Deloitte: Compliance costs Australian economy 250 billion

26 November 2014 Consultancy.uk

Internal regulations by industries and companies are known to be one of the key frustrations of businesses, yet a new study by Deloitte reveals that the cost of compliance may be much larger than previously thought. Deloitte’s research shows that the cost of compliance to self-imposed rules is more than twice the cost of complying with government regulations. According to the Big Four firm, these rules are crippling Australia’s productivity and ‘better rules’ could free up time that could be spend on enhancing companies’ productivity.

Big Four firm Deloitte recently released its new report ‘Get out of your own way – Unleashing productivity’, which is the fourth edition of the firm’s ‘The Building the Lucky Country’ series first released in 2011. This series has been launched by Deloitte to drive debate, and action, around issues critical to Australia’s future prosperity. This year’s edition focuses on the costs to corporates and the nation of self-imposed red tape.

Australian business burdened by own bureaucracyThe overall conclusion of the report is that Australia has a bright future ahead as long as the country is able to boost its productivity, productivity that is currently being obstructed by red tape. “Addressing the weight of Australia’s government and corporate red tape is the clearest path to raising national livings standards across the next decade. It is where we’ve made the biggest mistakes as a nation, but also where we can make the biggest – and most profitable – progress,” explains Chris Richardson, co-author and Deloitte Access Economics Partner. The report shows that administering and complying with public and private sector bureaucracy is costing Australia $250 billion every year.

Time spent on compliance

Currently, the average employee will spent around 8 weeks a year just on administering and complying with rules. When breaking it down to professional levels, we see that middle managers and senior executives are spending almost 9 hours a week, which is a full working day, complying with the rules that firms set for themselves, other staff members are spending 6.4 hours a week. Deloitte states that this time spent is posing a crippling burden to the companies and nation, as this time is lost and not spend on productivity. “

Annual costs of regulation

What is most striking about the results of the report, according to the consultants, is that the cost of complying with self-imposed rules created by the private sector is more than double of that of complying with government regulations. Self-imposed rules are costing the nation $155 billion a year, of which 86% ($134 billion) a year is spend on compliance costs. Federal, State and local government rules and regulations are costing Australia $95 billion a year, with $67 billion a year spend on compliance. “Bureaucracy isn’t solely something that governments can do better – we all can. Remember when you actually used to be able to do work when you were at work? The pay offs to better rules have the potential to be a big driver of gains in productivity, as well as our living standards. Individual businesses need to unlock the profit potential they’ve tied up in their own red tape,” concludes Gerhard Vorster, co-author and Deloitte Chief Strategy Officer. The consulting firm states that reducing the total cost of $250 by just 10% could already save 1.6% of national income. As a result, the impact of regulation reform is ranked as one of the largest impacts Australia has ever seen.

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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.