As any compliance professional working in Malta will tell you, regulatory scrutiny has increased. Even as penalties are levied for non-compliance with existing rules, new rules continue to be rolled-out. With an increase in compliance standards, supervisory inspections and penalties, there is an undoubted increase in the compliance burden falling upon all subject persons. This presents several challenges for the Maltese market, most notable with costs, as legacy technology hinders innovative and agility in keeping up with a fast-changing regulatory environment. Additionally, the relatively small size of local entities compared to those on the global market means that Maltese entities carry a higher proportional cost of compliance.
The notorious cost of non-compliance is used as the stick by regulators, to impose regulatory expectations and ensure the ongoing management of compliance frameworks.
Most notable is the issuance of penalties and fines. Locally, the FIAU (Financial Intelligence Analysis Unit) increased their penalties in the area of AML/CFT by over 210% from 2020 to 2021, whilst the value of FCA (Financial Conduct Authority) issued fines abroad has doubled, with no signs of slowing down.
However, fines and penalties represent the smallest allocation of non-compliance costs. Other factors, rarely considered, such as business disruption (i.e., economic losses as a result from non-compliance, including shutdowns, contract cancellations and business process changes imposed by regulators.) and productivity/revenue loss (i.e., the opportunity cost associated with the downtime of systems and human capital expenditure to non-core business activities as well as losses incurred from reputational/brand risk), represent the majority of non-compliance costs and may be sustained for the long term before any sense of return to “normality”.
The cost of compliance is broad but may be distinguished by three main categories, namely:
All companies should be aware of their compliance costs, through the use of costing exercises, which will identify minimum regulatory obligations and enable compliance professionals to accurately gauge priorities for constructing their compliance integration calendars. This alone can decrease compliance costs drastically, as priorities are made clear, and resources may be distributed efficiently and effectively.
For many companies, compliance strategies focus around putting an increasing number of staff, time and resources toward regulatory burdens. However, for many entities this is becoming less and less feasible. For example, individual corporate service providers, advocates, notaries and accountants have been slowly pushed out of the market from ever increasing AML/CFT standards, and the continued era of low profitability for credit institutions increases compliance hesitancy.
Looking towards more efficient management practices in this field, Deloitte guidance suggests the below, non-exhaustive list, which may help establish scenarios for reducing compliance overheads:
Every firm and compliance function have a starting point somewhere. Wherever you start and to wherever you are headed, begin looking at compliance as a value creation exercise instead of a cost cutting one and bring compliance onboard as one of our greatest assets as opposed to our greatest liability.
About the author
Brandon Spano is a Consultant at Deloitte Consulting.