Lucy Farrow argues that viewing complaince simply as a cost is too restrictive. Firms should be using it to improve efficiency and gain a competitive advantage
The association between the word ‘compliance’ and ‘cost’ is not only becoming all too familiar but will potentially start burning holes within the pockets of small firms. Increased regulation across the mortgage and general insurance (GI) sector has emphasised the need for firms to take their compliance seriously, and that investment, whether in the form of cash when buying external support, or of costs associated with additional resource requirements will have an impact on other areas of the business. Or will it?
How many firms associate the word ‘compliance’ with ‘business development’? Compliance is still perceived to be costly and maybe even a hindrance on activities aimed towards developing the business. By investing in compliance it can appear that vital funds are being diverted from essential growth activities such as sales and marketing.
Growing compliance teams
In the past two years the size of firms’ compliance teams has grown dramatically with the average broker compliance function tripling in size. A survey conducted by Huntswood earlier this year showed that 55 per cent of intermediary firms have been directly involved in the preparation for GI regulation. This equates to increased costs and the impact on other business functions where resources have been diverted to focus their attentions on compliance.
Turning the tables
The time has come to turn the tables. Compliance can be used as a competitive weapon to not only gain business advantage but also greater efficiency. No one can argue that the time and resources needed to transform businesses processes, systems and controls into a robust framework that meets the regulatory requirements, doesn’t carry a hefty price tag. However, again the perception is that the ‘cost’ is hefty – or is it just that as businesses we are not used to making specific investments in our compliance.
The benefits of having well-structured business processes, risk management systems and much tighter governance speak for themselves. For example, the costs of investigating and resolving complaints from unhappy customers can end up costing more than simply embedding a process within the business and then conducting your business accordingly.
Compliance framework
Establishing your compliance framework is probably regarded as the highest up-front cost and maintaining compliance going forward won’t cost anything, or very little. This view point is flawed and the industry is proof is this. Many firms have spent money with good intentions towards building a compliance business framework; however what’s often forgotten is how compliance will be managed, monitored and maintained. This is evidenced by the FSA’s enforcement news where firms are now suffering heavy penalties, and in some cases their permissions withdrawn, for failing in areas that basically constitute as business best practice, let alone regulatory requirements.
ICA and SCA
There is a significant business case for ensuring you embed and maintain compliance and risk management processes within the business. Individual Capital Assessment (ICA) is almost a ‘one size fits all’ requirement to keep and maintain adequate capital reserves. However, Supplementary Capital Assessment (SCA) is somewhat different – this can impact on the business ability to invest towards future development activities.
In simple terms the Supplementary Capital Assessment determines how well the firm’s systems and controls manage risk. The less emphasis placed on risk management, systems and controls and lack of evidence within processes and procures mean that the regulator can and will insist on additional capital reserve requirements. This will have a detrimental affect on the firms’ ability to divert cash into areas of development.
Business best practice
I’ve said earlier that compliance is a competitive business weapon and therefore should be considered an essential part of business development. Successful businesses assess risk, mitigate risks with systems and controls, operate within functional processes, maintain adequate records and consistently focus on improvement. Aside from regulatory requirements if you look at any guide to business best practice, these are the fundamental elements that apply to any business model.
Lucy Farrow is senior consultant at Huntswood
