Regulatory Watch: How to Make Reg Compliance Less of a Nightmare

Cascading regulatory mandates are quickly turning basic treasury operations into a nightmare. Here are three steps that can help.

Global transactions banks are facing a very difficult time now with regulations. These regs include Basel capital and liquidity rules, new tax initiatives like the Foreign Account Tax Compliance Act (FATCA), Report of Foreign Bank and Financial Accounts (FBAR) as well as FINRA’s onerous Know Your Customer (KYC), Know Your Customer’s Customer (KYCC) and anti-money laundering (AML) requirements.

These rules, not to mention the flood of acronyms, have made even the simple task of opening a bank account a nightmare for customer and bank alike, and they are only going to get worse. Thus, the current challenge for transaction banks is how to prevent progress made on improving solutions and customer experience from being undone by other regulatory compliance requirements. The path to capturing the stickier and regulatory-driven, less balance-sheet intensive revenue needs to be clear.

Mitigating the reg impact
But there is hope and here are three steps that will help mitigate the compliance nightmare. 

1. Push back on legal/compliance departments. Bank legal and compliance teams will too often push for the most conservative interpretation of regulatory requirements to mitigate the bank’s risk. This is why a bank may ask for a whole new set of supporting documents to open an account, even when a customer has delivered the same set of documents to open a similar account the month before. It is also why the more conservative interpretation of Bank A will eventually show up at Bank B, and then Bank C, because regulators for Bank A will talk to the regulators at bank B and tell them, this is how bank A is doing it, and eventually Bank C’s regulators will learn of it too, and soon that is the new standard for compliance.  

   This pattern further incentivizes every bank to take the most conservative interpretation. Customer-facing bankers should do more than embarrassingly make the request the conservative interpretation requires of their customers and point out the business risk and customer experience cost in lost business the request will cause. Corporates can also push back by saying they refuse to adhere to this interpretation and continue to move their business to banks that will not hold them to it.

2. Push back on the absence of definitive regulatory guidance. Corporate customers need to be made aware of the true nature of the regulatory process impacting banks (and, indeed, most regulated entities). By design, regulation does not prescribe any exacting guidance as to what constitutes compliance, because to do so would allow the regulated to figure out how to game the system with regulatory arbitrage and other means. Quite the contrary, regulators offer almost no feedback on whether the actions the regulated entities propose or take will satisfy the rules. What’s worse, the regulators don’t always fully understand the activities being regulated and are learning as they go. Worse still, each major bank has large conference rooms full of their own dedicated team of regulators learning how the regulations apply to that bank and how that bank is attempting to comply with them. Any feedback given to one bank by their set of regulators may not have any bearing on what another bank’s regulators might say or do. Yet, each regulatory team is reporting back to their central regulatory body and shaping the regulations based on what is learned. While separate teams of regulators make it difficult, some discussion of standard responses by banks on how they interpret and seek to comply with the rules might still be fruitful.

   Corporates can do their part by giving up the expectation that they can find definitive guidance on what they have to do from their banks or some authoritative independent expert. That guidance does not exist. Corporates can push back on this lack of guidance by speaking with regulators to explain why the current interpretation required of their bank makes the regulations untenable, or how compliance with it creates severe unintended consequences. In addition, corporates could also take a community approach to regulation by coming together and say this is our standard of compliance with this regulation and seek to hold to it. They would thus encourage their banks to do the same.

   US banks and their corporate customers bear a global responsibility, too, because US rules are the most onerous and, because of the importance of US financial markets and access to USD clearing, they are setting the standard for most major banks worldwide.

3. Employ technology to make compliance more effortless. Even if these other two means fail, there is hope that technology can help make compliance with bank regulations more effortless and eventually end the nightmare. The silver lining in the regulatory response to the financial crisis is that it has come during another breakthrough period in information technology. Cloud platforms and smartphones can now connect everyone almost anywhere to vast amount of data and documentation, increasingly with identify verification. Accordingly, it should be conceptually possible to comply effortlessly even with the most silly compliance mandate with the aid of technology. A big help here would be to force regulators to accept documentation digitally, so that repetitive requests could be satisfied with smart forms that are prepopulated with all the relevant information.

Regardless of which of the efforts to mitigate the regulatory impact prove most effective, something should be done. Otherwise treasury practitioners will have only regulatory compliance nightmares to look forward to.