BankingOpen BankingRegulatory pressures to prepare for

Regulatory pressures to prepare for

Treasurers have had to cope with an influx of new compliance obligations over recent years, and it looks like these challenges are only going to increase in number. Nash Riggins explores some of the key regulatory pressures treasurers must prepare for in the coming months.

Over the course of the last decade, treasurers have been faced with a proverbial tidal wave of new regulations. From the Dodd-Frank Act and it’s 2,300 pages of rules and mandates, to GDPR, MiFID II and CRD IV, banks and financial services companies across a variety of jurisdictions have had to commit more time and money than ever before towards meeting their strenuous new compliance obligations. Unfortunately, it looks like those ever-increasing regulatory pressures aren’t going to let up any time soon.

In fact, treasurers are already bracing for the impact of a fresh new wave of legislative hurdles looming on the horizon.

According to Strategic Treasurer’s 2019 Treasury Perspectives Survey Report, the number of corporates are expecting an increase in regulation over the next two years is around seven times that of the number of treasurers expecting any sort of future decrease. What’s more, not only do half of all corporates surveyed report that costly new regulations are causing them significant delays or obstructing operations, but 45% of corporates said they still do not have dedicated teams or established processes in order to manage regulatory change.

With a huge number of treasury teams now operating on a streamlined basis, it’s more important than ever that companies ensure they’re able to fully understand impending regulatory burdens and how those challenges can be mitigated.

So, what pressures should treasurers be preparing for in 2019?

The demise of LIBOR

For decades, LIBOR was considered ‘the world’s most important number’. As the globe’s premier benchmark for short-term interest rates, LIBOR was published in five currencies and underpinned around $300trn worth of financial contracts, derivatives, bonds and loans. Yet in the wake of 2012’s rate manipulation scandal, the UK’s Financial Conduct Authority (FCA) announced in 2017 it would no longer require banks to participate in the LIBOR submission process by the end of 2021.

That’s good news for treasurers, because LIBOR’s lack of underlying transactional data meant that it isn’t actually the best benchmark. Yet as market authorities start to designate new alternative risk-free reference rates to replace LIBOR in the run up to 2021, treasurers will now have a lot of work to do untangling LIBOR from their operating models, renegotiating contracts and shifting the way risk is calculated and managed within their organisations.

Because the valuation of derivatives has always relied on a LIBOR-generated discount curve, treasurers will need to place particular emphasis over the next two years on shifting their respective portfolios to discount curves derived from emerging LIBOR alternatives like the Bank of England’s Sterling Overnight Index Average (SONIA) or America’s Secured Overnight Financing Rate (SOFR) benchmark.

For more information on how treasurers can prepare for LIBOR transition, click here.

PSD2 and open banking

The EU’s Second Payment Services Directive (PSD2) has been a thorn in the side of most financial institutions for a couple years now. Officially coming into force at the start of 2018, PSD2 was hailed as a landmark regulation designed to level the playing field between small fintechs and huge incumbent banks, while offering added security and protections for customers and businesses. Yet even a year after implementation, firms are still struggling to meet their PSD2 compliance obligations.

Earlier this year, a study conducted by the open banking platform Tink found 41% of European banks had failed to meet the March 2019 deadline requiring them to set up testing environments for third-party providers to test bank APIs. With regulation dictating these open API sandboxes be up-and-running by September 2019, that gives FIs just a few months to rollout their respective sandboxes or face severe penalties laid out by the European Banking Authority (EBA).

That being said, the impending compliance obligations of PSD2 extend far beyond the fintech and payments space. The EBA is also set to introduce a series of new Regulatory Technical standards on customer authentication in September that will prescribe the ways in which banks are allowed to use customer data and authorise integrated third party to use customer data.

From a corporate treasury point of view, this could add some friction in dealing with payments and means TMS and ERP systems will require new API connections to both new and existing banking partners. Yet by and large, the implications of these changes should be great for corporates – but only so long as FIs are able to meet their compliance obligations and deliver.

Changes to accounting standards

In January 2019, the International Accounting Standards Board (IASB) finally brought its new financial reporting standard into effect forcing businesses to be more open about their leasing obligations and how they’re reported. IFRS 16 covers nearly all contracts that incorporate the right to utilise an asset in exchange for a consideration, and has effectively redefined what constitutes a lease by removing the previous distinction between financial leases and operating leases.

That means corporates must now record all leases on their balance sheets at the current value of future lease payments, while lessees will need to record each asset and include any rights to use that asset – inevitably increasing debt levels.

Bearing in mind the new standard was announced in 2010, one might assume the vast majority of banks and corporates were well prepared for the transition.

Yet according to Deloitte’s Global IFRS 16 and ASC 842 readiness survey, almost one in four companies had yet to start their implementation projects by December 2018 – and only 6% of companies surveyed said they were fully prepared for IFRS 16’s launch in January 2019.

Treasurers and institutions that have yet to meet the new standard will have quite a lengthy to-do list over the months ahead.

Not only will companies need to conduct a major audit of existing leases and develop a transition approach, but they’ll also be forced to meet new data requirements to split lease and non-lease components.

KYC pressures

When it comes to regulatory pressures, know your customer (KYC) regulation tends to give treasurers the biggest headaches.

According to Strategic Treasurer’s 2019 Treasury Perspectives Survey Report, KYC is the single greatest compliance concern amongst corporates – and although KYC regulations are typically designed with banks alone in mind, nearly two-thirds of all organisations say they’ve been adversely affected by KYC rules in the form of prolonged onboarding procedures, excessive documentation requests and added friction.

Banks have been forced to adopt a range of rules in recent years, from Dodd-Frank and an expansion of the Bank Secrecy Act, to the Financial Crimes Enforcement Network’s new Customer Due Diligence (CDD) rule in 2018. But now there’s a new set of KYC obligations on its way in the form of the EU’s Fifth Money Laundering Directive (5AMLD).

While not quite as extensive as its predecessor, 5AMLD will add new provisions focusing on enhancing regulatory powers for direct access to information and bolder transparency concerning trusts and beneficial ownership. It’ll also regulate virtual currencies and pre-paid cards, introduce new safeguards for financial transactions to and from high-risk countries and open up centralised national bank registers to all EU member states by September 2020.

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