While monetary fines are still rapidly growing as a result of persistent non-compliance, they are not seen to have changed the underlying behavior, with many firms considering financial penalties to be part of the standard costs of doing business, according to a report by Thomson Reuters.
Regulators have moved on to using a wider range of measures to ensure compliant behavior. The wider impact can result in the firm or the individual suffering multiple instances of the cost and pain of the penalty, the ramifications of which will be felt by all stakeholders.
The report reveals that monetary fines, while still significant and growing, can be the least of the "costs" imposed on a firm or individual.
Financial implications are much wider than the actual fine levied. They can include the end of a business line, the curtailment of the ability to sell specific products or ultimately the end of the business itself.
The report also highlights that regulatory action can have a negative impact on the share price of a firm and damage its relationship with investors.
Additional regulatory powers could also now result in firms being required to increase liquidity or capital, putting them at a disadvantage to their more compliant peers.
Expensive and disruptive operational consequences of non-compliance include the increased cost of recruiting and retaining high-quality compliance resources and implementing past business reviews and customer redress programs, which may require costly third parties or skilled persons.
Increased regulatory scrutiny, complexity, regulatory change and customer distrust are set to continue as a result of the widespread compliance failures, says the report.
Increased Personal Liability
The study reveals that there has been an increased focus on greater accountability and personal liability by regulators seeking to hold senior managers accountable for any compliance breach.
It is now routine for senior executives, over firms, to be held accountable and often dismissed as part of an enforcement case. The stakes for individuals in Asia are potentially even higher with jail sentences often a regular feature of market abuse cases.
Another cost of non-compliance to the individual is the potential claw-back of bonuses. Regulators are putting rules in place to ensure individuals are not being rewarded for taking excessive or undue risks.
The need for additional skilled staff, business reviews, policy and procedural reform, and widespread compensation schemes are just some of the remedial actions imposed on firms over and above the monetary fine.
The costs of paying redress and compensation to customers can significantly outweigh any financial penalties levied.
Regulators are also seeking to influence behavior by imposing changes to businesses, ranging from product bans to limitations on specific business activities to suspension of licenses.