Treasury Today Country Profiles in association with Citi

Playing by the rules

Looking down on a major interstection at night in South Korea

Understanding the diverse regulatory environment is challenging enough for treasurers operating in Asia – but these challenges are being further compounded by the rate of regulatory change. From new accounting rules to more robust know your customer (KYC) obligations, how can treasurers stay abreast of new regulations?

From tax rules to anti-money laundering (AML) obligations, regulation is a considerable challenge for corporate treasurers around the world. Complying with existing regulation can be onerous enough, but these regulations are not static: as new rules come into effect, companies must also remain up to date with the relevant changes. For companies operating in several markets, this can be challenging.

Suman Chaki, Head of Cash Management Corporates – Asia Pacific at Deutsche Bank says that the bank carried out a survey of some global clients and asked about their major pain points. “The top one that came up was regulatory diversity and the pace of change,” he says. “So this issue is top of mind for all global treasurers, especially those who operate in multiple markets.”

In Asia, the region’s disparate countries, currencies and regulatory authorities make these challenges even greater. Companies operating across the region may be exposed to hundreds or even thousands of regulatory changes each year, depending on their geographical footprint. Against this backdrop, how can treasurers best keep on top of regulatory change – and even use certain changes to achieve business benefits?

Types of regulatory change

There is no doubt that regulation represents a considerable challenge for treasurers in Asia. “APAC is very heterogeneous, and this presents many challenges to treasurers to keep up with the volume and breadth of regulation as well as the diversity of market infrastructures,” comments David Blair, Managing Director of Acarate Consulting in Singapore.

Damian Glendinning, Treasurer of Lenovo, agrees that one of the key challenges is “simply keeping up with the regulatory changes”. He notes, “Thomson Reuters actually has a database which tracks these changes – the number runs into the thousands every year.”

Developments which affect corporate treasuries can relate to anything from accounting and tax developments to cross-border payments and FX flows. Some types of regulation, such as cyber security, ecommerce laws, tax and accounting, may directly affect corporations. In other cases, regulations which are aimed primarily at banks may also have an indirect effect on their corporate customers.

“Regulatory changes do not just relate to a single market – there are regulators for whom the changes impact other markets as well, which is the supranational impact of regulatory change. For example, AML embargos are applicable beyond the jurisdiction where they are issued, which affects all clients who have money flowing around the world.”

Suman Chaki, Head of Cash Management Corporates – Asia Pacific, Deutsche Bank

In addition, areas such as cyber security and KYC are increasingly attracting regulatory attention. “Today, of course, we have the additional burden of all the post-global financial crisis (GFC) regulations, as well as the avalanche of KYC and AML requirements,” says Glendinning. “The practical solution is to wait for the banks to require the input. However, in the case of KYC, there is a serious issue: large treasury departments end up providing multiple copies of the same documents to many different banks – or even different branches of the same bank.”

More control or less control?

Adding to the complexity, regulatory developments do not necessarily follow the same broad themes across the region: while some regulators are working to increase controls, others are working to reduce them.

“In Asia, there are two streams of regulatory change that keep people busy,” explains Chaki. “One is that regulators are trying to get better control around flows, AML issues and security issues – so they are imposing higher controls. This is true for all regulators around the world. Over and above this, emerging market regulators are also trying to de-regulate their controls. In China alone, for example, there are several hundred new regulations in a year.”

Supranational impact

The challenges are compounded by the fact that regulations introduced in one market may affect other markets as well. Vivek Batra, Head of Sales for Global Transaction Services at DBS, points out that it is important to understand how changes in one jurisdiction may lead to actions in other jurisdictions. “For example, if there is a regulatory change which affects country A, it could be beneficial to move operations, liquidity or people into or away from country A,” he comments. “The global footprint of the company, as well as operations in individual markets, need to be taken into account.”

“Regulatory changes do not just relate to a single market – there are regulators for whom the changes impact other markets as well, which is the supranational impact of regulatory change,” adds Chaki. “For example, AML embargos are applicable beyond the jurisdiction where they are issued, which affects all clients who have money flowing around the world.”

Industry-specific changes

In addition to the changes already mentioned, companies may also have to take into account regulatory changes which relate to their particular industries – and the industries of their customers and suppliers.

“The treasurer needs to look beyond the organisation – it’s really about looking at the materiality of regulatory change on your whole ecosystem,” says Batra. “An auto manufacturer, for instance, would be affected by borrowing regulations for auto finance companies, and this will affect the company’s operations upstream and downstream.”

He adds, “It is not just about the company. The same auto maker will also be impacted by what’s happening in the aluminium, steel and power generation industries. The treasurer understands the company best and should have a good grasp on how regulations across its ecosystem affect all facets of the organisation.”

What’s changing?

Vijay Shankar, Head of Transaction Banking Asia at ANZ, notes that significant regulatory developments in Asia include the following:

  • The recent induction of the RMB to reserve currency status.

  • The introduction of the Goods and Services Tax (GST) Bill in India. This is considered the biggest change in tax structure between federal and state government and all companies will have to prepare.

  • Partial opening up of Myanmar and related opportunities.

  • Changes in emerging markets, such as tax amnesty schemes.

  • Incentives by the Hong Kong and Singapore governments to attract companies to set up regional treasury centres in those markets.

  • Negative interest rates in Europe and Japan.

In addition, Shankar notes that net outflows of US dollars are expected out of Asia in light of Brexit and the US elections. Treasurers should be prepared to hedge adequately in order to protect their P&L.

Managing change

With such a vast array of regulatory changes to manage, how can treasurers keep on top of all the relevant changes?

The first step is to understand what is changing and how these changes will affect the company. Depending on the company’s geographical footprint, this can be a daunting task. “Even if you know that there are regulations that impact you, as a treasurer it is almost impossible to go through the volumes of regulation and find out what impacts you – especially if you are in many markets in Asia,” says Chaki. “It is critical to have a mechanism by which this filtering can be done, and that’s usually where the banking partner comes in.”

Chaki explains that Deutsche Bank provides clients with a periodic update of regulatory changes that have happened in the previous quarter. This information is filtered where possible. At the same time, discussions about regulatory change are part of the bank’s day-to-day conversations with clients – in almost every client meeting, the first 20 or 30 minutes will be dedicated to regulatory topics.

“For these discussions, it’s important to know our clients’ businesses and their markets,” Chaki explains. “For example, if we know a client is working on a cross-border pooling solution across Asia and another market is opening up and allowing certain currencies to be pooled, we need to decipher that situation and discuss it with the client.”

Conversations about regulatory change are a two-way street, however, and treasurers shouldn’t wait for banks to come to them if they are concerned about particular developments. Wan Chun Shong, Group Treasurer of Tan Chong Group, says that the company stays up to date by continuously monitoring changes, as well as by liaising closely with relevant people who are well connected to the authority. “In this way, we will always have the upper hand before any regulatory rules are implemented,” he adds.

Anticipating change

Navigating regulatory change becomes easier if the changes are anticipated and the organisation is prepared.

“Some of these changes are expected: you see them coming either because they are being talked about, or because they are obvious,” says Batra. Consequently, Batra says it is important for companies to understand the overall direction or path taken by the regulators. “What changes have already taken place? What is their direction of thinking? It is possible to gain an understanding of the direction of regulatory change, which can help companies prepare for what might come in the future.”

In order to do this effectively, Batra says it is important to engage advisors, such as banks, who are constantly looking at the impact of regulatory change across a wider portfolio of companies, industries and geographies. “If a company is operating in the auto industry, its banker would likely have insight of the auto industry from a global perspective,” he says. “So if there is a Chinese auto maker exporting into Africa, and we have a knowledge of what is happening in those markets and in that industry, we can provide insight to the treasurer about the possible impact on the company’s operations even if it is not operating in those markets.”

Batra suggests that treasurers work closely with their bankers and leverage their expertise and insights. “The objectives complement each other – bankers and treasurers can navigate regulatory change together and act in a manner that is absolutely compliant, reduces risk and enhances returns.”

Conflicting advice

Banks can certainly provide valuable advice on regulatory topics – but companies should also be aware that certain regulations may be open to interpretation. As such, different banks may have different opinions on the same issue.

“In practice, most corporates wait to be advised – usually by their banks – of the most significant changes,” says Glendinning. “This approach is convenient, as the banks are usually the ones on whom the onus of compliance falls – for example, when opening a bank account or complying with a new exchange control regulation.

“However, this approach is not fool proof: sometimes the banks themselves have conflicting interpretations of the regulations, and it can happen that these interpretations are not in line with what the authorities intend. Usually, when this happens, it is not hard to establish the good faith of the corporate, and so the consequences are usually not too serious – but the clear message is that ignorance will not be accepted as an excuse next time around.

“This can be a real problem in Asia, where regulations are often vague, and frequently not enforced – until circumstances change, and they are applied again with more rigour. So it is always good to make sure your company has a track record of compliance and good behaviour!”

In some cases, this issue can be overcome by seeking input from regulators on specific questions. For example, banks may arrange joint meetings with the regulator and a specific client in order to gain clarity on a real life situation.

Companies may also choose to call upon different sources of support. Blair notes that while corporates tend to rely on bankers as a first line of regulatory information, they typically look to the big four and law firm advisors for due diligence when they decide to take action.

Seizing the opportunities

Indeed, knowing which regulatory changes will affect the company is just the start. Treasurers also need to know what changes they need to make in order to overcome the challenges – and, ideally, take advantage of any opportunities which may arise.

In some markets, such as China, pilot programmes can provide opportunities to gain early adopter benefits from specific regulatory changes. “Banks have to work closely with their clients, ask them if they want to be part of a pilot and take these pilot cases to the regulator,” says Chaki. “It’s critical for banks to be proactive and ensure we are representing the right kind of clients in the pilot programme.”

Companies can also use certain types of regulatory change to drive business benefits. One example is the introduction of real-time, 24/7 clearing systems, such as the FAST electronic funds transfer system introduced in Singapore in 2014. The system can be used to transfer up to SGD 50,000 between 20 participating banks. The beneficiary receives funds within five minutes.

“A lot of banking services are moving onto platforms which allow treasurers to access information and analysis faster and cheaper than it has been in the past. Whether it is for anticipating, reacting to or leveraging change, companies should aim to use technology to the fullest extent possible.”

Vivek Batra, Head of Sales for Global Transaction Services, DBS

By using such developments effectively, companies may be able to achieve significant benefits. “If a regulator revamps the clearing mechanism in a particular country and leapfrogs from a manual, inefficient mechanism to a real time 24/7 online clearing system, just imagine what it can do for a company’s business model,” says Chaki. “If you can sell to a customer and collect money immediately, imagine how you can de-clog your entire value chain.”

In other cases, staying on top of industry-specific changes can make companies more competitive. Tan Chong Group is a Malaysian company which distributes, assembles and sells vehicles in a number of markets across Asia. In particular, the company is an exclusive distributor for certain Nissan vehicles in some of these markets.

Wan says that Tan Chong Group has used regulatory change to the company’s advantage – as illustrated by recent changes to Vietnam’s Special Consumption Tax. “Close co-operation and support by management allowed us to respond quickly to the regulatory changes,” he explains. “Nissan CBU (Completely Built Up) vehicles with lower engine capacity, but higher power output, allow us to enjoy lower SCT rates.”

The company has also remained ahead of the curve when it comes to the introduction of new vehicle emissions rules on January 1st 2017. Wan notes that around half of the automotive players in CBU (whereby a vehicle is imported fully assembled) and CKD (completely knocked down, whereby a vehicle is imported in parts and assembled locally) are not yet ready for the new rules. However, in the case of Nissan both types of vehicles are already prepared for the changes, resulting in a competitive advantage.

Leveraging technology

Treasurers can also make use of technology in order to adapt to – and benefit from – regulatory change. “A lot of banking services are moving onto platforms which allow treasurers to access information and analysis faster and cheaper than it has been in the past,” says Batra. “Whether it is for anticipating, reacting to or leveraging change, companies should aim to use technology to the fullest extent possible.”

This might include making better use of the company’s ERP system. For example, some regulators are tracking the purpose of certain cross-border payments in order to curtail illegal flows by requiring companies to use purpose codes. “This looks daunting, but if you have a proper ERP system in place, it’s a one-time activity and doesn’t become such a hassle,” comments Chaki.

Conclusion

Staying on top of new and existing regulations is a challenge for treasurers around the world, but this is particularly the case in Asia. Treasurers can make the task more manageable by taking advantage of the information provided by banks, but there is still a need to monitor changes in the market and proactively seek opinions from the experts.

“In the end, no matter how difficult it is, compliance is not optional,” concludes Glendinning. “So it is important to read as much as possible, and use existing resources, such as the banks, treasury associations, conferences and webinars.”

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