The cost of financial crime compliance, including customer due diligence and anti-money laundering, in the UK continues to rise, mainly driven by increasing regulatory expectations, as well as investment in technology and training.
In discussion:
- How to reduce costs
- Improving effectiveness
- Future trends
In conversation with:
- Joy Macknight, editor, The Banker
- Nina Kerkez, director, consulting, LexisNexis Risk Solutions
How much is financial crime compliance costing UK banks, and are the billions of Pounds being well spent?
Nina Kerkez considers why the UK’s financial services sector is not yet seeing optimal returns on the tens of billions of pounds being spent on technology and software to fight financial crime.
£34.2 billion is the headline figure from the latest True Cost of Compliance report from LexisNexis Risk Solutions. That’s how much UK financial services organisations, such as banks and fintechs are collectively spending each year on financial crime compliance (FCC).
It’s an eye-watering figure that requires some perspective to truly comprehend. £34.2 billion is almost three quarters of the UK’s defence spend[1] for 2021/22. Financial services organisations are spending almost as much protecting themselves and their customers against the risks of fraud and financial crime, as the country is against threats to its national security.
With more than 900 UK firms generating revenues of over £5 million, this puts the mean annual cost of compliance for a UK financial services firm at an equally eye-watering £194 million. Or, to draw a comparison with one of the UK’s most popular pastimes, this means that an average bank is spending more on financial crime compliance each year, than it would cost to bankroll the multimillionaire players’ salaries of a top Premier League football team[2].
Findings from the True Cost of Compliance report also show the total annual costs of FCC rose 19% from 2020 to 2022. This increase is particularly noteworthy because over the same period, technology costs have grown as a share of the total amount spent on FCC, increasing from 25% in 2020 to 30% in 2022. Together with technology-related employment and training costs, total technology spend now represents half of all FCC costs (50.9%).
Typically, when organisations invest in technology, software, and training, they do so to enhance performance. These are transformative investments designed to streamline processes and improve ways of working to deliver efficiency and productivity gains. But according to the latest findings, banks are yet to see this return on investment.
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.
On one hand, this apportioning of budget is not altogether surprising. CDD processes can benefit hugely from investment in technology and software, with automated ‘know your customer’ and identity authentication processes not only strengthening fraud and financial crime checks, but also improving overall customer experiences.
However, an increase in the investment of technology and software to automate such processes should lead to a corresponding fall in annual FCC spend, as a bank reaps the benefits and efficiencies of automation. So why are organisations not realising these cost savings? Could the issue be end-to-end processes not working in harmony?
The findings suggest that, while organisations are making well-intentioned investments automating distinct processes within the compliance workflow, 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 the technology, software, and data sources that banks are investing in.
On a positive note, there are indications that the spend on FCC will start to slow. Firms expect their annual costs of financial crime compliance to rise by an average of 8% over the next three years. Against a backdrop of costs jumping by 19% during the past two years, it would be reasonable to expect a much slower growth rate or even a decline in annual costs.
Risk orchestration technology could help banks to maximise their investments in FCC further by organising and optimising the various elements of fraud and financial crime prevention measures together in harmony. It reduces inefficiencies and duplication of processes and generates near real-time insight, analysis and actionable data that is easily interpreted. And it can integrate the multiple systems and data sources that are employed in a typical financial crime screening workflow, with zero coding required.
The sheer volume of FCC activities revealed by the True Cost of Compliance report, which are carried out by UK financial services organisations points to many firms going above and beyond – known as gold-plating – when it comes to protecting themselves and their customers against financial crime. Despite investment in technology, this is further contributing to the growing annual costs of compliance, but with efficiency gains increasingly hard to come by, how long before the sector reaches a tipping point?
To read more about The True Costs of Compliance, click here to download the full 2023 report.
Nina Kerkez, Director, Consulting at LexisNexis Risk Solutions.
[1] Departmental Resources, MOD, 2022: https://www.gov.uk/government/statistics/defence-departmental-resources-2022/mod-departmental-resources-2022#:~:text=Defence%20spending%20calculations%20are%20set,when%20compared%20to%202020%2F21
[2] Recent industry estimates suggest Premier League champions Manchester City FC spend around £163million annually on players’ wages. This is less than the mean annual cost of FCC, which stands at £194.6 million. https://www.planetfootball.com/quick-reads/premier-league-wage-bill-ranking-arsenal-newcastle-man-utd-city-liverpool/
