Compliance costs are all expenses that a company uses up to adhere to government regulations. Compliance costs incorporate salaries of employees in compliance, time and funds spend on announcing, new system necessitated to meet retention, and so on. Compliance costs happen to be as results of local, national or even international regulation (for instance MiFID II or GDPR applying to countries in European Union). Global firms operating all over the world with varying new regulations in each country tend to face significantly larger compliance costs than those functionating solely in one region. Example – people registered for value added tax (shortly VAT) have to keep records of all tax (input and output) to simplify the completion of returns. They need to employ someone skilled in this domain, which is regarded as compliance cost.
Compliance cost mostly includes following:
- The cost to assemble and issue reports
- Cost of creating and maintenance of the system needed to collect facts and details for compliance reporting
- Cost of person to monitor compliance systems and to construct them
Compliance costs are often combined and misunderstood with regulatory risk or conduct costs. Compliance costs are simply onward for following rules as they arise. It may include variance compliance – human resources policies, independent audits, quarterly reports, environmental assessments etc
Rising cost of compliance
Managing and coping with rife and frequent regulation changes are one of the biggest challenges for compliance practitioners. Increasing personal liability is key concern, expected to rise each year, presumably. In regulated industries, compliance costs can rise to a point where they are barriers to entry to a market. That easily creates oligopoly. If that is the case, enterprises already competing in the concrete market mostly favor new regulations in order to keep new entrants from entering and making bigger competition. Costs are higher for firms operating for publicly held companies, they are more watched and are requested to produce reports.
The impact on operating models
According to the survey: The cost of compliance, KPMG International, 2013; we can divide managers into two camps – first, those who react to changes as they happen without previous planning, and second, those who proactively use changes to transform their operating models. Interestingly, different continents reported remarkably similar results (varying in units of percentages). There was not a side which would overcome any approach. Although exceptions exist, some said they considered exiting market due to rising regulations, others admitted thinking about moving their fund domicile.
The changing regulatory system also influenced product development decisions. According to the research, managers agree that regulation might not be the best way to improve products designs.
Taxonomy of regulatory costs
- Compliance costs
- Administrative burdens
- Substantive compliance costs
- Implementation costs – short-term costs, used to understand the new obligation, developing compliance strategies
- Direct labor costs – wage and non-wage (sick leave etc.)
- Overhead costs – office equipment, rent
- Equipment costs – software and machinery
- Material costs – for instance where material has to be changed for one more ecological
- External service costs – professional assistance (only when it is needed – technician etc.) with goal to find most profitable way with new regulation
- Administration and enforcement costs – implementing new licensing systems, processing renewals or publicizing a new information
- Administrative burdens
- Financial costs – the price of capital spent on being in accordance with restrictions
- Indirect costs – also called “second costs”
- Opportunity costs – for example staff spends time on dealing with compliance instead of working on another projects
- Macro-economic costs – these affects variables such as GDP, GNI etc.