Banks spend 25% of compliance budget on overseas regulation

New research finds banks face steep extraterritorial compliance costs

Richard Shave, BDO

Regulations such as the US Foreign Account Tax Compliance Act (Fatca) mean banks are spending 25% of their compliance budget on other jurisdictions' laws and regulations, according to the latest research carried out by operational risk consultancy Protiviti.  Along with anti-money-laundering (AML) regulation, Fatca is the area where banks are having to shell out the most on expensive compliance programmes.

34% of respondents to the survey said they are spending more than 25% of their compliance budget on extraterritorial compliance, with 45% of respondents saying they are spending between 10% and 25%.

Respondents to the survey ranked AML requirements as top of a list of regulations that have the most impact on their business, with Fatca in second place.

Industry experts are not surprised by the amount of compliance budget now being allocated to overseas' regulation.

"With the level of regulatory action picking up pace both in the UK and globally, and with fines for regulatory breaches, in particular in the US, now reaching eye-watering levels, it is no surprise that businesses are committing so much resource into managing these risks," says Richard Shave, a director at BDO Forensic Services in London. "The risks of non-compliance are, after all, catastrophic."

Bernadine Reese, managing director at Protiviti UK, agrees. "Spending up to a quarter of the compliance budget on other jurisdictions' laws and regulations seems high in the light of domestic priorities, however perhaps not surprising with the rise in use of extraterritoriality provisions," she says.

Fatca is of particular concern for Shave. "Due to the complexities of achieving compliance [with Fatca], which will often require significant upgrades to processes and systems, firms have so far racked up big costs on this issue without the luxury of knowing what the final act will look like," he says.

He also points out that the additional uncertainty from the introduction of bilateral agreements under Fatca between various countries and the US could lead to different approaches to compliance in different jurisdictions, which increases the compliance costs and the scope for error.

Stephen Ley, a partner in the risk services enterprise group at Deloitte UK, is more positive about the intergovernmental agreements under Fatca. "It's come as a relief that the US has very much listened to the feedback it's had globally regarding its original Fatca requirements, and its revised draft guidance has taken those items into consideration," he says. "Obviously, with the intergovernment arrangement now in place as well, that should reduce the amount of information and work that needs to be done by the countries that take part in that. Nonetheless, there's still a lot of work to do in a short space of time."

He also points out that companies are having to deal with increased compliance requirements from Asian regulators.

"Some of the European banks I work with are having to do more and more now to comply with very specific regulatory requirements coming out of some of the Asian regulators as well," he says.

He cites the monetary authorities of Singapore and Hong Kong as being quite specific in terms of some of their requirements around security and the use of data, for example. "These regulators are more prescriptive than you would see in other jurisdictions," he says.