, including having the employee dealing with a less-than-happy employer. “The cost of non-compliance to the individual is the potential claw-back of bonuses. The cost to the firm of the same non-compliance is the need to build and resource the policies, procedures and reporting mechanisms required to implement the new requirements and, critically, to provide evidence to all relevant regulators that the appropriate remedial, compliant, action has been taken.”

Sometimes, the law of physics enters the equation. Every employee who is cleaning up the non-compliance mess is doing that instead of something that would bring in revenue and profits for the company.

“Additional skilled staff, past business reviews, wholesale policy and procedural reform, and widespread compensation schemes are just some of the remedial actions imposed on firms over and above the monetary fine. There is an old rule of thumb that fixing the underlying problems costs 10 times the size of the fine imposed. This may no longer hold as true in the current era of super-sized fines, but it is unlikely to be too far off,” the report said. “Not linked to a single enforcement action, in late 2013 it was reported that JPMorgan intended to spend an additional $4 billion and commit 5,000 extra employees to clean up its risk and compliance problems. As part of a company-wide effort, it was estimated that the bank was to spend an additional $1.5 billion on managing risk and complying with regulations, including a 30 percent increase in risk-control staffing.”

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