From PSD2 to GDPR, and from IFRS16 to KYC, the challenges of regulatory change extend far beyond the numerous acronyms. Which regulations should treasurers be focusing on in 2019 – and with many treasury teams operating on a streamlined basis, how can treasurers best understand and manage the implications of the recent and upcoming changes?

For corporate treasurers, the importance of managing regulatory change may be nothing new – but in recent years, the high volume of new regulation has pushed this topic higher up the priority list than ever before.

Consequently, it should come as no surprise that research published by the Economist Intelligence Unit in 2018 found that 35% of respondents identified regulation as a driver of change. And as the report highlighted, there are plenty of regulations to consider: the survey’s respondents – a third of which were based in the US – said that treasury would be most affected by US tax reform (28%), IFRS 9 (25%), AML/KYC regulations (25%) and PSD2 (24%).

Likewise, the impact of regulatory changes can affect many different areas of treasury. For example, Deloitte’s 2017 Global Corporate Treasury Survey found that a fifth of treasurers were using or considering alternate funding sources as a result of banking regulatory reforms, while 17% were revisiting their short-term investment policies and the same percentage had noticed an increase in hedging costs.

“Regulatory change is constant,” says Ashley Pater, Senior Vice President, Product Management at GTreasury. “Not only do corporate treasury teams need to think about what is ahead in 2019, and prepare accordingly, but they also need to consider the continuing impact of regulations that came into effect in 2018, such as PSD2.”

With that in mind, which recent and upcoming regulations will treasurers be focusing on in 2019 – and how can treasurers best manage the growing burden of regulatory change?

Weighing the impact of Brexit

Straddling the divide between a regulatory and a political topic, Brexit is one area that treasurers have been monitoring closely over the last couple of years. While the final shape of the UK’s exit remains unclear at the time of writing, Brexit is likely to have a considerable impact on treasurers over the course of this year – whatever the outcome.

Without clarity over whether or not a transition deal would be agreed, treasurers have had no choice but to plan for a hard Brexit scenario. The possible implications of this have been wide ranging, from predicting the impact on deposits and lending to understanding the implications for market liquidity and derivative clearing.

Also unclear at the time of writing is whether the UK will continue to be part of SEPA following Brexit. A paper published by the European Payments Council (EPC) in May 2018 described three different Brexit scenarios, outlining the impact for participation in SEPA. However, the paper also noted that the EPC “needs to wait until the negotiation parties deliver a concrete outcome.”

Which regulatory and government initiatives will most affect treasury over the next 12 to 18 months?

Source: The Economist Intelligence Unit

Beyond Brexit

While Brexit is set to have major implications for European treasurers in 2019, this is far from the only regulatory topic that treasurers will be monitoring. Other areas of interest include:

• PSD2, payments and open banking. The Second Payment Services Directive continues to have a wide-reaching impact. “Particularly notable are the technical standards around customer authentication, which are due in September 2019,” says Ad van der Poel, Head of Product Management for GTS EMEA, Bank of America Merrill Lynch. “This may have an impact when it comes to logging into online banking platforms, and may impact the treasurer’s experience as well.”Meanwhile, van der Poel notes that local regulators are looking to ensure the execution of payments is as secure, risk free and transparent as possible. “For example, the UK is planning to launch a confirmation of payee feature within CHAPS and faster payments,” he says. “That means participating banks will require their customers to confirm the name as well as the sort code and account number of the payee.”While the initial focus of open banking may be on the consumer side, in time the implications for treasurers could be considerable, as treasury management systems and ERP systems are likely to implement an open banking approach. “That means building different API connections to different banks, and creating an even more flexible and easy-to-use multi-bank environment than is available today,” explains van der Poel. “This will translate into a more flexible experience, which will definitely have an impact on a treasurer’s daily life.”
• Accounting standard changes. IFRS 9 Financial Instruments became mandatory from 1st January 2018, with significant implications for the accounting of financial instruments – not least of which was removing the 80-125% rule for hedge effectiveness testing. Compared to IAS 39, IFRS 9 has the potential to make hedge accounting more achievable, while reducing the associated back office complexity.Meanwhile, treasurers also need to be aware of the implications of the new lease accounting standard, which came into force on 1st January 2019. Pater notes that under IFRS 16, lessees “will now be required to recognise most leases on their balance sheet,” adding that accounting for lessors remains substantially unchanged.With the International Accounting Standards Board (IASB) estimating that the new standard will bring over US$2trn of leases onto the balance sheet, the implications of IFRS 16 are substantial and range from greater auditor scrutiny to the need for robust data management. Alankar Karol, Managing Director, EMEA at GTreasury, adds that IFRS 16 “will impact reported earnings and change the classification of expenses and cash flows”, bringing a “downstream effect on covenant calculations, cash sweep mechanisms and also, in some cases, management incentives.”
• KYC/AML. Know your customer (KYC) compliance is a major burden for corporations around the world: with banks increasingly alert to the risk of fines, simply opening a bank account is a process that can sometimes take months to achieve. Likewise, even established relationships can come with regular requests for KYC information. Respondents to the EIU survey noted that from a corporate point of view, the most useful steps to improve the KYC process include the use of new technology (30%), the creation of a global standard to address KYC (24%) and corporate-bank collaboration within current regulations (19%).
• Demise of LIBOR. With LIBOR expected to be phased out by 2021, Karol explains that structural changes in capital markets “are forcing most treasurers to rethink their debt and derivative structures.” While the valuation of derivatives has traditionally relied upon a discount curve “derived from the LIBOR rates and their underlying swaps, futures etcetera,” Karol notes that the reduced liquidity in LIBOR is necessitating a change to discount curves based off overnight indices such as SONIA (in the UK), SOFR (in the US) and EONIA (in the EU). “Besides creating a legal quagmire of restructuring their contracts, it is also having a significant impact on the valuations of their derivative and their collateral obligations,” he comments.
• Money market funds. European money market funds are required to comply with new rules by 21st January 2019. While fund managers have been busy converting CNAV funds to the new LVNAV model, treasurers have had plenty to do to prepare for the changes, such as updating investment policies, engaging with auditors and checking that their cash and treasury management systems can accommodate the new products.
• GDPR. While not aimed specifically at financial services, the EU General Data Protection Regulation (GDPR) adopted last year has had significant consequences. The regulation, which introduced strict rules for data privacy and security – and hefty fines for non-compliance – has implications for treasurers as well as their providers.“Audit of information is quite important to this particular regulation, which has had a major impact on software systems in general,” comments Christian Suhrbier, Director Product Management, Treasury & Cash Visibility at Serrala. “It requires providers to restrict data, for example via encryption and reduced access – but it also requires systems to be open. So overall, systems need to be able to communicate more effectively than in the past.”
• New European Parliament. Also significant are the upcoming parliamentary elections in Europe. These are likely to result in a hiatus where new regulations are concerned, as well as a review on progress so far on areas such as the Capital Requirements Directive (CRD IV) and MiFID agendas.
• Future regulatory topics. As well as understanding the regulatory changes already under way, treasurers should also give some thought to topics which might one day result in further regulation. As Suhrbier explains, “Today’s innovations can lead to tomorrow’s regulatory changes.”Suhrbier says that these innovations could include areas such as blockchain and machine learning. “At the moment there is no real regulation for these topics,” he says. “A company could start to rely completely on machine learning for areas such as cash forecasting – but what if a company went bankrupt because of this reliance? At this point there would need to be specific laws for this type of technology.” Likewise, Suhrbier says that as the adoption of blockchain becomes more widespread, it will become more relevant as a regulatory topic.

What should treasurers be doing?

With so many regulatory changes to consider, it’s important for treasurers to have a clear view of the direct impact that different developments may have on their businesses – and, indeed, of the changes that may affect their banks and technology providers. As Pater remarks, “Obviously it is better to be proactive than reactive.”

At the same time, with fewer truly global banks now able to support businesses across multiple jurisdictions, corporates are increasingly required to work with more local institutions, which can introduce additional complexity.

There is plenty to consider in this rapidly evolving landscape – but the good news is that treasurers are rising to the challenge. “While managing regulatory change has always been part of the treasurer’s role, my personal experience is that treasurers are more savvy about regulation now,” comments van der Poel. “The conversations we are having with treasurers about regulation are more detailed than ever before, as treasurers take it upon themselves to make sure they understand the changes.”

Defining responsibilities

When tackling regulatory change, one important step is to define who is responsible for managing any changes that may be needed. “Since most treasury departments consist of one to four employees, it should be clearly defined who is responsible for the changes through adjustments to the regulation,” comments Suhrbier. “It is often advisable to draw up a small project plan and thus consider both the time perspective and the corresponding tasks. It is also advisable to find reliable vendors that can assist in compliance and also some that are focussing on keeping systems up-to-date such as including fraud prevention and encryption.”

He adds that using vendors that have many customers also allows any weaknesses to be detected early – “since they are tested by the many.”

Seeking advice

Achieving compliance with the relevant regulations may be non-negotiable, but it also takes time and resources that streamlined treasury teams may struggle to free up. Fortunately, there is help available in the form of banks and technology partners, which should be able to keep treasurers up to date about the relevant changes and advise on any changes needed.

“It’s important to partner with your technology provider to collaborate on what is happening in the industry and how to prioritise changes to meet requirements and stay compliant,” says GTreasury’s Pater. “Treasuries need a strategic partner, whether it is a TMS provider, a consultant, or a bank, to stay accountable. As a TMS provider, we ensure we have the technology in place to handle change. We additionally have an internal security and compliance team focused on looking at trends in the market, regulations, and internal compliance.”

In practice, some treasurers will be more proactive than others when it comes to seeking advice. As well as speaking to banks and technology providers, treasurers may also be able to keep abreast of relevant changes by attending industry events, monitoring guidance by industry bodies – and, of course, reading relevant articles.

Taking advantage of regulatory change

While new regulation can bring considerable challenges, it is also important to consider whether upcoming changes introduce any opportunities for treasurers to operate more effectively. As van der Poel comments, “My advice to treasurers is – if you have the time – to try to understand as much as you can and see if new regulations can help you, rather than only looking at the mandatory impact.”

In practice, he notes that open banking creates an opportunity for treasurers to revisit a multi-banking approach and review how they connect to different banks. “Using APIs could change the way that treasurers connect with their banks,” he says. “It may also alter the way that they collect data or initiate payments – and treasurers should consider whether there are opportunities to make payments more efficiently.”

Moving forward

In conclusion, regulatory change has long been a fact of life for treasurers everywhere – but this topic has become increasingly central as the volume of change has increased. Treasurers will have their work cut out for them this year in monitoring everything from the impact of Brexit to the adoption of IFRS 16. But by building an action plan and seeking support from suitable sources, they will be better placed not only to keep up with regulatory change but even, on occasion, to take advantage of it.