The world’s leading 100 financial institutions have seen their expenditure on regulation and compliance rise by more than 30% in the past three years to an estimated €36 billion (US$56 billion) in 2007, according to a new report by Deloitte, the business advisory firm.

Deloitte believes that the cost of regulation is yet to peak and predicts that the governance and control bill for the world’s largest 100 financial institutions could hit €65 billion (US$100 billion) by 2010. This is even before the cost of any new regulation introduced in response to the credit crisis.

However, a new report by Deloitte entitled ‘In Control?’, finds that this investment in regulation and compliance can only be fully effective if institutions connect their risk management & controls, and the governance of the two into a ‘holy trinity’.

Gerry Fitzpatrick, Partner, Deloitte, Enterprise Risk Services, commented:
“Current market dynamics dictate that there are few more vital issues for financial institutions to address than risk appetite, governance and control. Such systems set few hearts racing until it is often too late, yet they are increasingly determining the winners and the losers across the global financial services industry. Governance and control systems need to be right at the top of the corporate agenda, as they are likely to play a central role in the individual success or failure of senior executives.”

Deloitte’s report also recommends that institutions need to stop viewing regulation as an unavoidable burden and start to consider compliance and competitive advantage in the same sentence. The challenge for financial services institutions is to develop the agility and flexibility to absorb new regulatory demands while accruing cost efficiencies and competitive advantages.

The financial services industry has been hit by an avalanche of regulation in the last five years. This has included capital adequacy measures such as Basel II and Solvency II, and those addressing market practices, such as MiFID. Investment banks, commercial banks and insurers have all been affected by regulations from a variety of jurisdictions.

Gerry Fitzpatrick added: “Even financial institutions applying current best practices have a significant way to go before they achieve the optimum return on governance and control investments. To achieve this, they need to clearly articulate their risk appetite and build stronger linkages to risks taken and risks reported.”

The report also highlights differences between larger, global and smaller, non-global financial institutions. It found that despite the complexity of multiple jurisdictions and greater compliance demands, larger institutions spend on average 4% of their total expense base on governance and compliance activities. In smaller institutions, this figure rises to 6%.

Gerry Fitzpatrick commented further: “There appears to be a growing and uneven regulatory burden which may act as a competitive disadvantage to smaller financial institutions. This is particularly applicable to Irish financial services organisations operating in an international marketplace – it is clear that there must be an increased emphasis on getting ‘value for money’ from their compliance spend by translating this into a source of competitive advantage.”

Deloitte makes a number of suggestions to improve controls in financial institutions. These include appointing a fully-accountable, board-level individual to oversee controls; using effective technology to automate controls and monitor transactions in real time to avoid errors; and implementing tools that allow managers and risk experts to collaborate in making decisions and to evidence control of significant risk from all sources.

The report reveals considerable divergence in who is responsible for integrating governance and control functions. Just 41% of respondents stated that the audit committee or board have overall control of governance and compliance systems.

Gerry Fitzpatrick concludes “Governance, risk and control is one of the biggest issues facing financial institutions today. As the bar of regulation and control continues to rise, senior executives must demonstrate to the relevant authorities and to investors that they are in control.”

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Note to Editors: 

About the report 

The purpose of Deloitte’s report is to shed some light on the progress of major financial institutions around the world on governance and control systems. As part of the research, Deloitte looked at actual operational data for 32 major financial institutions from around the globe.

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