Financial and Monetary Systems

Too big to fail? Try too complex to manage

A woman walks between buildings at Sanlitun SOHO residential and commercial complex in Beijing May 12, 2011.

Image: REUTERS/Jason Lee

Brian Peccarelli
Chief Operating Officer, Customer Markets, Thomson Reuters
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This article is part of: World Economic Forum Annual Meeting

Want to catch the ear of C-level executives at multinational corporations these days? Tell them you can simplify their regulatory burdens.

Too-big-to-fail has led to a regulatory free-for-all that’s too-complex-to-manage. Dodd-Frank, the Markets in Financial Instruments Directive, the Foreign Account Tax Compliance Act, the Base Erosion and Profit Shifting (BEPS) initiative, International Financial Reporting Standards – these are just a few of the major reform initiatives introduced over the past few years to address everything from financial markets transactions to global tax law.

The phenomenon has made compliance one of the fastest-growing career categories and elevated the practice of navigating a constantly evolving, ever-expanding web of regulatory requirements to an art form. While many large companies have become adept at managing this challenge, helped in part by a steadily growing economy, the evidence is starting to mount that the runaway pace of regulatory scrupulosity is becoming an unsustainable cost burden. Technology can help, but we’ve still got a long way to go.

Consider the results of a survey published in May by my colleagues in Thomson Reuters Regulatory Intelligence that found banks and other financial institutions now spend up to $500 million a year meeting Know-Your-Customer (KYC) requirements designed to prevent money laundering, terrorism funding and other financial crime. That’s just one sliver of the compliance requirements associated with a fraction of the new regulations that have been introduced over the last six years.

Add the cost of complying with the litany of global tax reforms stemming from the BEPS initiative, and the total compliance costs become almost impossible to count. Beyond the taxes themselves, the herculean effort to implement the financial systems required to manage the country-by-country reporting requirements and newly created taxes on digital transactions linked to BEPS is significant. Many of our clients tell us they plan to double the amount they currently budget for tax controversy resolution as a direct result of the BEPS initiative. Globally, 86% of corporate tax professionals say they are increasing the amount of time spent on tax compliance due to BEPS.

Recent political rhetoric surrounding the US presidential election and the UK Brexit vote has centered on eliminating some of this complexity. President-elect Donald Trump campaigned tirelessly on a platform of lower taxes and reduced regulation. His Treasury Secretary announced, just minutes after being appointed to the post, that his “number one priority is tax reform.” Likewise, lower corporate taxes were at the core of economic strategy for post-Brexit Britain, with the UK Treasury planning to cut corporate taxes to keep businesses from leaving the UK.

Alas, when you consider the real-world business impacts of these types of seismic movements to the corporate tax rate in major economies like the US and UK, the end result for big business is really just more administrative complexity. The structures that multinationals currently have in place for navigating global tax codes – from transfer pricing strategies to headquarters location – are not the kinds of things that can be unwound at the drop of a hat just because of top-line tax rate changes.

So, what’s the answer? If the path we’re on is truly unsustainable, will multinationals simply have to grit their teeth and bear it? Will we see compliance costs become a refrain on quarterly corporate earnings reports that miss their growth targets? Or is there a solution on the horizon?

Most likely, the answer will involve a little of both. In fact, we already have seen many companies, particularly those in the financial services sector, attribute weaker earnings to increased compliance costs. But we’re also seeing a surge in an entirely new category of “RegTech” firms taking this challenge head-on, leveraging big data and cognitive computing technologies to streamline many of the regulatory compliance hurdles that have become so costly to manage. Even in the world of corporate tax, new cloud-based technologies are unlocking predictive capabilities that are transforming the way tax professionals project future liabilities and anticipate the impact of new legislation before it is passed.

While those who still pine for the simplicity of the good old days won’t likely see their wishes fulfilled, the new normal of regulatory overload isn’t the end of the world. It’s simply a new challenge that the brightest innovators and disruptors will find ways to manage.

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