Reading the Article 50 tea leaves…where is compliance heading in the next two years?|Wolters Kluwer Financial Services
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  • Reading the Article 50 tea leaves…where is compliance heading in the next two years?

    By Selwyn Paker

    Published May 12, 2017

    Now that Article 50 has been triggered and the wrangling has begun, compliance officers might reasonably ask if there will be a reprieve from the flood of financial regulation.

    Flood? Well, more like an avalanche. In the last two years the financial sector’s compliance function was on the receiving end of an average 200 new international regulations and announcements every day, according to Zurich-based compliance consultant Qumram.

    As PJ Di Giannarino, founder and chief executive of JWG Group specialising in regulatory change management, has figured out, if all the financial regulations in force today were stacked end on end they would reach all the way to the top of the Eiffel Tower. And for those compliance officers who haven’t yet ascended the great Paris landmark, it is 1,063 feet high. More dismayingly, if regulators keep churning the stuff out at the current rate, the pile will be three times higher than the Eiffel Tower in a few short years.

    This is why the world’s three biggest banks have hired 6,600 compliance specialists in the last two years, all while shedding staff in other departments. With all these regulations raining down on them, compliance is the one function that can’t be short-changed.

    The question inevitably arises: will there be some relief as the Brexit negotiations grind on over the next two years at a minimum but more probably five years, as back-room veterans of Brussels. With so many issues on the table, it’s impossible to say whether there will be a reprieve in regulations. It is however possible to say things will be different.

    Tea leaves

    Reading the tea leaves, we can at least see where things may be heading.

    First, the EU regulation pipeline is filling up. In the wake of the scandals relating to foreign-exchange manipulation, the European Commission will introduce its regulations on indices in January 2018. This is all about changes to Libor among other financial benchmarks that were supposed to provide the impartial basis for transactions worth trillions of dollars. There’s certain to be a scramble by administrators, contributors and users to understand the new benchmarks when they are finally released.

    The European Securities and Market Authority is supposed to issue a final draft in April, but we already know this will be a big job. As Deloitte pointed out in a note in April: “The regulation sets out a wide range of requirements on governance and oversight arrangements, managing conflicts of interest, accountability and control frame works, input data, and benchmark methodologies and transparency.”

    It looks like there will be no escape from this particular set of regulations because it will apply before UK leaves the EU – that is, inside the two years. In any event compliance with it could offer a competitive advantage as the dust settles after Brexit.

    Other regulations are already internationally embedded and unlikely to be affected by Brexit. One of these is the know-your-customer (KYC) rules even though they impose a considerable burden on companies and banks alike. Privately, corporate treasurers are complaining that it’s taking six weeks or more to open a company account because of all the due diligence that banks are required to do on their customers.

    “There is no standard format for KYC,” points out independent treasury consultant Paul Stheeman in GT News, the online publication for corporate treasurers. “This makes it extremely painful for corporates and consumes a great deal of time.”

    It may however be possible for a post-Brexit UK to harmonise its KYC rules with prevailing international ones rather than having to look over its shoulder at Brussels.

    Cleft stick

    Compliance officers in UK-based banks that are contemplating a relocation to the EU will be caught between a cleft stick. Because they cannot know how the negotiations will turn out, they must prepare to meet EU regulations while satisfying UK ones to the extent there is a difference between the two.

    Time is not on their side. As the European Central Bank (ECB) has just pointed out, it will take up to a year to secure a licence to operate across the English Channel. However institutions already functioning in the eurozone may obtain their licence sooner.

    To a significant extent this will depend on the internal risk models that UK banks have developed because they may not meet the ECB’s approval. However Europe’s central bank says it may accept UK-based models for a limited period.

    Hard Brexit

    Wealth management funds face a similar dilemma. Although not knowing whether they will suffer from a “hard Brexit” or get off lightly from a soft one, they will still become “third country” funds for the purposes of the eurozone.

    As independent consultants point out, funds may have to decide where in the EU they are going to establish a branch or some form of licensed entity. Already, different EU jurisdictions are bidding for firms to locate within their borders. Luxembourg, for instance, is bending over backwards to welcome UK firms through arrangements that won’t require them to shift a lot of staff and operational infrastructure out of the UK.

    Also, third countries aren’t all the same. Although they are technically third countries as far is the EU is concerned, Jersey and Guernsey for instance have already negotiated arrangements that give them pretty much full access to the EU. This won’t change after Brexit.

    Scrutiny

    Negotiations won’t be conducted in the dark. The European Scrutiny Committee in Westminster has told the government that it must keep the country in the picture throughout the deal-making. “The committee understands the government does not wish to provide information which would prejudice negotiations but considers that there is far more information which could be provided without any such danger,” it warned recently.

    A little- known institution, the committee acts like a watchdog on Brussels. The government is obliged to deposit EU documents in the Commons and the Lords and it’s the committees job to examine them and draw the most important ones to attention of the elected representatives. As the negotiations proceed, the committee will be issuing its views on EU documents as it’s always done, but while also explaining what they may mean after Brexit. Thus compliance officers in the corporate and financial sectors could do worse than read the committee’s weekly reports, which contain a round-up of Brexit-related issues.

    The City

    Theresa May has made it very clear that the government will not accept a punitive Brexit that seeks to put Britain at a disadvantage. If that happened, negotiators would simply walk away.

    In a landmark speech when Article 50 was triggered, the prime minister mentioned the financial sector just once. In a warning against a hard Brexit, she said any new barriers to trade would jeopardise investments in Britain by EU companies to the tune of half a trillion pounds – “it would mean a loss of access for European firms to the financial services of the City of London.”

    That’s coded language intended to deter Brussels from trying any tricks such as using regulation as a weapon to weaken Britain’s financial sector.

    About the author: Selwyn Parker is an author of books on finance and business topics, a specialist in financial history, and regular contributor to newspapers and magazines. Based in Spain, France and the UK, he focuses mainly on European developments. His latest book, The Great Crash, is a new history of the Great Depression that among other things explains the rise of regulation in the form of the SEC and related authorities. Selwyn is a regular contributor to Wolters Kluwer Financial Services.



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