The range of new regulations which treasurers will have to face in the next few years is not only overwhelming, it is bewildering and inconsistent and often contradictory. Some of these may have a direct impact on the treasury function but many will have unforeseen effects on the rest of the financial supply chain, from suppliers to buyers, banking and other financial counterparties, and the accounting and audit requirements. They will certainly impose complexity and increased costs of compliance. Even more unfortunately, they are incomplete and still subject to rounds of discussion.
“It’s absolutely surreal,” says Damian Glendinning, treasurer of computer giant Lenovo, referring to the plethora of complex new rules his team has to grapple with.
It’s difficult to put all of these regulations into a pecking order but perhaps the most complicated on a global scale is the banking industry and then come the accounting and tax proposals on an international and national level.
Basel III whales and minnows
Top of the list is Basel III. Its ambitions are laudable. In the wake of the global financial crisis, the Basel Committee on Banking Supervision of the Bank for International Settlements (the central banks’ central banker) wanted to introduce certain reforms to strengthen the international banking system. Banks had foolishly dividended down their capital, leveraged their positions through freely available derivative instruments and relied on the availability of liquidity in the interbank markets.
So Basel wanted to set standards for higher and better quality capital, improved risk coverage, capital buffers, and liquidity and funding requirements. It also proposed a timetable, to be agreed internationally, to implement these reforms. The problem was that even the most international of banks remain national banks. These big banks live with little banks in their jurisdictions and getting national regulators to agree on what will apply to the whales and the minnows was not easy.
So, in June 2012, the Basel Committee mandated a small group of members to constitute the Task Force on Simplicity and Comparability. The name gives the game away. As Stefan Ingves, Chairman of the Basel Committee and Governor, Sveriges Riksbank said: “The Committee is keenly aware of the current debate concerning the complexity of the current regulatory framework. The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework.” Among the details are leverage ratios and how they should be applied – or made subject to exemptions – at national, European or international levels. For treasurers, this means continuing uncertainty not only on long term funding (and its cost) but also the short term supply chain – trade finance and availability.
IFRS keeps on going
Next up is the never ending story that is the International Accounting Standards Board (IASB) and its standards, International Financial Reporting Standards (IFRS), and conceptual frameworks. Hans Hoogervorst, the IASB’s chairman, reflected on progress: “A little over a decade ago the IASB was created with what seemed then to be a courageous expectation that countries would entrust an independent body to set financial reporting standards for their companies and businesses.” Readers can judge that but it is only fair to add that Hoogervorst concedes, “Our task is far from complete.” He went on to acknowledge that “accounting standards are not free from judgement and they can be subject to fierce controversy” and many practitioners would agree.
But the IFRS Foundation is happy enough with progress and with itself. In June 2013, it published a piece of market research which gave an initial assessment of 66 jurisdictions, including all G20 members, and found that 95% of them had made commitments to IFRS and 80% had adopted them.
Michel Prada, chairman of the trustees, noted “the remarkable progress” although, he added, “different countries are at different stages.” But he remains confident that “the direction of travel is clear and the momentum is unstoppable.”
The IASB doesn’t deal only with standards. It has also concerned itself with the conceptual framework for financial reporting. The name alone may cause many to assume that this is a somewhat theoretical exercise “of interest only to accounting geeks with seemingly little relevance to investors” (their words). Not so. “While a framework for financial reporting is not in itself an accounting standard, the decisions taken now will have far-reaching consequences because the IASB will use the revised framework as it develops new and revised IFRS.”
Derivatives regulation requirements
At least IFRS tries to be international. The problem is that there are still individual nation states and also a group of 28 nations in the European Union, 17 of which share a common euro currency and whose monetary policy is led by the European Central Bank. The EU’s European Market Infrastructure Regulation (Emir) introduces new requirements to improve transparency and reduce the risks associated with the derivatives markets and central counterparties. Emir also establishes common organisational, conduct of business and prudential standards for CCPs and trade repositories.
The European Securities and Markets Authority (Esma) has set clearing thresholds for different derivative contracts: in gross notional value terms, these are €1 billion for credit derivatives and equity derivatives and €3 billion for interest rate, foreign exchange and commodity derivatives. But not all OTC derivative contracts count towards the clearing threshold. Esma makes it clear: “Those OTC derivative contracts entered into in order to reduce risks relating to the commercial or treasury financing activity of the non-financial entity, or of non-financials of the group it belongs to, are excluded from the calculation of the clearing threshold.” Further considerations are expected.
US deadlines and delays
Then there’s also the question of the US. Lots more deadlines, delays and, yes, consultation and discussions. The main piece of legislation is Dodd-Frank (the Wall Street Reform and Consumer Protection Act) which was signed by President Barack Obama in July 2010 but the lobbying and technical discussions go on and on. This is not surprising because the act is an enormous piece of work (848 pages) which covers everything from the securities industry (regulated by the Securities and Exchange Commission) to banking (the Federal Reserve and Federal Deposit Insurance Corporation) and everything between (derivatives and too many acronyms). So far, Dodd- Frank’s track record is about 50/50 in deadlines missed and rulemaking proposals still missing.
While Dodd-Frank tightens up on banking and securities trading, the US also has the Jumpstart our Business Startups Act ( Jobs Act) which aims to encourage small businesses by easing certain securities regulations and the Crowdfund (Capital Raising Online While Deterring Fraud and Unethical Non-disclosure) Act which could also help raise capital. Dodd- Frank gave the SEC new authority to require registered investment advisers to maintain records and file reports on hedge funds, private equity funds and other private funds they advise (more compliance) while Jobs and Crowdfund are hoping to reduce complexity.
Finally comes tax and then come more taxes. The G20 governments want to crack down on tax evasion (it’s illegal) and on ‘aggressive’ tax avoidance (even if it’s legal). Yet at the same time they engage in tax competition to attract foreign investment. Their latest wheeze was to adopt a plan from the Organisation for Economic Cooperation and Development (OECD) to draft an international framework for tax reform and to close what they see as loopholes in corporation tax.
Big companies quite legitimately book investments, intellectual property and sales in countries and tax jurisdictions which are most amenable. Moreover, they disclose how they do their business in statutory audited accounts.
Some governments – mostly in continental Europe – also want a financial transaction tax (now usually, but not officially, FTT). Sometimes called the Tobin tax (named after Nobel laureate James Tobin who first suggested it in 1972), its theoretical origins go back to another Nobel, John Maynard Keynes, in 1936 and, in practical terms, the stamp duty which the British government first imposed on share dealing in 1694. The details remain unclear because there are so many ways of defining what’s going on and where. Moreover, the law of unintended consequences could mean a simple reduction in financial transactions. The result would then be no tax take for governments. More importantly, companies would find their abilities to make important hedging transactions dramatically reduced. So there will be yet more discussion and politics and continuing uncertainty.
The US also has a well meaning piece of legislation in its new Foreign Account Tax Compliance Act (Facta). This is part of the Hiring Incentives to Restore Employment (Hire) Act and has already run into problems which have put the timetable out even farther. As it stands, it proposes ‘unacceptable extraterritoriality’ and places a huge burden on non-US citizens and companies. Colleen Graffy, formerly US deputy assistant Secretary of State for public diplomacy for Europe and Eurasia, and now associate professor of law at Pepperdine University in London, also points out the reputational damage in addition: “This infringement on the sovereignty of other nations has not gone down well abroad and has only served to reinforce the most negative stereotypes of America.”
But treasurers’ concern should be how Facta may have an impact on their own businesses even in their own countries. As Graffy says, “A particularly alarming aspect of Facta is that it seeks to coopt foreign banks as longarm enforcement agencies of the Internal Revenue Service – even when it might contravene that country’s own privacy or data-protection laws. If financial institutions don’t report US citizens holding accounts with them, these institutions face a 30% withholding tax on securities transactions that originate in the US.” So a company in country A doing business with another company in country B in US dollars will have a further burden.
All these complexities and compliances arrive at a time when businesses and treasuries are streamlining and speeding up their own operations. It is a strange paradox that more and more computing power is being used to help trade and investment and yet more is there for the purpose of ticking boxes.