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Regulatory demands will act as competitive advantage to larger financial institutions

Contact: Tamara Vlastelica Bakic
Deloitte in Montenegro
Senior Coordinator
+381 11 38 12 100

The top 100 financial services institutions have seen expenditure in the area compliance to regulations increase to $56 billion in the past three years. According to  Deloitte’s survey 1,   it is projected that the cost for governance and control for the top 100 institutions could reach $100 billion by 2010. The most significant increases are likely to be in compliance activities, risk management and business unit control.

The financial services industry has been hit by a deluge of regulation since the turn of the Millennium, such as Sarbanes-Oxley in USA, IFRS, Basel II and MiFID in Europe. Investment banks, commercial banks and insurers have all been affected by regulations from a variety of juristictions. The European banking industry is estimated to have invested $18 billion in the implementation of Basel II, and it is estimated that MiFID should lead to a one-off investment of $2 billion. However, it is also estimated that these initial investments will reduce compliance and transaction costs for cross-border firms. Interestingly enough, only 41 percent of companies in the survey stated their board of directors have overall control of governance and controls.

“There has been much debate around the issue of the exact business impact of increased regulation in financial markets. Larger financial services institutions spend on average four per cent of their total expense base on governance and compliance activities. By contrast, smaller financial institutions on average spend six per cent of their total expenses. In essence, it appears growing regulatory demands could be creating an uneven regulatory environment potentially acting as a competitive disadvantage to smaller financial institutions”, says Aida Kirlin, Senior Manager in ERS.

Deloitte’s survey found that insurance is currently the sector lagging in its implementation of a governance and control structure. However, preparations for compliance with Solvency II by 2012 are putting pressure on insurers to improve their governance, control and risk practices. On the other hand, investment banking is furthest ahead in terms of an institution’s likehood to have fully implemented a governance and control structure, since it is driven by the need to obtain improving shareholder confidence.
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1 Deloitte's survey was conducted in January 2007 in 11 countries, and its results were published in study In control? Gaining competitive advantage through governance, riska and control best practice.

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