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Cost-effective regulatory audits

Updated: Nov 30, 2022

Regulatory audits can become very expensive if lawyers take a combative view of regulation. As Warren Zevon once sang: "Bring Lawyers, guns and money"! A regulatory consultant with experience of working with regulators can sniff out problems rapidly, and develop cost-effective solutions.


The requirement to conduct regulatory audits and follow through on their findings is becoming more common – even for the best-run and most compliant firms. The FCA has recently launched thirty enforcement investigations as a result of its work on DB transfers, and firms’ responses to these need to be managed carefully and professionally to avoid them getting out of hand. This is accelerating the long-anticipated consolidation in the advice sector, alongside a realisation that no deals can be done unless a solid assessment of outstanding regulatory issues (including DB transfers) is undertaken.

For some firms, the knee-jerk is to throw the problem at their legal advisers. Existing relationships, the demonstrable depth of knowledge, and confident authority of legal firms makes this a seductive choice. But it’s a choice that could be the most expensive that a firm ever makes, for three reasons.


First, the legal mindset is inherently adversarial. Time and again we have seen a position being taken based on a legalistic interpretation of rules, implicitly challenging the regulator to say otherwise, inevitably leading to confrontation rather than collaboration. This approach misses the point about how regulation works. If you find a loophole or weakness in law and exploit it, there is nothing that the courts can do until Parliament changes the law. But regulatory rules exist as a manifestation of regulatory principles, and if the rules don’t work they can be changed or, as we have seen recently, overridden by the Financial Ombudsman. Even if a legalistic point seems to be ‘won’, in itself this risks damaging the whole relationship with the regulator.

Regulatory engagement

Which brings us on to the second reason. Experienced regulatory professionals work by bridging the relationship between a firm and its regulator. They don’t work for the regulator, but they know that a good understanding of their priorities, plans and practical approach is gold dust in implementing the most efficient compliance regime for a firm. And this understanding flows from engaging with the regulator on a frequent basis in successfully implementing compliance projects. These are the people who can rapidly assess a firm’s regulatory risks and accurately determine what needs to be done and how much it will cost. Ironically, some law firms have identified the validity of this argument by seeking to bolt professional services on to their legal services. But even this falls foul of the third problem: cost.


Finally, a good regulatory consultant will identify the likely issues in advance, gain budget approval, and stick to that budget. By contrast, legal firms usually feel they have the moral authority to act on whatever they discover (whether or not they are actually right) without reference to cost controls. They then present a (non-trivial) bill, boosted by their “white coat” authority: clients almost always feel obliged to pay. As a result, costs can easily spiral out of control.

Is it possible to control costs by going for the cheapest regulatory “expert”? Clearly no: any short term cost gains are more than likely to be wiped out by the future cost of remediation or even failure. The answer is clear: focus on value. A competent and experienced regulatory professional is likely to be far cheaper than a legal adviser and will, almost by definition, deliver more robust and reliable assessments than either an expensive lawyer or a cheap contractor.


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