Compliance cost explosion a sign of the times

This increase in the cost of risk management and compliance is part and parcel of being a properly regulated financial institution, says chief executive Shemara Wikramanayake.

She says banks not only have to pay the price of meeting the demands of regulators, but meet community expectations.

She adds the cost will increase as Macquarie grows. One of the perverse outcomes of this growth is that by this time next year, Macquarie will be spending more on compliance and risk management than it spends on technology investment.

“It’s growing with the footprint of our business as we go into new markets,” Wikramanayake says. “But it’s also growing as the community out there is expecting more and more from organizations.

“So, financial crime risk, anti-money laundering, anti-bribery and corruption, cyber risk, there’s no end to the sort of things that we have to step up and make sure we protect against.”

It is a tribute to the quality of Macquarie’s risk management systems that it closed its office in Russia in 2018 and has limited exposure to China – a brewing geopolitical hot spot.

Peter Warne, who steps down as Macquarie chairman next week after 15 years on the board, says the tremendous volume of information being presented to directors is impossible to get through in narrative form.

Changing landscape

This has required the typical 1000-page board papers found at major banks to evolve into much more visually friendly documents that dissect information and present it in a form that is much easier to digest.

“It is a challenge, that’s for sure,” he says. “Board papers these days come in terms of PowerPoint, dashboard presentations and those sorts of things, so they’re a bit quicker to get through.

“But the issue is that it’s a real challenge to actually get the information the board needs in a comprehensive way that the board can get over in a sensible timeframe.

“I mean, reading 1000 pages of narrative is almost impossible, I would say.

“There is a real challenge to our management when they’re putting board papers up to actually make them incisive – to cut to the chase.

“The real challenge is that we need to get less data and more information. We are continually barking at our management to actually make sure that happens.”

Warne, who will be replaced as chairman by former Reserve Bank governor Glenn Stevens, says the challenge for directors is not just to look at areas where there might be compliance problems, but to also anticipate issues.

“It is the individual businesses and the compliance that goes with them that has [become] more complex and more demanding,” he says.

“And then the size of the businesses and the reach of the business … is increasing as well. It’s coming from both angles.”

Wikramanayake says community expectations about sustainability and ESG have added another layer of complexity, and this is lifting compliance costs.

“There is all the net zero reporting now that we have to do in chapter and verse, there’s reporting on modern slavery, workplace health and safety, and customer analysis,” she says.

“It’s a huge range of non-financial risks that we’re investing in. But that’s an expectation of us to do business and also lots of this … is improving how we do business.”

Warne says regulators are increasingly wanting further information about what is happening inside the business.

“There is a huge amount of analysis that management has got to do and get that information to us to say whether we are complying and if we’re falling short somewhere, what are we doing to fix it?” he says.

“It’s a continual process. And, of course, as technology improves the ability of regulators to seek more information about our businesses increases, so they can analyze it as well.

“The amount of not just compliance, but business analytics that our regulators want to see is continuing to grow as well.”

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