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How the compliance challenge is hurting innovation

Compliance officers at financial institutions outline how the cost of complying with a raft of regulatory reforms is dampening innovation and making it difficult to stay competitive.
How the compliance challenge is hurting innovation

Heads of compliance and regulatory affairs at financial institutions have spoken of the difficulties they face to remain competitive as they deal with over-arching reforms from Europe and the US.

They point to the Foreign Account Tax Compliance Act (Fatca) which takes effect next year as among their chief concerns, amid a raft of rules coming on top of stringent capital requirements such as those imposed under Basel III.

They were speaking at the third Pan-Asian Regulatory Summit in Hong Kong last week, shortly after a debate at the event in which securities regulators themselves listed Basel III as among their chief challenges, as reported.

Brian Harte, group head of compliance for Europe and Asia at the Royal Bank of Canada, notes that in a world calling for increased investor protection, the risk of “retrospective moralising” – applying today’s moral values to past situations – is challenging compliance officers as never before.

“[Compliance officers] increasingly need to predict the future – what happens if the product morphs into something else [it was not intended for]?" he says. "In a commercial world it has became very difficult to judge; it’s crystal-ball time."

Harte notes that the cost of compliance is weighing heavily on product innovation. “In the case of Fatca, product committees of [financial institutions] will increasingly have to factor such regulatory costs into their cost-benefit studies,” he says.

Fatca is a far-reaching piece of policy designed by US authorities to clamp down on tax evasion by US citizens with overseas assets. Foreign banks will really start to be impacted by Fatca in 2014, when they risk being penalised for failing to comply.

Foreign financial institutions (FFIs) that opt for compliance are required to report to the US internal revenue service by September 2014 all the US account holders they count as clients.

Participating FFIs will have to make 'pass-through payments' by withholding 30% tax for any payment linked to US assets made to a non-participating FFI. While operationally onerous, Fatca has been widely criticised for forcing banks worldwide to play the role of US offshore tax agent.

Meanwhile, the forum also heard that lack of harmonisation of regulatory initiatives globally, such as the G20 commitment to bring over-the-counter derivatives under a more transparent framework via mandatory clearing and reporting, is having unintended consequences.

Catherine Simmons, head of regulatory, industry and government affairs for Asia-Pacific at State Street, says increased regulatory complexity means that clients are starting to pressure institutions to come up with global solutions to help them deal with such issues.

“There is a lot of pressure on firms internally to become global, with their clients facing a complicated world asking service providers to [resolve diverse regulatory requirements] to deliver a global offering," says Simmons.

"This is opposite to what regulators would have wanted to see – the pressure [that institutions face] internally to speed up the approval processes and get things done."

Benjamin Bair, head of corporate and investment bank compliance for Asia-Pacific at Barclays, points to staff recruitment in legal and compliance as another challenge.

With banks under pressure to cut costs and uncertainty over the global economic outlook, compliance and legal professionals are likely think twice before changing jobs.

Bair notes that banks have had to turn to “non-traditional places” to recruit compliance staff, citing audit firms, external consultants and law firms, even though they might have zero experience working with a bank's compliance division.

¬ Haymarket Media Limited. All rights reserved.
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