Tedious, costly compliance a ‘risk’ to financial services: MinterEllison

Speaking to ifa, MinterElllison partner Richard Batten said change fatigue and the ongoing cost of risk, governance and compliance is a key ongoing issue for the financial services industry.

“Onerous, complex and expensive compliance is a risk to financial services organisations,” Mr Batten said. “Not only in relation to the risk of non-compliance but also leading to challenges to the ability to focus upon delivering corporate strategies.”

Mr Batten, an expert in Australian financial services regulation, says “constant and overlapping regulatory reform” can lead to reactive behaviour and make it difficult for institutions to proactively identify and address the risks of their business operations.

“It can also lead to poor planning, weak compliance management capability and weak systems and have an impact on product and service innovation and management affecting customer experience,” he said.

While there is an increased focus on ensuring compliance, Mr Batten notes that there is little focus on the amount that should be spent for compliance.

“There is little if any domestic or global benchmarking in this area that we are aware of,” he said. “It is therefore difficult for Australian financial institutions to benchmark themselves against what an optimal amount of compliance spend should look like. This is also an issue for regulators and the economy as a whole.”

Industry groups from across the Australian financial services sector, including the AFA, FPA, FSC and SMSF Association, have expressed their concerns with onerous compliance and its stifling effect on businesses.

The Joint Associations Working Group (JAWG) submission to Treasury’s Quality of Advice Review - Issues Paper argued that the complex legislative and regulatory environment, with a one-size-fits-all approach to different types of advice and advisers, and ‘zero’ tolerance for mistakes and compliance breaches, as well as onerous civil and criminal penalties, has resulted in licensees and advisers being in fear of making even a minor compliance error or a mistake.

“This leads to double, if not triple, checking of all aspects of advice being provided and over-engineered systems and processes, which add additional cost to and delays in providing advice to consumers,” the submission stated.

The financial services industry associations argue that regulatory certainty needs to be introduced and duplication removed to provide for a regulatory environment that provides consumer protection without adding significant cost and complexity to the provision of advice.

Mr Batten told ifa that there needs to be a focus on getting the balance right to ensure compliance is able to be achieved in a cost-effective manner.

“This is an issue for individual institutions but also for regulators both in relation to the nature and level of requirements imposed and the way in which they are administered,” he said.

“There is a potential for compliance costs to reduce as the impact of regtech and fintech become more significant. On the other hand, more or more accessible information can also lead to more regulation and therefore higher cost so a balance needs to be struck.”

MinterEllison expects risk, governance and compliance-related costs to remain high for Australian financial services businesses in the medium term.

“This is due to a combination of specific elevated high-risk areas such as financial crime and cyber, but also due to the increased regulatory change which can be complex and tricky to operationalise in an efficient and cost-effective manner,” Mr Batten said.

The cost of financial crime compliance for financial firms in Australia will reach $2.54 billion in 2022, according to a new study by LexisNexis Risk Solutions.