Extraterritorial Compliance Becomes the ‘New Normal’ for Financial Institutions

May 14, 2012

·         Extraterritorial laws such as FATCA, Dodd-Frank, Sarbox, Solvency II are growing in number and intensity

·         Almost half (45%) of financial institutions in a new survey say that extraterritorial compliance now accounts for between 10-25% of compliance budget 

Extraterritorial regulation has multiplied in the wake of the financial crisis to such an extent that over half (53%) of financial institutions that took part in a recent survey have decided not to enter an overseas jurisdiction – or have exited one – as a direct result of the cost of compliance with another country’s laws and regulations.

In a survey by global consulting firm Protiviti1, 60% of respondents said that growth in extraterritorial regulation – the rules of one jurisdiction imposed on firms based in another – had “escalated significantly” since the crisis. Respondents, particularly those based in the UK, cited laws and regulations from the US as having the most impact – for instance, FATCA (Foreign Account Tax Compliance Act), Sarbanes-Oxley and Dodd-Frank. In contrast, UK or European directives such as Solvency II are seen as having less impact on US firms.

Asked what percentage of their compliance budgets is currently dedicated to complying with other jurisdictions’ laws and regulations, over a third (34%) said that they are spending more than 25%.

Bernadine Reese, managing director at Protiviti UK, said: “With the emphasis in the financial services industry on improving performance and managing costs, extraterritorial laws and regulations are noticeably adding to an already complicated picture. As a consequence, global financial institutions are being forced to re-examine and in many cases significantly change the way they are managing compliance risk. Few observers appear to have any expectations that this trend will abate any time soon. Organisations will need to find a way to manage an increasingly complicated and often conflicting web of regulation.”

Some 55% of the firms that participated in the survey by Protiviti felt some degree of extraterritorial application of regulation is necessary and unavoidable, compared to 28% who felt it was unnecessary. However, asked if they would prefer global versus individual country standards, 70% of respondents said they would prefer global standards.

The approach taken by US and UK financial institutions to manage the added challenge of extraterritorial requirements differs significantly: firms in the UK have added people to their compliance functions while respondents in US organisations have redesigned their functions and relied on technology in order to meet the challenge.

Bernadine Reese continues: “Dealing with this ‘new normal’ is creating challenges for compliance functions, ranging from staying abreast of regulatory developments to promoting day-to-day compliance in global functions. While the notion of more global or regional standards is very appealing to the financial services industry, significant questions remain about the feasibility of such approaches when the reality is that national policymakers have differing priorities that may not be reconcilable on a global basis.

“Financial institutions need to ensure that they are organised to track and understand the implications of new and emerging regulatory developments outside of their home country as well as within their country. They need to invest in the appropriate blend of people, processes and technology required to address the ‘new normal’ in the most effective and efficient ways possible.”

What Percentage of Your Compliance Spend is Attributable to Extraterritorial Laws and Regulations

 

What Percentage of Your Compliance Spend is Attributable to Extraterritorial Laws and Regulations 

 

 

% of compliance budget

% of firms

Less than 10%

21%

Less than 10-25%

45%

Less than 26-49%

26%

50% or more

8%

Source: Protiviti 

 

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