Treasury Compliance Framework

Introduction

Corporate treasury groups have become increasingly familiar with the recent onslaught of new regulations coming at them from many different jurisdictions. These new regulations have been added to a range of existing requirements coming from assorted entities ranging from creditors, card companies and payment associations.

The sheer number (FBAR, FATCA, EMIR, Dodd-Frank) and increased rate of new compliance items coming into play represents a new level that significantly exceeds anything experienced in typical corporate treasuries in at least several generations. At the same time, the expectations that treasury will keep their organisations protected against or range of risks and exposures and in compliance is also at a new high-water mark.

Situation in Detail

There are three key premises vital to the overall arguments we are making in this article. They include the following items, initially identified separately, and then embedded in the discussion that follows:

• Calibration of standards or practices should be assumed. That is, differences in standards should exist between organisations that have substantially different size, industry characteristics and operational needs. An organisation with specific regulatory oversight of their industry will need a different level of compliance attention than another in a less regulated industry in those areas.
• Range of Standards. For any company there are a range of practices from excellence to the minimum to those below a level of care that should be tolerated. We refer to the minimum level as the Standard of Good Corporate Conduct.
• Ongoing Change. Standards will need to change over time to reflect new expectations, a more volatile operating environment or other external and internal demands. Adaptations are required at different times. Think of the changed compliance requirements around the security of card data before the series of major cyber-breaches at several retailers.

Compliance Triage

In order to avoid creating undue stress or depression by showing a full list of compliance related requirements that are established, new or soon to come, we offer the following simplified chart. Here are a few points to help the reader interpret the chart:

• Impact Type (x-axis). The horizontal axis offers a range of impacts from direct to indirect. Direct might include a rule that applies to your particular industry or is a requirement placed upon your company by a competitor. Indirect could include a regulation on another industry that could have a secondary impact on your company. An example of this could be Basel III that impacts their banking partners directly. The indirect impact could come from a devaluation of non-operating balances held at that bank which provided economic support to the relationship in the past. The new calculus may move the bank’s view of the relationship from a positive, income producing one to one that is now negative.
• Timeframe (y-axis). The vertical access is a relative timeline to a compliance activity. At the bottom we will find proposed or developing regulations or standards. These are items that may be open to influence. As you move up, regulations will be found that have a future implementation date. Finally, you will see the categories of new and established which represent items that are in force just recently or for multiple years. Near future and new items represent those areas where the greatest level of risk exists. A compliance process and the attendant knowledge, processes and reporting elements are typically being formed and adjusted.

Definition of Terms

We indicated that the level of care required to ensure compliance could vary by organisational industry, location, level of globalisation or other dimensionally complex areas of treasury intensity. It will help the rest of the conversation to be efficient if we define a few terms. Here are four primary terms and show that there are really only two different definitions that are relevant.

• Standard of Good Corporate Conduct. If we consider conduct and practices across a continuum from the minimum level of conduct to the highest level of care or attention, we can both note and name some important points on this continuum. The Standard of Good Corporate Conduct (SGCC) represents the minimum level of care or conduct that most organisations (from small to mid-size organisations up) should maintain. This level of care is generally constant across most industries with some exceptions. Certain treasury intensive organisations may have higher minimum standards for particular areas or practices than others (i.e. a bank would have a higher SGCC level of cyber security than a distributor of plumbing equipment).
• Leading Practice. This is a term that can calibrate. It answers the question ‘what should we be doing to be a leader.’ It necessarily has a realistic bent and adapts based upon the organisational size, level of demand and risk tolerance. It takes into account these differences. This term replaces the oft-overused and misused term ‘best-practice’ which is typically used to apply to every organisation as if they had the same regulators and level of complexity.
• World Class. This term is most frequently applied to the largest or most treasury-intensive organisations. It refers to taking a leadership position among those with the highest level of standards and the most pressing of demands. World Class would be a leading practice for large and/or treasury intensive organisations.

The graphic shows three separate companies. The first two companies have the same minimum level (Standard of Good Corporate Conduct) which is relevant to the general business population. Also, you will note that they have a different level for a higher standard that would represent a leading practice. These differences are reflective of their varying complexity, industry, size and scale.

The same graphic has a third company that has a different minimum and top category. The minimum level is higher as this company finds themselves in a highly specialised and perhaps more highly regulated industry creating an elevated standard that would reflect good corporate conduct. For the leading practice level in this industry, it is also noticeably higher than for other firms. This categorisation is also paired with the World-Class Practice moniker as it represents the highest standard across all industry categories.

The next graphic shows a progression of leading practices and the standards of good corporate conduct. This is meant to help demonstrate that standards shift over time. And, the changes in expectations or level of care is almost always upwards. A company will typically seek to target their performance within the band between SGCC and Leading Practice. Falling below the SGCC represents and unacceptable level of performance. This might be a lack of adequate care, improper controls or an inefficient process or workflow. Achieving above the leading practice mark, unintentionally, may represent excessive or burdensome costs.

Channels for Systematic Compliance

Given the number and range of emerging and new compliance activities that impact treasury, organisations must be more deliberate and formal about monitoring these items than in the past. There are too many balls in the air. There are three primary methods of gathering information on compliance related items which should be coupled with a more formal tracking method. [we may or may not be able to use the graphic below]. Briefly,

• General Input. General business media provides a scan of various regulations and it is quite simple to listen for compliance-related items as part of the normal part of staying current
• Specialised. Specialised reporting and information by your industry or with a treasury-focus will often be the first indication of a direct application of a compliance related item.
• Targeted. Engaging your consulting, legal or other partners in a custom engagement or as part of a retainer program provides a dedicated set of resources at your disposal for a part-time fee.
• Monitoring. Assignment of active, pending and developing items that could impact your organisation will now be formalised. Reporting may take different forms. But, characteristics will include: systematic and calibrated updates among the treasury leadership team.

Conclusion

Given the increase in compliance related activities that treasury faces it is important that treasurers establish a more formal process in monitoring pending and emerging compliance issues. This process must be appropriately calibrated to ensure that the limited time is properly calibrated to the most urgent and emerging issues in this domain.

Craig Jeffery formed Strategic Treasurer LLC in 2004 to provide corporate, educational, and government entities direct access to comprehensive and current assistance with their treasury and financial process needs.  His twenty-plus years of financial and treasury experience as a practitioner and as a consultant with various financial institutions have uniquely qualified him to help organizations craft realistic goals and achieve significant benefits quickly. He is primarily responsible for relationship management and ensuring total client satisfaction on all projects. Additionally, he oversees the development of all practice areas and staff.

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