Compliance.ai Five Ways Compliance with Artificial Intelligence Saves You Money

It’s no secret that there has been a significant rise in regulatory compliance related rules, regulations and enforcements since the 2008 financial crisis. Those new compliance burdens have had a direct and significant effect across the spectrum for financial institutions. To understand the costs of compliance, we must first consider the largest expense, which is the compliance team.

“Chief compliance officers who hold law degrees have an average base salary of $295,000 at companies with at least $5 billion in annual revenue, compared to a base salary of $225,000 among chief compliance officers without law degrees.”

– 2018 Compliance Compensation Report, Barker Gilmore

Based on national averages for a mid-sized bank with assets under management between $8 to $50 billion, an average compliance department is made up with the following roles following:

Chief Compliance Officer – $250,000+
Compliance Officer – $150,000 to $250,000 salary
Assistant Officer – $115,000 to $145,000 salary
4 Senior Analysts – $80,000 to $110,000 salary
5 Junior Analysts – $60,000 to $80,000 salary
4 Clerical – $40,000 to $55,000 salary

These salary ranges can fluctuate depending on bank size, products and services offered, and regional location. Salaries in some areas of the country might be significantly higher, but these figures are national averages. Based on these estimates, an average compliance department will spend more than $1 million annually on team salaries. Add in 30% for healthcare and other employee benefits, staffing an adequate compliance department can greatly exceed $1 million dollars depending on the size and complexity of the financial institution (Suszek, 2015).

The cost associated with the implementation of a regulation is referred to as a regulatory burden. A bank may face higher costs to train staff on the new rule or may need to spend more time reviewing an area to assess the impact or necessity of implementing new changes. Some of these costs are passed down to the consumer in the form of higher loan rates, lower deposit rates, more fees, and fewer lending options.

There are two main types of Regulatory Burden: Operating Costs and Opportunity Costs

Operating Costs (i.e., Compliance Costs) are the costs the bank must incur to comply.
- For example, in response to a new rule, a bank may spend more money training its employees to understand the rule. The bank may find it necessary to purchase or update computer programs because the new rule is incompatible with the current systems. Or even the time it takes for an in-house legal expert to read, analyze and provide guidance on the implications of the proposed rule.
Opportunity Costs are associated with missed business opportunities because of additional regulation.
- A bank may decide to offer fewer mortgage products because regulations make mortgage lending more expensive, and instead choose to offer a particular product because it is more profitable.

The institution’s size is the number one factor that influences regulatory burden. This is usually determined based on the bank’s Total Assets Under Management (AUM).

There are several other factors that can attribute to that burden:

Charter – A bank’s primary regulatory requirement depends on its charter. Each regulator has different practices and policies. For example the FDIC.
Risk Profile – Not all banks pose the same risks. Depending on the products and services offered, the regulatory risk might be different. For example, a bank that offers a wide range of mortgage services is riskier than a bank that only offers savings accounts.
Business Model – Certain activities will attract more regulatory attention than others; therefore, some banks have a higher regulatory burden. For example, if banks engage in securities or derivative markets, it could trigger additional activity-based regulations.

Why is Compliance Under-Resourced?

In many financial institutions, the Compliance function is not only burdensome to manage, but causes a significant drain of resources. Compliance is often viewed as an expense to the company and not a source of revenue. While on the surface, this may appear to be true, the reality is that the Compliance function actually saves the bank money, in the form of preventing fines, restitution and damaging reputation or trust.

It is estimated that since the 2008 financial crisis, banks have paid over $200 billion in compliance-related fines and infractions.

The costs don’t stop at fines and penalties. In some cases, regulators can require banks to perform an expensive and time consuming two-year look-back investigation into the compliance integrity of their systems and transactions. This lookback typically requires a team of high paid consultants and can cost banks millions of more dollars. In addition to the operations costs, there is also a reputational cost which can have a cost impact in marketing campaigns to re-establish consumer trust.

Another reason Compliance departments are under-resourced is a shortage of qualified talent. Compliance is a complicated field of study, and the number of people with the required skill set is challenging to find in some areas of the country. Finding the most knowledgeable person can prove difficult.

As a result, respondents continue to report capability shortages— particularly in specialized areas. These challenges—skills shortages and a lack of integration with the rest of the business—are likely to persist.

In Accenture’s 2017 “Global Risk Management Study, “In recent years, most financial institutions have invested significantly in risk capabilities and headcount. Yet talent shortages remain a major problem: the time it takes to find the right talent, integrate them and also continuously adapt to the changing demands of the function create a situation where the benefit to the risk function develops slowly.” Gartner also recognized talent shortage as a top business risk in its quarterly Emerging Risk Report.

One of the reason is attributed to the fact higher education has not caught up to the new demand for compliance professionals. In order for people to acquire the necessary skills more comprehensive certification and training programs need to be developed. Currently, most financial institutions supplement these programs with internal talent development. Salaries for compliance professionals are also lagging behind demand and not attracting the next generation of talent. Traditional salaries and bonuses are targeted at rewarding employees that engage in revenue-generating activities. Banks have been slow to update their compensation models for compliance professionals who are still viewed as a hindrance to running a successful business. (Palm, 2104)

Potential Solutions

Financial institutions attempt different solutions to the regulatory burden problem.

Increasing Headcount – Hiring, training and supporting new employees might seem like the easiest approach, but this is the most costly and least sustainable.
Vertical Disintegration – While using vendors to manage some operational functions will save on staffing overhead, it comes with additional pitfalls. Vendor Management is often a major burden on resources. Regulators have increasingly scrutinized the outsourcing of operational functions and it is crucial to do thorough due diligence before selecting a vendor partner. Remember the deficiencies of a vendor inherently become the bank’s deficiencies.
Turning to Technology – In a survey released last year by Fannie Mae, 95% of mortgage lending executives said they are dependent “in some measure” on technology solution providers; this group also estimates that on average 84% of their mortgage business is enabled by technology (Mortgage Compliance Magazine, 2017).

How Can Compliance.ai Help?

Compliance.ai has a suite of products specifically designed to help financial institutions address the primary compliance challenges described above.

“Some of the toughest operational challenges facing regulators—resource constraints, backlogs, massive volumes of public comments—also offer some of the biggest opportunities for new technologies and techniques.”
– Deloitte, Center for Government Insight Analysis (2018)

1) Regulatory Change Cost Calculator – This interactive tool assists the compliance department in estimating its regulatory change cost based on jurisdiction, agencies, and the average hours spent reviewing regulatory documents. The calculator produces an estimated monthly cost based on the complexity of the regulatory environment combined with the average hourly rate of staff and the number of compliance staff on the regulatory change management team.

2) Topic Explorer – Compliance.ai applies its proprietary Expert-in-the-Loop machine-learning methodology to automatically classify regulatory documents into business and operational topic areas. Topic classification allows compliance professionals to analyze incoming regulatory content from a business and operational lens, to more quickly determine whether it applies to their organization, which group should be responsible for analyzing and assessing the risk associated with the change, while also ensuring that relevant content published by other sources are not overlooked.

3) Pro Edition – Allows compliance professionals to Search, Monitor, Access, Research and Track comprehensive financial regulatory content, industry insights, and regulatory updates across various jurisdictions. Users can set personalized notifications and alerts to track and monitor regulatory changes automatically. Compliance.ai monitors and updates you in real time when new content is published about a specific regulation, agency, concept and/or topic area. This automation saves both time and money, providing you with a focused view of what’s relevant to you, and reduces the number of resources wasted on the daily process of tracking regulatory changes manually.

4) Team Edition – provides a simple, centralized way for financial compliance teams to collaborate on tasks, actions, and prioritization of deadlines, with dependencies across business departments. Workflow Automation improves collaboration across stakeholders by creating automatic to-do lists that guide team members through the change management process based on regulatory changes relevant to them, across various jurisdictions, while also intelligently assessing risks.

5) Weekly Activity Updates – Compliance.ai focuses on informing compliance professionals of new and developing regulations, trends, and deadlines. With Regulatory Agency Updates, users can browse through a weekly summary of the latest regulatory changes and updates. Financial Enforcement Actions are analyzed by automatically surfacing key enforcement action information (such as Respondents, Violations, and Penalties), which can assist compliance professions in estimating regulatory risk. Weekly Regulatory Deadlines outlines recent regulatory new and upcoming deadlines at a glance. Automatic Key Date Extraction (publication, comment close, effective dates) enables accurate prioritization of regulatory tasks.

Conclusion

Compliance.ai delivers on the promise of RegTech, offering intuitive and easy to use regulatory change management solutions that can be tailored to your financial institution’s needs. The capabilities range from automated: insights, summaries, priorities, action items and deadlines to highly curated financial regulatory news, automated workflows and task management. The end result slashes cost and time traditionally associated with regulatory compliance while positioning the compliance team to be proactive, improve workflow management and better allocate resources.

References

Mortgage Compliance Magazine. (2017, January 4). Reviewing Compliance Costs in 2017. Retrieved from Mortgage Compliance Magazine: http://www.mortgagecompliancemagazine.com/compliance/reviewing-compliance-costs-2017/

Suszek, D. (2015, October 22). The Cost of Compliance. Retrieved from Global Radar: https://www.globalradar.com/the-cost-of-compliance/

Palm, Susan. (2014, September 9). Why Banks Face a Risk Management Talent Shortage. Retrieved from American Banker: https://www.americanbanker.com/opinion/why-banks-face-a-risk-management-talent-shortage

KPMG. (2016). Transforming the Regulatory Agenda. https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/kpmg-transforming-the-regulatory-agenda-fs.pdf

Deloitte. (2014). In Focus 2014 Compliance Trends Survey. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/risk/us_aers_dcrs_deloitte_compliance_week_compliance_survey_2014_05142014.pdf