UK financial services firms currently spend over £21,000 per hour fighting financial crime and fraud through onboarding and compliance screening processes, according to the latest True Cost of Compliance report from LexisNexis Risk Solutions.
In a study of 254 regulated UK financial services firms, LexisNexis Risk Solutions found compliance costs rose by 12 per cent in 2023, with 95 per cent of firms reporting an increase. Just two per cent believe costs have fallen. These figures suggest that, annually, the sector now spends a huge £38.3billion on compliance.
LexisNexis says that costs have risen by nearly around 33 per cent since 2021 – well above the rate of inflation. Despite this, the National Crime Agency (NCA) estimates that criminals launder at least £36billion in the UK each year.
While firm-level financial crime compliance (FCC) costs are on the rise, these increases have been ‘largely driven’ by investment in technology over the past three years, the financial crime compliance firm explained.
In fact, levels of tech investment have grown at twice the rate of employee-related costs. Technology-related roles also now, for the first time, account for over half (52.4 per cent) of all FCC recruitment and training costs, up from 34.1 per cent in 2022, as firms build teams of technologists capable of operating the technology and interpreting the outputs.
Increasing customer volumes was also cited as a key driver of costs, with 52 per cent of firms reporting an increase and one in six reporting customer numbers rising by over 20 per cent.
Not all doom and gloom
Despite the increase in customers, firms reported a significant drop in the cost of Know Your Customer (KYC) and identity verification operations, as an overall share of FCC costs, from 22 per cent to just 15 per cent, as automation yields process efficiency gains. Firms also enjoyed similar benefits in AML screening checks, alert remediation and internal investigations.
Steve Elliot, managing director of LexisNexis Risk Solutions, discussed the findings: “This year’s study features some stand-out good news stories, with firms and their customers reaping the benefits of sustained investment in technology over the past three years.
“Firms appear to be implementing more thorough financial crime controls throughout the customer journey, including more rigorous checks at onboarding and placing greater emphasis on ongoing monitoring, while the increased automation should be helping them deliver better customer experiences.
“What’s particularly encouraging is that, despite around 80 per cent of Customer Due Diligence (CDD) processes on average now being automated, there’s no sign of a slowing in investment pace, with KYC, fraud checks, alert remediation and AML screening all being earmarked as priorities for further development.”
Utilising analytics and AI
LexisNexis also revealed that many firms are shifting their focus to advanced analytics and AI to ensure compliance and bolster anti-financial crime processes. Process automation and machine learning are key areas of focus for a majority of respondents, with 40 per cent saying they’ve already adopted these new technologies into CDD processes. A further 58 per cent said they plan to do so within three years.
As a result, technology spending is expected to continue to be a key driver of FCC costs, pushing them up further by an estimated six per cent in the next three years. Going hand-in-hand with AI adoption, firms are also prioritising data, with the majority expecting to continue to make improvements to their data quality and augment their existing data sources.
“Our study shows that the UK financial services sector is making a strategic move away from time and labour-intensive manual processes, in favour of more efficient, automated processes, with skilled staff providing oversight and focusing on nuanced investigations work,” added Elliot. “While this investment is continuing to push up costs in the short term, firms clearly see the longer-term value that technology like AI can bring, in helping to make financial crime detection and prevention far more efficient and effective and ultimately to drive more money laundering and fraud out of our financial system.
“The sector will need to continue to work hand in hand with regulators to ensure that AI and similar technologies can find their approved place in FCC processes, but assuming this is achievable, there’s no reason to doubt that additional cost and efficiency benefits can be realised across the entire customer journey.
“At this rate, we could see overall compliance costs starting to fall for a majority of firms by the end of the decade.”