By Nina Kerkez, Director, Consulting at LexisNexis Risk Solutions.
Effectively and efficiently fighting financial crime is more important now, than ever before. But as UK financial organisations increase their efforts to manage risk, the cost of the battle is growing at an eyewatering rate. According to our latest True Cost of Compliance report, estimated financial crime compliance spend each year in the UK has now reached over £34bn.
The scale of these numbers can’t be understated. This figure is the equivalent to three quarters of the UK’s total defence spend for 2021/22. Drill into the data further and you’ll find that the average firm spends over £194m per year – or around £22,000 per hour.
So, what is driving these costs?
Is increasing regulation to blame?
The National Crime Agency (NCA) estimates the cost of money laundering to the UK economy to be in the hundreds of billions of pounds a year. And according to the House of Lords: “An adult in England and Wales is more likely to become a victim of fraud than any other individual type of crime.”
Therefore, and totally understandably, much of the onus for detecting, disrupting, and deterring economic crime sits squarely with industry. Regulation is putting pressure on businesses to reform and enhance processes to safeguard the public. As a result, the external pressures of growing regulatory expectations remain the biggest perceived driver for Financial Crime Compliance (FCC) costs.
But the reality is that no new anti-money laundering (AML) regulation has come into effect since the last True Cost of Compliance study in 2020. Instead, much of the regulatory change has been updates to existing guidance. And much of the regulatory pressure has come in the form of ‘Dear CEO’ letters targeting poor AML controls, as they relate to existing regulation.
If it’s not regulatory, what is driving costs?
The report reveals that Customer Due Diligence (CDD) activities are still consuming the largest portion of FCC budgets, rising from 53% to 67% of all costs since 2020. Most firms expect FCC costs to increase over the next three years, by an average of 8%, with the rising importance of Know Your Customer (KYC) and Identity Verification (IDV) checks, as well as fraud checks at onboarding and transaction monitoring.
The good news for firms in this respect is that CDD processes can benefit hugely from investment in technology and software, with automated KYC and IDV processes not only strengthening fraud and financial crime checks, but also improving overall customer experiences.
Therefore, unsurprisingly, technology spend as a share of the total spend on FCC, increased from 25% in 2020 to 30% in 2022. Combined with technology-related employment and training costs, total technology spend now represents half of all FCC costs (50.9%). No wonder the push for greater automation was highlighted as the biggest internal cost driver for firms.
Does this mean technology will start to help find efficiencies?
Typically, when organisations invest in technology, software, and training, they do so to improve performance. These are transformative investments designed to streamline processes and advance ways of working to deliver efficiencies and productivity gains.
However, the latest report suggests financial services organisations are yet to see this return on investment.
A key reason for this could be that firms’ overall risk management strategies remain extremely fragmented. Day-to-day processes are siloed, feeding inefficiencies, or failing to make the most out of the capabilities offered by newly-installed technologies.
Fraud and financial crime risk orchestration technology can help here. An orchestration platform enables firms to better organise and optimise their various technology and data solutions across the customer onboarding and ongoing lifecycle. It can reduce inefficiencies, data siloes, and duplication of processes. And it can give near real-time insight, analysis, and actionable data in the form of a single risk score. What is more, integration of multiple systems and data sources can be done with zero coding required, using natural language processing.
What does the future look like for FCC?
Fraud and financial crime statistics show the financial services sector as being no more effective now than ever before in fighting or preventing economic crime.
It’s fair to assume that if nothing changes, FCC costs will continue to rise. All the more reason for firms to continue to strive to better understand how to maximise the benefit of their compliance spend.
Moving from simple risk management to risk orchestration is one practical and workable way to do this. This would bring together all the various elements of fighting fraud and financial crime to enable organisations to find new efficiencies, both for them and their customers. They will be able to minimise friction during customer onboarding and transactions, whilst strengthening efforts to better protect customers against threats, all while improving compliance.
The firms we speak to are realising that fraud and financial crime risk orchestration is a next-generation strategy that can save time, expense, and resource, while improving their overall performance.
To download the full True Cost of Compliance report, visit https://risk.lexisnexis.co.uk/insights-resources/white-paper/true-costs-of-compliance?trmid=BSUKFC23.FCC.Orch.CS3P-911101&utm_source=finance-derivative&utm_medium=referral&utm_campaign=BSUKFC23.FCC.Orch
