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Step Away From the Regulation: The Solution to Soaring Compliance Costs

The cost of compliance is keeping Capital Markets CEOs up at night: more than half identify over-regulation as their chief concern.  Although the pace of regulatory change has slowed somewhat of late, compliance costs continue to rise. According to a recent survey, a third of CEOs report that compliance costs now consume more than five percent of their annual budgets.

Greater complexity drives higher costs

As Capital Markets become more complex and sophisticated, that complexity is mirrored in the rules created to regulate them. Recent regulations:

  • Cover more asset classes and more jurisdictions
  • Expand the scope and extent of data to be reported on
  • Require more intensive surveillance of transactions and related communications
  • Mandate faster response to inquiries from regulators

These increased demands require firms to devote more resources and budget to compliance, with a substantial impact on their bottom line. In fact, according to a study by the Association for Financial Markets in Europe, increasing regulatory costs were the reason for a 14-percentage point reduction in return on equity from 2010 to 2016.

Case in point: MiFID II

All financial service businesses that operate in the EU, and some non-EU organizations that trade with European clients, are required to comply with MiFID II. This regulation comprises 1.4 million paragraphs of rules and applies to equities, fixed income, commodities, currencies, futures, exchange-traded products and retail derivatives. Enacted in 2018, it is estimated that implementation may have cost in excess of $2.6 billion, with the bill for annual compliance costing an additional $790 million. Plus, failure to comply can result in penalties as high as $5.6 million, or ten percent of global revenues.

MiFID II is just one example. From SFTR to Reg BI, the transition from LIBOR to SOFR, to the latest DOL rule, Capital Markets firms need to continually demonstrate better control of their data – and this requires an unprecedented level of transparency and efficiency.

Legacy systems aren't up to the task

All too often, the desire for a "quick fix" to each new regulation has led to a siloed approach to data management. Firms may believe that this saves time and money. However, it makes data management more convoluted and expensive over time.

Many compliance systems are now a patchwork of disparate technologies. Fulfilling each new set of requirements becomes increasingly costly and complex. Disconnected data silos require considerable administration and maintenance efforts. This adds to the financial burden, and a reactive approach to each new regulatory challenge creates a significant drain on operational efficiency. Profit margins erode as firms struggle with an untenable tangle of disparate data sources. Regulatory change demands transparency and agility, yet each quick-fix effort ensures both are harder to achieve as the next change comes along.

The solution: a more strategic approach to data management

Firms that adopt a more proactive mindset, view their data as a strategic asset. Instead of "band-aid" fixes, they seek a long-term solution that can transcend the demands of individual regulations, reduce costs, and provide actionable insights that enhance business value.

Replacing outdated, inflexible legacy silos with a single, centralized data repository enables greater data integrity, transparency, and efficiency. All compliance data can be captured, consolidated, enriched, and mapped to create a single source of truth.

The benefits are enormous. By automating repetitive and resource-intensive processes such as data cleansing, validation, and reconciliation, firms can achieve even greater accuracy, efficiency, and savings.

  • New rules can be integrated more quickly and easily
  • Exception management becomes the exception rather than the rule
  • Duplicative effort is eliminated
  • Manual workarounds are no longer necessary
  • Demands on IT can be significantly reduced

Benefits beyond compliance

Improvements in data transparency and integrity can be leveraged to streamline workflows, identify untapped profit potential, evaluate risk and enhance productivity across all departments. Insights that may have been too costly or resource-intensive to obtain can be easily made available for analysis and smarter decision-making. And, with a holistic view of enterprise data, firms become better poised to capitalize on new market opportunities.

Broadridge can help you stay ahead of regulatory complexity and reduce the ongoing costs of compliance. We see what’s coming because the industry runs through us. Explore the leading technologies, operations and expertise that add transparency and control at every step.

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