Imposed and self-imposed rules cost the finance sector millions in profits and productivity
29 October 2014: In addition to the record amounts financial services organisations are spending on implementing both global and national regulations, Deloitte Access Economics calculates that most organisations are costing themselves twice as much complying with their own rules.
The annual spend of each of the big four is projected to reach up to $300 million on projects relating to imposed regulatory change1. And according to a new Deloitte report, Get out of your own way: Unleashing productivity, Australia’s finance sector is also wrapping itself up in its own red tape.
The chart below shows that almost one in every five workers in the finance sector is involved in compliance and that the share of compliance workers within overall employment in the finance industry is continuing to grow, albeit more slowly than mining, construction, transport and education.
Compliance workers – share of total workforce and the increase in that share
The higher a sector is on the chart, the larger the share of compliance occupations in its total workforce. The further to the right on the chart, the faster the growth in the share of compliance occupations. Bubble size reflects the size of the sector in terms of output.
Source: Deloitte Access Economics analysis of Census and labour force data
According to Deloitte Financial Services Risk and Regulation leader Kevin Nixon: “The financial services industry spends relatively less time on managing self-imposed rules than most organisations - but at 57% as a proportion of all time spent on compliance vs. 65% of all time for other industries, FSI’s smaller share is likely to reflect the heavier impact on the sector of government regulation, rather than the sector being ‘ahead of the game’ on managing the significant impost of self-imposed red tape.”
“The sector – and authorised deposit-taking institutions in particular – have to deal with a greater intensity of imposed regulation than most, so the current Financial Services Industry Inquiry led by David Murray which is due to report its recommendations to Government in the next four weeks, is of particular relevance at this juncture.”
Nixon added that the post-GFC global regulatory agenda for financial services was still unfolding. The G20 under the Australian presidency this year has moved many of the critical elements forward towards completion. The G20 Leaders Summit in Brisbane 15-16 November will see significant policy announcements on Basel III, ending ‘too-big-to-fail’, and shadow banking.
Deloitte Banking Regulatory Leader Tim Oldham said it was the regulatory and industry response in the aftermath of the GFC that has been constricting the industry and had helped create a ‘risk averse’ culture within the banking sector that “seems to have triggered a licence to create an accumulation of internal checks and balances, many of which are less than cost effective.
“The GFC created such anxiety about risk that self-imposed risk appetites were progressively tightened at all levels of the organisation” Oldham said. “The good news is that the industry has been consolidating its self-imposed regulation for the last three years. But there is more work to do. So calling out the costs of self-imposed red tape as identified in this week’s research - the fourth in the Deloitte Building the Lucky Country series – is very timely.”
According to report co-author and Deloitte Access Economics partner, Chris Richardson, Australia’s productivity is being choked by red tape, with the combined cost of administering and complying with public and private sector bureaucracy costing the nation $250 billion every year.
Strikingly, the cost of complying with self-imposed rules created by the private sector is double that associated with government regulations.
Self-imposed rules are costing the private sector $155 billion a year: $21 billion to develop and administer, and a stunning $134 billion a year in compliance costs Richardson said.
The research shows that the time required for employees to comply with self-imposed rules has become a crippling burden. Middle managers and senior executives chalk up almost nine hours a week complying with the rules that firms set for themselves, with other staff members spending six and a half hours a week on compliance.
Richardson said: “Where rules don’t exist, we create them. Where they already do, we make more. They overlap, they contradict, they eat our time and they weigh us down.”
“We’ve created a ‘compliance sector’ that employs more people than construction, manufacturing or education, and taking a long, hard look at the rules that individual organisations operate within will reduce the cost and complexity of doing business in Australia.”
Tim Oldham said: “The key lever the financial services industry can use to manage the plethora of self- imposed rules is to challenge current duplications around processes and controls. By taking the view of what should go right as opposed to what could go wrong, we can help to create a culture of performance rather than compliance. We can also engage the organisation in identifying and removing the ‘dumb’ rules.
“You’d be amazed at how many dumb rules will surface in this way! The questions we need to ask on a tactical and functional level is how important is this rule?
“Rules are important, but they are not all equally important,” Oldham said, adding that project managers are one of the fastest growing cohorts of rule makers in organisations. “Project managers are almost twice as costly as back office compliance workers,” Oldham said.
“On a strategic level the executive also needs to ascertain where the organisational capacity for risk is relative to the current risk appetite and adjust its declared risk appetite accordingly. The days of ‘set and forget’ are long gone.
“In the current environment where meeting customers’ expectations demands greater staff engagement, responsive service and innovative products, it is important there is intelligent risk management.”
Nixon concluded that in both the public and private sectors, the nation’s productivity and hence prosperity, will benefit from a new approach to managing risk.
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