Frank Leonette | The true cost of non-compliance in the financial sector

The financial sector is one of the most highly regulated industries in the world, with a complex web of laws and regulations designed to protect customers, maintain financial stability, and prevent financial crimes. Non-compliance with these regulations can have severe consequences, extending far beyond financial penalties.

According to the South African Reserve Bank (SARB), several financial institutions have faced administrative sanctions, including financial penalties, for non-compliance with the Financial Intelligence Centre Act (FIC Act).

The total financial penalties imposed on some financial institutions in South Africa for non-compliance with the FIC Act amount to millions of rands. Some of the key areas of non-compliance that were identified were; Know-Your-Cusomer (KYC) requirements for failure to properly identify and verify customers, Record-Keeping requirements for inadequate record-keeping and suspicious transaction reporting, Cash Threshold reporting for failure to report cash transactions above the prescribed limit and Internal Rules and Controls for inadequate processes and working methods to detect and report suspicious transactions.

Financial Costs of Non-Compliance

Not adhering to Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements and regulations can be crippling for financial institutions that face hefty penalties. But financial penalties are just the beginning. Non-compliance can also lead to increased operational costs, as financial institutions may need to invest in new systems, processes, and personnel to rectify compliance deficiencies.

In addition, non-compliance can result in lost revenue opportunities, as financial institutions may be forced to forego certain business activities or relationships due to regulatory restrictions. These penalties not only affect the financial bottom line of financial institutions but also damage their reputation and erode customer trust.

Reputational Damage: A Lasting Impact

Non-compliance can also damage a financial institution's reputation, leading to loss of customer trust and loyalty. In today's digital age, news of non-compliance can spread rapidly, damaging financial institutions brand and reputation. This can have long-term consequences, including reduced customer acquisition and retention, decreased revenue, and increased costs associated with rebuilding trust.

The Benefits of Compliance

While the costs of non-compliance are significant, the benefits of compliance far outweigh them.

Compliance helps financial institutions to:

• Maintain a Strong Reputation - By prioritising compliance, financial institutions can build trust with customers and maintain a strong reputation in the industry.
• Avoid Financial Penalties - Compliance reduces the risk of financial penalties and reputational damage.
• Reduce Operational Risks - Effective compliance management systems can help financial institutions identify and mitigate operational risks.

The Role of Technology in Compliance

Technology plays a critical role in compliance, enabling financial institutions to automate compliance tasks, improve efficiency, and reduce costs. GloRep's advanced all in one solutions help financial institutions facilitate their compliance cycle.

Best Practices for Compliance 

To ensure effective compliance, financial institutions should:

• Implement Robust Compliance Management Systems - Financial institutions should implement comprehensive compliance management systems that cover all aspects of regulatory requirements.
• Conduct Regular Risk Assessments - Financial institutions should conduct regular risk assessments to identify and mitigate compliance risks.
• Provide Ongoing Training and Support - Financial institutions should provide ongoing training and support to employees to ensure they understand and comply with regulatory requirements.

The Importance of having a Compliance Culture

A compliance culture is essential for ensuring that financial institutions prioritise compliance and maintain a strong reputation. This culture should be embedded in the institutions values and practices, with a focus on transparency, accountability, and integrity. 

The True Cost of Non-Compliance

There is nothing worse than financial institutions having to pay hefty fines that can result in major financial losses, that can impact business growth. However, the true cost of non-compliance in the financial sector extends far beyond financial penalties and needs to be looked at more seriously. Non-compliance can damage a financial institutions reputation, lead to operational risks, and result in significant financial losses. By prioritising compliance and leveraging technology, financial institutions can reduce costs, increase efficiency, and maintain a strong reputation in the industry.

A Call to Action

As the regulatory landscape continues to evolve, it is essential for financial institutions Ito prioritise compliance and invest in effective compliance management systems. By doing so, financial institutions can reduce the risk of non-compliance, maintain a strong reputation, and build trust with customers.

Financial institutions must therefore to take a proactive approach to compliance, leveraging technology and expertise to stay ahead of emerging risks and regulatory requirements. GloRep remains committed to ensure that we work together with financial institutions to help decrease their costs and to ensure that they become fully compliant so that we create a safer, more compliant banking sector that benefits everyone.

*Frank Leonette is the Chief Executive Officer of GloRep, a regulatory technology (RegTech) startup specializing in automating compliance for businesses.