Published: 26 April 2023
Regulation and compliance are core work for treasurers. Mastering them and collaborating with colleagues and specialist support saves time and costs, and enhances reputation. Ignoring them is not an option.
What is regulation?
Regulation is the evolving body of rules that treasurers need to know about, understand and comply with. Regulation follows risk, and usually past problems. Understanding the problems makes it much easier to understand the related regulations.
The ultimate aim is generally to protect the general public from the consequences of market failures or misconduct. To protect against market failures, regulators require individual firms to behave prudently under good governance, avoiding excessive risk taking.
Who do regulations apply to?
The important regulations for treasurers are the ones that apply to our own organisation, its counterparties including banks, and ourselves as individuals. We’ll start by considering regulation as it applies to our organisations.
In larger organisations, some regulatory compliance may be fulfilled outside the treasury function. However, we still need to understand what our colleagues are doing, and why. For example, we will often supply information for financial reporting and tax compliance by our accounting and tax colleagues respectively.
What if we fail?
Adverse consequences of compliance failures include: reputational damage, wasted time, financial penalties and loss of business. On the other hand, successful regulatory management can maintain and enhance our reputation, save time and money, and help us retain and win business.
Are regulations the same as laws?
Some regulations are indeed laws. They can be part of “primary legislation”, a law enacted directly by a parliament. Other regulations with full legal force are “secondary legislation”, drawn up by a lower authority under powers granted by the parliament. Relevant legal regulations include company law, tax law, anti money laundering and terrorist financing laws, and sanctions.
Other important regulations include codes of practice, ethical codes, guidance, principles, rules and standards. They may derive from the financial markets, the Association of Corporate Treasurers or other professional bodies the treasurer belongs to.
Law: European Union (EU) Regulations
EU Regulations have direct legal effects in all 27 EU member states. Especially relevant for non-financial sector corporate treasurers are the European Market Infrastructure Regulation (EMIR), General Data Protection Regulation (GDPR), Market Abuse Regulation (MAR), Markets in Financial Instruments Regulation (MiFIR), Securities Financing Transactions Regulation (SFTR) and the Sustainable Finance Disclosure Regulation (SFDR).
Other EU Regulations particularly relevant for treasurers in the financial sector include the Benchmarks Regulation and the Capital Requirements Regulation (CRR).
I’m in the UK, can’t I ignore all that now?
Not yet, unfortunately. As you say, the UK is no longer a member of the EU, and it is free to make its own rules. For now, though, there’s actually more to understand than before. When the UK was a member of the European Union, EU Regulations were directly applicable in UK law. For example, the Market Abuse Regulation (MAR).
Following the UK's departure from the EU, to ensure initial continuity, the UK now has its own "onshored" versions of these Regulations. For example, the UK Market Abuse Regulation. Many of these onshored UK versions of EU Regulations began as exact duplicates of the EU Regulations at the time.
However, they have subsequently diverged as the UK seeks to develop appropriate domestic versions for the UK markets. The onshored Regulations will diverge further in future as this process continues. For this reason – here as elsewhere – take specialist advice and follow it.
I’m in a non-financial corporate, can I ignore bank regulation?
Not if you want to obtain the best quality and cost-effective service from your banks. Banks and other financial institutions are strictly and increasingly regulated. The constraints they are working under include anti money laundering (AML), countering the financing of terrorism (CFT) and sanctions compliance.
This is why it can take so much time and administrative work to open a new bank account, for example. Appreciating the reasons for the work will generally ease and speed up the process.
Banks are also subject to minimum capital adequacy and liquidity requirements from their regulators. This affects their capacity and appetite to provide products for corporate customers, as well as negotiations over pricing. As customers, the more we can understand the banks’ constraints, the better we can engage with them, to the benefit of our own organisation.
Which technical regulations are evolving most rapidly?
Those relating to environmental, social and governance (ESG) concerns, related reporting and assurance. Urgency in the environmental area is increasing rapidly, together with related concerns about the validity of the environmental claims that organisations are making. Leading treasurers are ensuring they are well informed about green and ESG finance, and related investor appetite and concerns.
The most important source of individual regulation for most treasurers is the ACT Ethical Code. The Ethical Code applies to all student members of the ACT, as well as all its other members. The Ethical Code is a framework for individual conduct in all treasury-related activities. It aims to ensure that all corporate treasurers follow the very highest professional standards.
The fundamental principles of ACT members’ conduct include integrity, professional competence and compliance. Compliance includes compliance with all relevant laws, regulations and conventions. Regulations, then, cover everything in between laws and conventions, and it is most safely defined to overlap them. The last thing wanted or intended is any failure of compliance through an item falling between the cracks of too-narrow definitions.
Professional competence also includes complying with relevant technical and professional standards. In short, getting ourselves up to speed technically, and then staying up to date. The most efficient route to doing this is likely to be completing the ACT’s professional qualifications, and continuing professional development.
Behavioural and emotional self-regulation
Individual self-regulation is an important behavioural skill. It means awareness of our own psychological and motivational states, and taking action to improve them. It includes self-regulation of our behaviour and our emotions.
Behavioural self-regulation includes resisting impulsive behaviours for the sake of achieving longer-term goals. Emotional self-regulation would include recognising a negative mood, and taking steps to get out of it. The better our emotional and motivational state, the greater our capacity to absorb and apply new technical developments.
How can I keep up to date?
There is a lot of support available to help you keep up to date with what is happening in the world of financial regulation. The ACT regularly updates information on its websites. See the Resources below. Speak with your lawyers and banks. Professional networking, online and in person, is also invaluable.
Author: Doug Williamson, FCT
Context of treasury - regulation (member-only resource): https://www.treasurers.org/hub/technical/regulation
Context of treasury - ESG (member-only resource): https://www.treasurers.org/hub/technical/hot-topics/esg-sustainable-finance
The Treasurer’s Wiki : https://wiki.treasurers.org/wiki/Regulation
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