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Slippage, compliance and CMU: who pays?

I’m at a regulatory roadshow in Frankfurt today, and one of the “big numbers” that has been mentioned is the total cost of the fines that have been charged against financial institutions in different jurisdictions.  The number quoted for the USA is $60 billion. It has also been said that current estimates are that some 7% of the total cost of operations for major financial institutions can be taken up by compliance costs.

Bringing down the costs of compliance is not just an issue for regulated financial institutions themselves, in order that they remain profitable or even in existence.  It’s also an issue for the investing community as a whole, right down to the individual private investor.

In the Retail sector, the term “slippage” is used for the percentage of stock that slips out of the front door of the shop – the stock that disappears and doesn’t get paid for.  In the retail payments sector, the equivalent “slippage” typically gets absorbed into the card processing transaction fees – the cost of fraudulent transactions, stolen cards, etc.  Users of the shop or of the payment system end up paying the additional cost of the breaches of regulations and legislation.

The same is true for users of financial markets.  The costs of compliance of financial institutions including their costs associated with non-compliance ultimately get passed through to each participant in the value chain, right down to end-customers, issuers and end-investors.  The cost-efficiency of regulatory compliance is therefore not just an issue that financial institutions must address.  It’s also an issue about which issuers and the investing community should be concerned.  Inefficiency of compliance processes and underlying systems and infrastructures adds to the cost of investment, reduces yields from investments, and reduces the interest of investors and issuers in being a participant in financial markets.  Cost-efficient regulatory compliance, in all of its aspects, is therefore fundamental to the effectiveness of Capital Markets Union (CMU) as a strategic goal of the European Union.


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