Banks are searching for ways to navigate the complex regulatory landscape, so that they can stay focused on serving customers, product innovation and improving profitability. Here are the top five heavy regulatory burdens that banks face.
1. Tax pain
European banks face a tsunami of recent rules around taxation, ranging from the exchange of information on savings and income across borders to tighter rules on opening offshore bank accounts and accounting. In addition, there are now a host of new national bank levies and a European Commission proposal for a financial transaction tax. Finally, there's uncertainty over whether banks in certain countries will be permitted to shore up capital by converting deferred tax assets into credits that sidestep planned tougher capital rules.
The continued lack of harmonization among EU tax regimes in general is causing regulatory uncertainty for investors in banks, according to Fitch Ratings. It also means that the banks themselves need to pay more to beef up their compliance teams and keep a far closer eye on policy changes in Brussels. For lawyers and accountants, it's a bonanza.
2. Know your customer
This is the broad term applied to consumer compliance legislation that has been imposed on banks globally, linked to the overall push for greater financial transparency in the digital age. A plethora of national rules requires banks to accumulate more data on their clients, detailing their backgrounds and where their transactions are coming from and going to.
With shorter reporting cycles, the burden is expected to go only one way: upwards.
In the United States, since the Dodd–Frank legislation was signed into law in 2010, reporting requirements have increased several-fold. The related Consumer Financial Protection Act of 2010 established a new bureau to regulate financial products and services and ensure compliance with federal law. Now, five or more disclosures can be required for opening a bank account. Helping to generate and channel this data requires banks to work with specialist companies with trained experts.
3. Reporting overload
The layers of detail that banks must add to regular financial reports have increased exponentially since the crisis. Just recently, Deutsche Bank broke cover, publishing an article by analyst Matt Spick in which he argued that "reporting has spiralled out of all control and meaning". UBS's annual report last year ran to 868 pages, he said, three times longer than it was in 2006. "Even professional equity analysts struggle to understand."
To that needs to be added the regular "stress tests" that banks are required to complete to assess capital adequacy for their regulators. In the US, domestic banks also now have to file quarterly "call reports". A decade or so ago these typically included 150-200 reporting elements; that has now risen fourfold.
4. Transaction screening
This term covers the spike in the compliance burden related to screening for terrorism financing and money laundering. It also covers targeted sanctions such as those imposed on Russia and Iran.
The new requirements need sophisticated software as the rules are highly sectoral and vary from one region to another. The main headache for banks is how to understand the regulations and reflect it in their information management and data processing systems.
Some smaller banks have preferred to outsource this function to specialists in low cost areas. Larger banks typically bulk up internally but, again, this requires more resources, and runs counter to attempts to rationalise.
There is also a risk of rogue internal employees circumventing systems in large banks. A number of large European banks have fallen foul of US rules and the scale of the ensuing fines has shocked seasoned industry watchers.
Technology solutions are available but, ultimately, the buck stops with the banks – they are responsible to the regulator.
5. Transatlantic exchange
The last regulatory headache broadly covers the issue of transatlantic banking. Several regulations, notably the Report of Foreign Bank and Financial Accounts and Foreign Account Tax Compliance Act, now require foreign financial institutions to send the IRS information about financial accounts held by US taxpayers.
The legislation is aimed at preventing tax evasion but European banks have struggled with demands that they disclose the assets of Americans overseas, finding the regulations too burdensome. In some cases the rules have stopped Americans from doing business with European banks as the requirements are expensive and in some cases violate European privacy laws.
A helping hand
Whatever the regulatory burden – and the above examples are by no means a comprehensive list –replacing complex legacy systems with modern core banking technology is the only hope banks have of keeping up with the ever-changing requirements, and staying afloat in a highly competitive market.