What is a 'Compliance Cost'

Compliance cost refers to all the expenses that a firm incurs in order to adhere to industry regulations. Compliance costs include salaries of people working in compliance, time and money spent on reporting, new systems required to meet retention and so on. These costs typically increase as the regulation around an industry increases. Compliance costs can be incurred as a result of local, national and international regulations, and they generally increase as a company operates in more jurisdictions. Global companies that have operations in jurisdictions all over the world with varying regulatory regimes naturally face much higher compliance costs than a company operating solely in one location.

Compliance costs are sometimes referred to as compliance overhead.

BREAKING DOWN 'Compliance Cost'

Compliance costs are often mixed up with regulatory risk and conduct costs. Regulatory risk is the risk that all companies face due to potential changes in the rules going forward and conduct costs are the fees and payments a company makes for breaking the current regulations. Compliance costs are simply the ongoing price for following the rules as they are. For a publicly traded company, compliance costs include all the industry-specific compliance — environmental assessments, human resources policies, etc. — as well as the costs of shareholder votes, quarterly reports, independent audits and so on.

The Rising Cost of Compliance

In a globalized world, compliance with shifting regulatory regimes is a complex task. Companies deal with differing regulations as well as expanding jurisdictions where countries like the U.S. look at the sum total of a company’s operations to ensure compliance with anti-bribery, anti-terrorism and anti-money laundering legislation. Then there are places like the European Union, which seems to have a regulation for every imaginable business practice. In 2016, all companies selling goods and services were informed that they would have to be in compliance with the General Data Protection Regulation (GDPR) which increases compliance costs by mandating the appointment of a data protection officer (DPO) to oversee implementation of systems and privacy reforms.

As a result of increasing compliance costs, many companies are turning to large enterprise level systems to lower the headcount they need to dedicate to compliance. Interestingly enough, the trends that created these large systems, like big data analysis, have also helped regulatory bodies spot non-compliance. So even as spending on compliance costs has increased, conduct costs have as well. This trend looks to continue as the number of environmental, tax, transportation, public health and other regulations have increased. Many nations go through phases of increased regulation followed by deregulation to a point, and the U.S. is no different. That said, the general rule is that once a regulation is on the books, it gets tweaked rather than erased.

  1. Compliance Officer

    A compliance officer ensures a company complies with its outside ...
  2. Compliance Program

    A compliance program is a set of internal policies and procedures ...
  3. Compliance Examination

    A compliance examination is a periodic examination to make sure ...
  4. Compliance Registered Options Principal ...

    The Compliance Registered Options Principal was a supervisory ...
  5. Conduct Costs

    Conduct costs are any payments made by a bank in the settlement ...
  6. Data Protection Officer (DPO)

    A data protection officer (DPO) is a position within a corporation ...
Related Articles
  1. Personal Finance

    How to Get a Job in Compliance

    What it takes to become a compliance officer, why the field is so diverse, the job's function in general and within the finance industry in particular.
  2. Personal Finance

    Common interview questions for compliance officers

    Prepare to ace your compliance officer interview. Learn how to answer some commonly asked interview questions and what you need to know to come out ahead.
  3. Financial Advisor

    Asset Manager Ethics: Risk Management and Compliance

    Managers should create a compliance and risk function that is integral to the investment function in order to plan for the increasingly more common market dislocations that occur in the global ...
  4. Financial Advisor

    How Advisors Can Create Compliance Programs

    Here's how investment advisers can set up a compliance program that adheres to SEC requirements.
  5. Tech

    Advisors: Are You Managing This Big Compliance Risk?

    A new study finds that supervision of electronic communications at financial advisory firms is falling short, putting them at risk.
  6. Financial Advisor

    The Fiduciary Rule: What Will Implementation Cost?

    Compliance with the new fiduciary rule is proving to be costly for many firms.
  7. Financial Advisor

    Advisors to Up Tech, Compliance Spending in 2017

    Many advisors plan to spend more on technology, compliance and marketing in 2017, according to a recent survey.
  8. Financial Advisor

    Advisors: What to Know Before You Text

    Texting is becoming more popular between clients and financial professionals, but compliance can be tricky. Here's what to know before advisors text.
  9. Investing

    What to Expect from OPEC’s Monitoring Committee

    OPEC and non-OPEC countries meet this weekend to agree how to monitor output cuts.
  10. Tech

    How SEC Regs Will Change Cryptocurrency Markets

    The SEC's recent broadsides have made regulation imminent in cryptocurrency markets.
  1. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  2. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  3. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  4. What barriers to entry exist in the financial services sector?

    Dive into the complicated and controversial relationship between the maintenance of stability in the financial services sector ... Read Answer >>
Trading Center