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‘Disruptive’ is the most suitable label for the latest cohort of Challenger Banks and other Financial Technology firms in the banking sector which have sprung up over the last few years. This sub-sector of Fintech banks is decidedly new, exhibiting agility and placing innovation at the core of their business, but they are entering a space already laden with relatively stringent rules and regulation.
Deloitte Private recently hosted a breakfast seminar for FDs, Heads of Tax, CFOs, and similar from various Fintech firms in the banking sector to discuss some of the challenges they may face as they continue to consolidate and expand.
The session kicked off with a look at regulation, specifically analysing the themes of significance in 2019 and constants over the past few years.
The first theme is the shift from regulatory development to supervision. The flurry of rule-making that has occurred since the financial crash has mostly come to a close, and so now the regulatory bodies take on a greater role of policing these regulations they’ve spent the last decade crafting. As a result, the compliance burden for firms may be greater than ever and firms need to ensure that they meet requirements.
Another key theme comes with an increasing risk of exposure to cyber and other IT risks in an integrated world, especially in a sector with ‘tech’ in its name. Building resilience to operation disruptions and understanding their exposure to potential risks is key for firms moving forward, especially as they scale up their enterprises.
Further themes include adequate preparation for Brexit (especially in case of a ‘No Deal’ scenario), the transition away from LIBOR and the need for firms to reduce their exposure to it, pressures from regulators (and investors) on climate change and sustainability issues, and the prompt from regulators to ensure firms are applying clear and fair charging structures.
Regulatory constants covered the need to address root causes of prudential failure with internal governance, scrutiny of business models in a changing risk landscape, protection and use of data, the level of access ‘vulnerable’ consumer groups have to FS products & services with their increasing digitalisation, testing for cyber vulnerabilities, and awareness to model risk management.
Regulatory Authorisation Process
The process of authorisation by the FCA and PRA is an expensive and time-consuming one. Generally, the process runs through several stages of presenting rough plans and refining them through consultation with the regulators before making a formal application, which is then followed (if successful) by a period of authorisation with restrictions before full authorisation is granted.
Throughout this process, a key item for firms to consider is the approach from the regulator’s point of view. One example of this would be how firms generally approach their plans and proposals from a micro, self-centric point of view, whereas the regulator may take a macro approach to analyse how a plan fits into the entire system.
Tax & Compliance
UK banks face a somewhat unique set of compliance and data sharing obligations, shifting the focus of consumer governance onto the banks themselves with regulation such as ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) and the 2020 Mandatory Disclosure Regime (2020 MDR). Internationally the OECD’s Common Reporting Standard and FATCA in the US serve similar functions. There is also the UK Banking surcharge, an extra 8% rate applied to profits of banking companies, calculated on the same basis as corporation tax. This should be applied only to companies offering banking services, so restructuring to separate out non-banking services can be something to consider.
Furthermore, when it comes to funding, there is no one-size-fits-all approach for UK banks. Debt and Equity funding will usually receive different tax treatments – for example, dividends are not usually tax deductible. By contrast, interest payments normally are. Therefore, it is key for financial institutions to keep an eye on their funding structures and the tax/regulatory consequences of them.
Expansion overseas adds a further layer of complexity for firms. As the UK is a member of the OECD, the actions of the Base Erosion and Profit Shifting initiative (BEPS) apply, covering a wide range of international anti-avoidance instruments. Part of BEPS are the global transfer pricing guidelines, that a significant number of foreign markets adhere to and bring with them requirements for documentation and evidence supporting the ‘arm’s length’ nature of intra-group transactions. Further items of interest are Corporate Interest Restrictions, and international Hybrid Mismatch Rules to catch potential tax advantages through the exploitation of ‘mismatching’ tax treatments between jurisdictions.
Overall, there is a vast minefield of regulatory challenges for Fintech firms, both at home and abroad. New and excited firms may get carried away with their expansion and goals, and so it is important not to be caught up and held back by potential exposure to regulatory risk.
Vishwas is a Director within Deloitte’s Risk and Capital Management Practice and leads the Deloitte EMEA Supervisory Review and Evaluation Process (SREP) initiative and New Bank Authorisations in the UK. Vishwas specialises in prudential regulation (CRR/CRD), stress testing and ICAAPs, risk management frameworks and risk governance and has 11 years’ experience working on projects in UK, EU, Ireland, India, Middle East and the US. Vishwas is an MBA (Gold Medal), an FRM and Licentiate of the Institute of Company Secretaries of India (ICSI). He recently spoke at the BARA Seminar for Indonesian Banks in Prague, Deloitte SREP Roundtable in London, Deloitte SREP Seminar in Malta, organised the Deloitte SREP Seminar for SSM Banks in Frankfurt and spoke at several Infoline conferences on industry challenges in relation to SREP/ICAAPs.