The world's leading 100 financial institutions have seen the cost of complying with regulations soar by more than 30 per cent in the past three years to an estimated £28 billion in 2007, according to a new report by business advisory firm Deloitte.
And with the cost of regulation yet to peak, Deloitte is predicting that the governance and control bill could hit £50 billion by 2010.
And that is even before the cost of any new regulation introduced in response to the current credit crisis is counted, the firm says.
Despite growing legislation, however, a new report by Deloitte, entitled In Control?, finds that the cost can only be fully effective if institutions connect their risk management and controls, and
the governance of the two. "It appears that a prime feature of the recent losses incurred by major banks in the credit crunch was the inability, in many instances, to link risk and control factors together," said Matt Perkins, financial services partner at Deloitte in Birmingham.
"Financial institutions are always seeking to find and sustain the correct balance between risk and reward, but this lack of triangulation between control, risk and governance is, in most cases, a missing link which needs joining up.
"Current market dynamics dictate that there are few more vital issues for financial institutions to address than risk appetite, governance and control.
"Such systems set few hearts racing until it is often too late, yet they are increasingly deter-mining the winners and the losers across the global financial services industry.
"Governance and control systems need to be right at the top of the corporate agenda, as they are likely to play a central role in the individual success or failure of senior executives."
Deloitte's report also recommends that institutions need to stop viewing regulation as an unavoidable burden and start to consider compliance and competitive advantage in the same sentence.
It says the financial services industry has been hit by an avalanche of regulation in the last five years. This has included capital adequacy measures such as Basel II and Solvency II, and those addressing market practices, such as Treating Customers Fairly and MiFID. Investment banks, commercial banks and insurers have all been affected by regulations from a variety of jurisdictions.
"Even financial institutions applying current best practices have a significant way to go before they achieve the optimum return on governance and control investments," said Mr Perkins.
Deloitte makes a number of suggestions to improve controls in financial institutions. These include appointing a fully-accountable, board-level individual to oversee controls; using effective technology to automate controls and monitor transactions in real time to avoid errors; and implementing tools that allow managers and risk experts to collaborate in making decisions and to evidence control of significant risk from all sources.
The report also highlights differences between large and small financial institutions. It found that despite the complexity of multiple jurisdictions and greater compliance demands, larger institutions spend on average four per cent of their total expense base on governance and compliance activities.
In smaller institutions, this figure rises to six per cent.
Mr Perkins adds: "Governance, risk and control is one of the biggest issues facing financial institutions today.
"As the bar of regulation and control continues to rise, senior executives must demonstrate to the relevant authorities and to investors that they are in control."
