Financial groups’ risk and control costs soar

The world's 100 largest financial companies expect to spend $100bn on risk and control activities this year – double what they spent in 2006, the last full year before the financial crisis, a study by Deloitte has found.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Deloitte surveyed chief risk officers at banks and insurance companies and found that 73 per cent expected annual spending on compliance, risk, audit and other control functions to continue to rise.

The study forecast that the 100 companies' total risk and control spending would reach $111bn by 2012.

The risk officers estimated that about $20bn of the past and projected increase was a direct consequence of the financial crisis. Much of the rest was being spent on implementing new regulatory capital standards known as Basel II and Solvency II, said Kari Hale, a Deloitte partner.

The increased funds for control functions were going to projects including hiring people in risk management departments, developing ways to model risk and link it to business decisions, and replacing computer systems.

Brian Harte, Royal Bank of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Canada's head of compliance for Europe and Asia, told the Financial Times that the spending covered “a number of factors including upgrading compliance risk – especially market and operations risk – and general control functions such as finance, both in terms of people and systems”.

Consultants who work with banks said they were seeing great interest in real-time risk-management programs, which automatically impose trading limits when an individual, desk or institution appears to be too exposed to a particular instrument or counterparty.

Some banks have spent significantly on integrating separate finance, audit, risk and market surveillance systems, or even rebuilding them from scratch.

Rupert Chapman, an IT risk management consultant at PA Consulting, said: “They've found that the systems were not up for the job and there is a real case for change.”

Heightened regulatory activity in the wake of the crisis has forced banks and insurance companies to devote more resources and management time to demonstrating that they have the right controls in place.

Peter Brook, a regulatory consultant at Navigant, said: “You need a lot more people to deal with this scrutiny and deal with the greater expectations of the regulators.”

In spite of the new focus on risk and control, the Deloitte survey found that many of the biggest companies had not yet found effective ways to tie pay to risk. The chief risk officers estimated that the pay of only 55 per cent of top executives was “significantly influenced” by risk-related goals.

Financial services companies were most likely to link the pay of heads of audit departments to risk – almost two-thirds already do. But only 40 per cent of the companies surveyed said that they linked the pay and bonuses of business unit heads to risk.