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Reflection and inflection: the past and present of regulatory change

12 February 2020

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Ciara Smith, Head of Regulatory and Compliance Services, looks back over some of the key initiatives in the regulation space from the past 10 years and looks forward to what 2020, and beyond, has in store for the regulatory landscape.

As is customary at the end of any significant period of time, we’re spurred into reflecting on events past, achievements, challenges, successes and failures. It also generates a renewed sense of potential, a year ending in a nice round zero brings thoughts of clean slate, a fresh start and general optimism.

For the financial industry and for regulation, the past 10 years have been similar to changing the tyres on a moving car. From the repercussions of the financial crash, to crypto assets becoming a mainstream, added to the exposures of the panama papers, and the value shift towards green and ethical investing driven by a rapidly changing demographic of investors; it has been a hell of a ride.

REFLECTION

So in this hyper charged world of regulatory change – what were the responses from our legislators which were expected to change the game? Here are some observations on those which have been the most thought provoking and had the biggest impact (both positive and negative).

FATCA/CRS (Automatic Exchange of Information – AEOI)

Looking back from 2020 where AEOI is now a fundamental pillar of the global tax and regulatory reporting environment, most people will admit that this was one of the big successes. Historical remediation requirements certainly posed a real challenge and the slow reaction of the regtech industry in creating viable solutions contributed to the pain felt probably disproportionately by non-banks.

The Alternative Investment Fund Managers Directive (AIFMD)

The alternatives directive aimed to address some of the perceived drivers of the financial crash, lack of insights and/ or understanding by regulators and central banks into the systemic risk exposures of the alternatives world. Based on the core concepts of the UCITS regulations, the legislation was a valiant attempt to standardise the complex. Almost six years on, the general consensus from both hedge and private equity industry participants has generally been neutral to positive. However, the extent to which the historical reporting requirements have been of value continues to be unknown.

Markets in Financial Instruments Directive II (MIFID II)

MIFID II has arguably been the giant of the regulatory landscape during the last decade and has come into very public and significant criticism from investors and industry participants since its introduction in January 2018. Commentary tends to focus on its complexity and scale, with the transaction costs and reporting requirements coming in for the most negative feedback generating substantial frustration. In response, the EU commission has indicated that it’ll conduct a review and potentially make some changes to cost and distribution of market data and investor protection rules.

The Packaged Retail and Insurance-based Investment Products (PRIIP) Key Information Document (KID)

The PRIIP KID has been a piece of legislation that was quite publicly put through the ringer, having been rejected and delayed on multiple occasions by the Commission. Aiming to standardise all documentation and simplify the complex for retail investors through comparability and more disclosure, this regulation always had a very high bar. The challenges of the requirements were extreme in terms of scope, timing and historical data. Widely touted as the most difficult piece of legislation to implement (outstripping MIFID II which is quite the achievement), the extent to which the cost of compliance outweighed the potential gain was a serious question asked by those impacted.

INFLECTION

As we look to the present and launch into 2020 and beyond, we’re faced with the implementation of regulations which will challenge some of the fundamentals of the global financial industry. The market has reached a point of inflection where some of the fundamentals to how the global financial world has operated may no longer ring through. There are numerous legislations either going live in 2020 and beyond or are currently in draft as proposals; far too many to list here. Of those with known details, the following are of key significance, with a key focus on transparency:

Base Erosion and Profit Shifting (BEPS) Multi Lateral Instrument (MLI)

The implementation of the MLI has a potential to impact over 2,000 existing bilateral tax treaties. Refer to the article ‘What you need to know about the MLI’ in this edition of the regulatory spotlight to read more insights into this complex topic.

Mandatory Disclosure (DAC6)

The EU response to addressing tax aggressive structuring, this regulation is extremely complex, wide ranging and has tight reporting deadlines. The intention of the reporting is to give the tax authorities insights into the structures and arrangements which, until now, have only had much delayed insights into.

In conclusion, there’s little doubt that the financial world at the end of this decade will look very different than the world of 2019, and the ability to react to regulatory change quickly will be the key to success for almost all members of the financial industry. As our regulators seek to continue to protect and prevent, our industry will still adapt and evolve and regardless of own opinions, we can all agree its certainly not going to be boring.

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