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This is the first in a series of three articles produced by Treasury Today Asia and Citi, giving you the chance to have your say on some of the key issues in corporate treasury today. In this article, Sandip Patil outlines his views on the Asia regulatory landscape. We invite you to answer three polling questions based on your view of the content. We will analyse and publish the results in an upcoming edition of our Treasury Insights newsletter, kickstarting industry debate.
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Region Head, Global Liquidity and Investments, Asia Pacific, Citi
Managing regulatory change in Asia Pacific is par for the course when doing business in the region. However, over the past few years, the pace of change has picked up, domestically, regionally and globally. What are the key challenges corporates are facing and what can treasury teams do to drive real value from compliance?
Regulation is often seen as something that must be done before the real business can get underway. Across Asia, this viewpoint is compounded by the fact that corporates are facing a complex and dynamic regulatory environment that can seem almost overwhelming for the uninitiated. But with a change of mindset, this challenging landscape can become genuinely beneficial, suggests Sandip Patil, Region Head, Global Liquidity and Investments, Asia Pacific at Citi.
Managing business in Asia is all about growth. With virtually every industry in the region exhibiting this aspiration, many companies are finding out how difficult it can be to move from market to market, says Patil. Heterogeneous regulations, different customer buying behaviours and even variances within banking service delivery, are creating a series of unique environments through which treasury must navigate in its support of business growth. With a series of optimisation goals to achieve, each domain in which treasury moves sees regulation having a major influence on what can and cannot be realised from jurisdiction to jurisdiction.
Where the wording of individual regulations is often uncertain, understanding the “spirit of their intent” is essential, says Patil. Facing an interpretive element can force businesses into a cumbersome tactical reaction for each change, he adds. Over time, this approach creates inefficiencies eventually leading to KPIs falling behind competitor or industry best practice. Conversely, a positive approach and a firm grasp of the regulations in each jurisdiction – and the intentions behind them – can be a source of improved efficiency and long-term value for treasury and finance teams.
There are many verticals in the regulatory space and within each there will be sub-sets to which corporates must adhere to, varying from country to country. These rules can, for example, dictate the types of accounts that can be opened or whether funds can be co-mingled or not. Cross-border regulations may further stipulate, for instance, the movement of cash and capital thresholds. FX rules can also dictate matters such as currency convertibility and necessary permissions for movement.
With a noted trend for protectionism in certain markets, regulators are also steering corporates into new actions such as the mandating of local currency billing. In addition, the governance of data is rising up the agenda in many jurisdictions, driven in part by a focus on digitisation. This is driving businesses to review how they manage their infrastructure and flows, potentially curtailing outsourcing plans. Yet another regulatory domain that demands close consideration is that of taxation. Again, rules can differ considerably between jurisdictions, as they are subject to both global and domestic variables.
Given the regulatory complexity to which many corporates in Asia, especially those from overseas, are exposed to, failing to see beyond compliance is perhaps understandable. However, Patil notes a broad spectrum of corporate reactions to this topic; from the static to the highly evolved. Those that have taken little or no action are often encumbered with fragmented operations, he says. “Often, they find it a challenge to determine what steps to take, especially if they do not have a consistent treasury policy or model to help them form an effective response to regulatory issues.”
The most agile corporates have implemented appropriate organisational structures for their needs. Commonly, this appears as a regional treasury approach with local outposts under constant management. This will be guided by strong governance, trusted local personnel, and a willingness to engage with the authorities.
Bringing the organisation together is key to success in a disparate regulatory environment, says Patil. In driving efficient working capital management and forming effective strategies around, for example, shared services, businesses can begin to understand what kind of legal entities are most appropriate to them.
From here, it becomes possible to build best-practice responses to matters such as cash repatriation, capital funding, expectations of returns on capital and comprehensive risk management practices. The role of the treasurer is therefore not only to understand the often highly nuanced applicable regulations, but also to bring this understanding to conversations with the wider organisation, generating a truly holistic and consistent outlook.
Delivery of the most efficient response will typically require the conversation to be extended to external stakeholders too, key amongst whom will be the organisation’s bank. The right banking partner, says Patil, will be able to engage treasury about what regulations exist and where, how best to interpret these, and how other businesses are responding so that vital benchmarking can be executed. This feedback must be delivered on a constant basis too, he adds, especially in rapidly evolving markets like China and India.
Perhaps the most obvious area where corporates can derive regulatory advantage is through understanding of the evolving tax environment in Asia and implications on treasury management. Where centralisation through a payment factory or in-house bank is desired, regulations in jurisdictions such as Singapore, Hong Kong, Malaysia and Thailand have all allowed government sponsorship for the onshoring of regional structures. Through this support, corporates have benefited from tax breaks and a de-cluttering of the rulebook affording them lower cost of funding, reduced operational cash requirements and opportunities to pay down expensive debt or repatriate cash to headquarters.
Although the Asian regulatory approach is still far from ‘one-size-fits-all’, and remains more restrictive than in Western financial centres, it is more open-minded today than ever before, says Patil. A bank such as Citi, with its long history, strong reputation for innovation, and on-the-ground presence in the region can be a proactive sounding board for ongoing local regulatory developments, to increase ease of cross-border business and help multinational clients operate more efficiently.
Whilst a strong partner is essential, the role of technology in enabling efficient operations in Asia’s complex and dynamic regulatory environment must also be acknowledged. This now extends beyond functions such as electronic clearing, into new endeavours such as blockchain, artificial intelligence, machine learning, ‘Big Data’ analytics and APIs.
The bank has for some time been helping clients to digitise their processes and documentation, and build connectivity standards for their underlying systems and platforms. But it also extends its work with the authorities as part of the effort to develop appropriate ‘RegTech’. “The regulators are extremely keen on making sure their respective countries are seen as leading some of these digital practices,” says Patil. This, he notes, has propelled a notable evolution in the market around the use of the kind of advanced technologies mentioned above.
In fact, Citi has been working with several Asian authorities, advising on and helping to develop a regulatory sandbox approach. This enables businesses to explore and test new products, services, business models and delivery mechanisms for regulations such as KYC and AML, within a controlled real-world setting.
Given the progress being made, naturally the level of enthusiasm and uptake for RegTech is rising amongst the corporate community. “We work with some of the most sophisticated companies in any market and we are seeing much more demand from them,” says Patil. With a collaborative spirit operating between bank and client, he adds that the pace of development in the real world is helping many more clients take a step along this pathway.
Rules for engagement
Corporates exhibit a wide range of readiness for handling regulatory change in Asia. Even within the inevitable diversity of maturities and needs, “the first step is knowing yourself”, says Patil. With every journey starting with a full understanding of the organisation, it will be necessary to map existing structures to what is needed. This should raise the issue of centralisation for financial processes, the learning of best practice, taking steps to mitigate any new process challenges, and, of course, securing C-suite buy-in for change.
The second step is knowing what is possible. No corporate can achieve this alone, states Patil. It will be necessary to talk to experts in the market, to learn all the local regulatory nuances, define a response and set benchmarks. Whether this is about establishing a major centralisation project or simply reducing the amount of local operating cash, the expert voice will help figure out the best way to do this at a country, regional or global level.
Regulatory optimisation can never be a one-off exercise, so the third requirement is to sustain the process of discovery, says Patil. In doing so, companies can ensure they are benefitting from changing regulatory conditions.
There is a clear advantage for treasurers choosing to work with a bank capable of offering an up-to-the-minute understanding of the regulatory environment. But, says Patil, a bank such as Citi can go further, helping the client explore the full range of opportunities and offering help in forming the most appropriate response for the entire enterprise, not just treasury, not just locally, and certainly not just as a one-off exercise.
With 70% of the centralised liquidity structures of the Fortune 500 companies on its books, Citi knows how some of the world’s most successful businesses are optimising their operations in the face of the complex and shifting regulatory landscape that is Asia. Being part of that ecosystem enables the bank to provide trusted advisory to clients – shifting the regulatory viewpoint from one of compliance to one of opportunity for corporates’ growth and transformation.