Increased regulatory scrutiny and complexity, enforced business changes and individuals being held personally accountable are all set to continue as a result of continuing widespread compliance failures. The onus is on senior managers to now:

• Define and lead a compliant “tone from the top”
• Fully understand their personal regulatory risk and the robust discharge of their obligations
• Invest in getting compliant as the regulatory dividend is growing with less regulatory intervention, potentially lower capital requirements, less distraction from enforced remedial action as well as the ability to attract both clients and talent

LONDON/NEW YORK – Thomson Reuters today announced the results of its Rising Costs of Non-Compliance report revealing that while monetary fines are still rapidly growing as a result of persistent non-compliance, they are not seen to have changed the underlying behavior, with many firms considering financial penalties to be part of the standard costs of doing business. Regulators have moved on to using a wider range of measures to ensure compliant behavior. The wider impact can result in the firm or the individual suffering multiple instances of the cost and pain of the penalty, the ramifications of which will be felt by all stakeholders. Other key findings include:

• Monetary fines, while still significant and growing, can be the least of the "costs" imposed on a firm or individual. Financial implications are much wider than the actual fine levied. They can include the end of a business line, the curtailment of the ability to sell specific products or ultimately the end of the business itself.
• Regulatory action can have a negative impact on the share price of a firm and damage its relationship with investors. Additional regulatory powers could also now result in firms being required to increase liquidity or capital, putting them at a disadvantage to their more compliant peers.
• Senior managers are in the regulatory firing line. As a deliberate international regulatory approach, senior managers are increasingly being held to account for their own behavior, with the potential for claw-backs on bonuses and a career-ending criminal conviction. All of which is in addition to being significantly distracted by having to spend increasing amounts of time on remedial actions rather than focusing on the business itself.
• Expensive and disruptive operational consequences of non-compliance include the increased cost of recruiting and retaining high-quality compliance resources and implementing past business reviews and customer redress programs, which may require costly third parties or skilled persons.
• Increased regulatory scrutiny, complexity, regulatory change and customer distrust are set to continue as a result of the widespread compliance failures.
• Action needs to be taken at the most senior levels not only to be compliant but also to avoid the growing costs of non-compliance.

“Since this report was last conducted in 2008, regulation and the financial landscape has undergone a complete transformation,” says Andrew Neblett, SVP and managing director, Enterprise Risk Management at Thomson Reuters. “Regulators are under intense pressure and are coming up with more creative ways to enforce and promote compliance. The new challenges that firms face go way beyond just a fine, and companies and individuals need to be aware of the wider implications that non-compliance can have throughout an entire organization starting from the bottom-up.”

Financial Implications

The study shows that total fines levied by the UK Financial Services Authority jumped to £474 million in 2013, up from £26 million in 2008. Whilst fine inflation has not been so dramatic around the world, the numbers remain significant. Academic research by the London School of Economics found that in the last five years fines and damages paid and estimated for misconduct in 10 leading banks amounted to £157 billion worldwide. In the UK alone, the figure, on average, was nearly £6 billion per annum. While fines are increasing, there is a growing consensus that they have failed to drive a change in behavior.  In addition to fines, withdrawing a firm’s ability to undertake or participate in regulated business on a temporary or permanent basis is a regular feature of enforcement actions.

Furthermore, share prices of a company can be affected. While there is no correlation between share price and the announcement of enforcement action, share price volatility is shown to change particularly if there are rumors of a substantial fine. Often the share price falls on rumors, and then bounces back once the detail has been made public.

Increased Personal Liability

The study reveals that there has been an increased focus on greater accountability and personal liability by regulators seeking to hold senior managers accountable for any compliance breach. It is now routine for senior executives, over firms, to be held accountable and often dismissed as part of an enforcement case.  The stakes for individuals in Asia are potentially even higher with jail sentences often a regular feature of market abuse cases.

Another cost of non-compliance to the individual is the potential claw-back of bonuses. Regulators are putting rules in place to ensure individuals are not being rewarded for taking excessive or undue risks.

Operational Risks

The need for additional skilled staff, business reviews, policy and procedural reform, and widespread compensation schemes are just some of the remedial actions imposed on firms over and above the monetary fine.

The costs of paying redress and compensation to customers can significantly outweigh any financial penalties levied. In the UK, widespread mis-selling of payment protection insurance has led to £16 billion in redress being paid out so far to customers, with the total bill expected to significantly increase.

Regulators are also seeking to influence behavior by imposing changes to businesses, ranging from product bans to limitations on specific business activities to suspension of licenses.  

Thomson Reuters
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