The financial and regulatory environment has in recent years been the focus of much consideration and activity by global market participants and other stakeholders. From stress tests to enforcing risk management practices to disclosure requirements, regulatory players around the world are taking action on many fronts as they seek to strengthen systemic stability and enhance transparency.
The financial and regulatory environment has in recent years been the focus of much consideration and activity by global market participants and other stakeholders. From stress tests to enforcing risk management practices to disclosure requirements, regulatory players around the world are taking action on many fronts as they seek to strengthen systemic stability and enhance transparency.
In some regions—particularly the US and the EU—regulators are casting a global eye as they seek to address cross-border and extra-jurisdictional activities that they view as potentially impacting their local markets. Regulations such as the Foreign Account Tax Compliance Act (FATCA) and Alternative Investment Fund Managers Directive (AIFMD) set out global demands and accountabilities. Market participants are as a result expending tremendous energy on assessment, compliance and reporting related to new and emerging requirements. The impact of global requirements is further compounded by a related area: reconciling global requirements with domestic rules in various jurisdictions.
In some cases, regulators and lawmakers in different jurisdictions are unable to come into alignment. For example, under FATCA, market participants are required to identify their clients who are US persons or face a 30 percent FATCA withholding tax. Canadian privacy law, however, bars unauthorised disclosure outside of Canada of certain information about individuals in Canada. As a result, Canadian market participants were faced with conflicting rules for dual Canada-US citizens residing in Canada.
To resolve this, regulators and lawmakers in Canada and the US put in place an intergovernmental agreement and related regulatory guidance that allowed Canadian institutions to report FATCA-related disclosures to the Canada Revenue Agency, which was authorised to then make the relevant disclosures to the US IRS. This strategy enabled Canadian market participants to stay on the right side of both Canadian law and FATCA.
Of course, the expectations and requirements of regulators in various jurisdictions are not always so smoothly coordinated—particularly when market participants are also required to assess the impact of those instruments on their operations. Contract requirements under AIFMD are an example. Canadian regulators direct assessment and reporting focus to the financial health of an institution or segment, rather than requiring the inclusion of specific contractual provisions.
Conversely, European regulators have in some cases called for specific language or terms within a given contract—and some institutions have taken a particularly conservative interpretation of these requirements. To resolve such differing expectations, global market participants active in Canada and their local asset servicing providers must work closely together to find solutions and practices that satisfy regulators on both sides of the ocean—all the while accounting for their own business and risk management needs.
In many cases, success is built on education: a domestic player well-versed in the requirements of a given local market can help educate global players about local requirements and identify possible challenge points in advance, working with their clients to develop a solution that accounts for both local and global regulatory needs.
Complying with regulatory requirements—global or domestic—can require substantial investments of time, energy and financial resources by both asset servicing providers and their clients. To find the right balance, asset servicing providers can assist their clients by helping clients understand where along the spectrum a given set of requirements might fall in terms of cost, challenge and feasibility.
Regulatory requirements can be grouped into three broad categories. First, tasks that an asset servicing provider is already delivering or can reasonably facilitate within its service offerings. Second, regulatory responsibilities that present a substantial additional burden, which can be undertaken when clients share some of the costs. Lastly, there are some responsibilities that an asset servicing provider simply cannot take on from a business or regulatory perspective. Certain filings under FATCA are a Canadian example of this last category, as FATCA requires self-certifications that domestic custodians are not able to give on behalf of clients.
The global regulatory environment will continue to evolve, and asset servicing providers and global market participants can expect to face new and changing requirements from regulators in many jurisdictions. Market participants can position themselves to move forward by seeking to partner with domestic asset servicing providers that can deliver deep insights into local market requirements, and that are positioned to work closely with their clients to help navigate potential areas of challenge between global and domestic regulatory requirements.
Here in Canada, our rules-based business practices, the collaborative approach taken by Canada’s regulators, and the strong governance efforts of domestic players across the industry have brought great strength to the Canadian brand and further enhanced our desirability as an investment destination. Effective regulatory practices remain a cornerstone of Canada’s value proposition.
For many global investors into Canada, the challenges of navigating our regulatory environment are far outweighed by the confidence and strength they provide. Canada is an exceptional place to do business, and we at CIBC Mellon continue to invite global participants to investigate the many opportunities available to them here.
