Regulatory Reporting Stifles Innovation: A Paradox in Progress
This little rant started, by accident I hasten to add, whilst writing up a summary of the Report Genie product in my projects section. It has come about as a direct result of regulatory reporting and the decade+ amount of time that I and my colleagues have been involved in delivering tax reporting solutions for our clients. I should therefore maybe not be moaning, but alas I will!
It was around 2012 that I as a tech consultant saw a sharp decline in innovation, in and around the finance industry in Guernsey. This was the year that the first of a whole raft of new tax legislation came in to force.
FATCA, or the Foreign Account Tax Compliance Act, is a United States law whose purpose is to prevent tax evasion by US citizens. It requires foreign financial institutions - banks, stock brokers, hedge funds, insurance companies, trusts, etc. to report to the US’s Internal Revenue Service (IRS) information about accounts held by US parties.
This triggered similar legislation (and reporting standards) to be put in place by the UK and a handful of other larger economies (France, Germany, Italy, Spain). Thankfully everyone (except the US - far too important) came together to establish a common reporting standard (CRS) and agreement to exchange data (something else the US haven’t exactly bought in to - one way information flow suits them just fine).
Anyway, I digress slightly. These FATCAs along with Solvency II and other regulatory standards that were defined at around this time resulted in a mammouth client review and classification exercise, together with implementing systems and adapting processes to onboard clients differently and produce the FATCA submissions themselves.
This redirected budgets from value add projects - to - must do regulatory projects.
There is no better example of this than my transition between two projects…
I went from implementing an innovative in-house FX payment processor - a system that delivered cost savings to clients by providing more favourable rates than the credit card issuers they were making FX payments into their accounts (ie. 1k USD => GBP account)
Creating a system that allowed the business to capture additional information about account holders so that they could classify them correctly for onward reporting and producing the summary figures required for the submissions.
The businesses themselves were crippled for many years as they worked through their existing client base (in some cases hundreds of thousands of customers), collecting additional information and verifying that it is all correct.
A Regulatory Tightrope
Now I get that some industries should be regulated. When it comes to financial services, healthcare, gambling or any other highly regulated industry, businesses have to walk a regulatory tightrope. Compliance isn’t a choice, it’s a mandate. But, stringent regulatory reporting requirements can often become a roadblock in the path to innovation.
Why? Because compliance often means playing by old rules in a new game. The time, effort, and cost spent on ensuring compliance can potentially divert resources from experimentation and research and development - key drivers of innovation. This is exactly what happened in the company I was consulting for - they were continuously innovating and looking for ways to differentiate themselves from competitors by offering better products and services to their customers, they even had a Head of Innovation role within the organisation.
This role no longer exists.
This has been replaced by a tax reporting department.
The Innovation Dilemma
Regulatory reporting, no doubt, brings transparency. However, there’s a flip side. Reporting requirements can be complex and ever-evolving. Keeping up with these changes can be challenging for businesses, particularly smaller ones and start-ups. These organizations may lack the expertise or resources to navigate the regulatory landscape, stifling their ability to innovate. Even the larger businesses fight to keep up with “business as usual”
Additionally, strict regulations can create barriers to entry in certain industries, discouraging potentially innovative newcomers and maintaining the status quo.
Navigating the Paradox
So, does this mean regulation and innovation are natural enemies? Not necessarily. We need to view it as a paradox, not a conflict. Regulatory reporting can indeed stifle innovation if it’s rigid and overly complex. However, even I can’t deny that it’s crucial for maintaining trust, stability, and fairness.
The challenge is in striking the right balance. I think that in Guernsey in particular with the tax haven tag that it often has pinned to it, they have to be seen to be whiter than white and go further than is necessary. This leaves little room for creative disruption!