UK: Banking And Capital Markets Insight – August 2009

Welcome to the August 2009 edition of Banking and Capital Markets Insight, which focuses on technical issues currently coming out of the banking, capital markets, securities and fund management arenas. This issue again is a wide ranging one, covering significant issues in respect of the regulation of regulatory capital, payments and short selling, and changes in the responsibilities of bank boards in respect of tax governance and planning.

Our articles cover the following diverse areas:

• Eric Wooding on the effective finalisation of the amending directive for the Capital Requirements Directive, which will come into force by 31 December 2010, and which includes a wide range of changes to existing European capital regulation including the scope of application of the large exposure requirements, the treatment of hybrid securities in Tier 1 capital, the requirements for, and risk management of, securitisation transactions and the co-ordination of home/host supervision;
• Simon McDougall on the challenges ahead for banks in trying to meet the 1 November deadline for compliance with the Payment Services Directive and the Banking Conduct of Business Sourcebook requirements;
• John Hammersley on the FSA's evolving approach to short selling, which involves greater disclosure of transactions and the potential for further bans on short selling; and
• Tim Sharp on the UK Tax Code of Practice which carries increased governance responsibilities for banks that adopt it and for the Senior Accounting Officer in particular, and the wider efforts of the G20 and the US government to improve banks' tax governance, transparency and control of "aggressive" tax planning.

We look forward to your comments on the current edition and your suggestions for future articles.

Mike Williams

Editor

CRD amendment finalised

Although the directive amending the CRD has not been published in the EU's Official Journal at the time of writing, no further amendments are expected to the text agreed in early May. While the directive is, in terms of the EU's overall legislative response to the crisis, no more than a toe in the water, it is the first such toe and merits attention. Member States are required to amend their laws and regulatory rules in accordance with the directive by 31 October 2010 and to apply the new requirements by 31 December 2010.

The directive was originally intended to address known gaps in the CRD. The two main gaps related to large exposures and hybrid capital. In the case of large exposures, the gap was that the CRD, which was issued in 2006, did not revise the large exposures regime established in the early 1990s in the Basel I era. As regards hybrid capital, the omission was that the CRD did not implement the 1998 agreement of the Basel Committee on the eligibility criteria for, and limits to, the inclusion of hybrid capital in tier one capital.

However, the financial crisis inevitably resulted in the scope of the revision being expanded to address some of the shortcomings revealed in the CRD, principally the need for better co-ordination of supervision of banks and investment firms which operate in more than one Member State and market failures in the securitisation process that contributed to the sub-prime mortgage debacle.

The directive also keeps up the pressure for further and bigger changes to EU regulation and supervision by requiring the Commission to issue proposals on a number of important matters by the end of 2009.

Key points of the directive are summarised below.

In the remainder of this article the term "bank" or "credit institution" includes BIPRU investment firms except where the context requires otherwise or the contrary is explicitly indicated.

Large exposures

There are two main changes to the current position. First, "limited licence" and "limited activity" investment firms are given exemption i.e. they are no longer subject to the large exposures regime. Thus in the UK only UK incorporated banks, building societies and UK incorporated "full scope" investment firms (i.e. those with unrestricted permission to deal as principal in financial instruments) continue to be subject to large exposures rules.

Secondly, and less beneficially from an industry point of view, the exemption that currently applies to one year or less exposures to other banks and investment firms is withdrawn. The aggregate exposure to a bank, building society or investment firm, or to a group which contains such an entity, must not exceed the higher of a) 25% of regulatory capital and b) €150m. Where €150m is the higher figure, a further test is applied, namely whether €150m is more than 100% of regulatory capital i.e. if €150m is more than 100% of regulatory capital, the limit will be 100% of regulatory capital but subject to the right of Member States' supervisory authorities to allow excesses over the 100% limit on a case-by-case basis. It remains to be seen whether the FSA will exercise this option.

Certain classes of exposure, including, but not limited to, balances in the course of clearing and intra-group balances in a group subject to consolidated supervision, are exempt from the limit set out in the last paragraph.

Hybrid capital

Criteria are established for determining which hybrid securities (i.e. securities, such as most preference shares, which combine features of debt and equity) may be included in tier one capital. While detailed consideration of these criteria is beyond the scope of this article (and merit careful study), many of the criteria are similar to those already contained in FSA's rulebook but there are differences. One such difference is that the directive permits the inclusion of dated instruments in tier one (up to a limit) provided they have an original maturity of at least 30 years and meet the other eligibility criteria.

The directive recognises the scope for differing interpretations of the criteria by Member States and therefore charges the Committee of European Banking Supervisors (CEBS) with developing, and monitoring adherence to, guidelines for supervisory convergence in this area. CEBS published a consultation paper on this on 22 June.

The directive also imposes limits on the proportion of tier one capital that may consist of eligible hybrids. The limit is 50% of tier one, after deductions, for hybrids that must be converted into core tier one instruments in an emergency and may be converted at the initiative of the supervisory authority at any time based on the financial situation of the issuer. Other eligible hybrids are subject to a sub-limit (i.e. within the 50% limit) of 35% of tier one after deductions.

These limits represent a tightening of the rules for BIPRU investment firms since current FSA rules do not impose any restriction on the proportion of hybrid securities (other than innovative tier one instruments) that may be included in tier one by such a firm. However, there are grandfathering provisions which may provide relief for eligible hybrids in issue on 31 December 2010.

The limits also represent a tightening of the rules for those UK banks and building societies which have tier one deductions such as goodwill.

Co-ordination of supervision

The directive contains two main provisions for improving the supervision of banks and banking groups operating in more than one EU member state, namely requirements for colleges of supervisors to be established and limited additional rights for host country supervisors of significant branches of a bank based in another member state.

Colleges of supervisors

To improve coordination among supervisors of banking/investment firm groups which operate in more than one member state, a group's consolidating supervisor is required to establish a college of supervisors. The college is to exchange information, determine supervisory examination programmes for Pillar 2 purposes, ensure the consistent application of prudential requirements across the group and coordinate supervisory activities in preparation for and during emergencies.

The authorities that may participate in a college include not only the consolidating supervisor and the supervisors of regulated EU subsidiaries but also EU host country supervisors of significant branches (see below) and supervisory authorities from outside the EU and central banks, where appropriate. However, the consolidating supervisor decides on the basis of relevance which college members should participate in a particular meeting or activity.

The consolidating supervisor is required to chair the meetings of the college and to keep all college members informed of meetings and actions taken.

Host country supervisors of significant branches of EU banks

To address the danger for host countries posed by the EU single banking passport (so clearly demonstrated by the UK's experience with branches of failed Icelandic banks), host country supervisors of "significant" branches of EU banks are given an additional right, namely the right to participate in the college of supervisors. The host country supervisor must make a request to the consolidating supervisor (or where none exists, the home country supervisor) that a branch be considered significant, having regard to whether the branch's share of the host country's deposit market is more than 2%, the likely impact of the branch's closure on market liquidity and payment and clearing and settlement systems in the host country, and the size and importance of the branch in the host country's banking system. If the consolidating and host supervisors are unable to agree within two months, the host supervisor has the power to decide whether the branch is significant.

Securitisations

The new requirements mainly address two shortcomings in the securitisation process which are widely acknowledged to have been key factors in the sub-prime mortgage debacle, namely:

• originators and sponsors often did not retain material exposure to the loans being securitised and therefore had little incentive to ensure that loans were of reasonably high quality; and
• investors, including banks and other regulated firms, failed to carry out adequate due diligence either because they chose not to or because the information to enable them to do so was not available.

The new rules apply to new securitisations issued from 31 December 2010 and from 31 December 2014 to existing securitisations where new underlying exposures are substituted after that date.

Retention of a material exposure

A credit institution (i.e. a bank or building society) which is not one of the parties involved in a securitisation (originator, original lender or sponsor) is forbidden from acquiring a securitisation position unless one of the parties involved in the securitisation has disclosed to it that it will retain a material net economic interest not less than 5%. A number of different ways of measuring the 5% interest are permitted. However, under all methods, the 5% interest must exist after taking into account hedges and it must be retained on an on-going basis (i.e. it may not be sold).

Certain transactions are exempt. These include exposures guaranteed by central banks and certain other public sector bodies and by banks which qualify for a 50% risk weight, transactions based on indices which meet certain conditions and certain types of transaction (syndicated loans, purchased receivables and credit default swaps) provided they are not being used to hedge or package securitisations.

Risk management responsibilities of investing credit institutions

Investing credit institutions must satisfy a number of requirements regarding their risk management of securitisation positions. If the requirements are not met, supervisors must impose a proportional additional risk weight of at least 250% but not more than 1250%. The requirements include being able to demonstrate understanding of each position, implementing policies and procedures for analysis and recording, regular performance of stress tests and monitoring of underlying exposures.

Responsibilities of originators and sponsors

Sponsors and originators are required to:

• apply the same criteria for granting credit in the case of exposures to be securitised as for exposures to be held – failure to do so will result in the securitised exposures being risk weighted in the same way as if they had not been securitised;
• disclose to investors the level of their committed net economic interest; and
• ensure that prospective investors have ready access to all materially relevant data on the credit quality and performance of individual underlying transactions, including the information needed to perform stress tests.

Further work ordered from the Commission

The Commission is required to complete by the end of 2009 a number of tasks of major importance to the restructuring of EU banking regulation and supervision. These tasks include:

• proposing legislation for further supervisory integration across Europe (a Commission Communication on this, which discusses such matters as the European Systemic Risk Council and the European System of Financial Supervision, has already been published (COM (2009) 252));
• reviewing the CRD as a whole to address the need for and response to macro-prudential problems, including counter-cyclical buffers and other measures to mitigate the ups and downs of the economic cycle, leverage ratios and the rationale underlying the calculation of capital requirements in the directive;
• reporting on measures to the transparency of OTC markets, including the CDS markets, such as clearing through central counterparties; and
• reporting on the expected impact of the new securitisation requirements.

Conclusion

Although the CRD amending directive is only a first step, firms – banks, building societies and investment firms – should consider its significance for their businesses. It is also a reminder of the need to keep an eye on EU developments in this area since it is largely EU legislation, albeit influenced by global standards, that will determine the UK's rule-book whoever is in charge of applying it.

Postscript

Since the above article was written the Commission has proposed further revisions to the CRD. The main further changes proposed are summarised below. They are of course subject to revision by the EU Council and EU Parliament.

• Higher capital requirements for re-securitisations than for first order securitisations of the same rating are proposed in order to recognise the former's greater complexity and sensitivity to correlated losses.
• Pillar 3 disclosure requirements are to be extended to cover securitisation exposures in the trading book and the sponsorship of off-balance sheet vehicles.
• The trading book capital regime is to be strengthened in line with proposals of the Basel Committee. The changes include (1) an additional capital requirement based on stress scenario VAR which is expected to result in a doubling of current trading book capital requirements for banks calculating capital requirements using ordinary VaR models; (2) extending the scope of the current charge for credit risk in the trading book to cover forms of credit risk other than default risk e.g. the risk of losses as a result of rating downgrades; and (3) basing the charge for trading book securitisation positions on the banking book risk weights.
• The Commission Recommendation on remuneration policies in the financial services sector is made binding. The intention is to bring remuneration policies within the scope of the Pillar 2 supervisory review and to enable supervisors to impose penalties on banks that fail to maintain remuneration policies consistent with sound risk management.

Eric Wooding

PSD and BCOBS provide a double challenge

On 1 November 2009 banks face a 'double whammy', as both the Payment Services Directive ("PSD") and the new Banking Conduct of Business Sourcebook ("BCOBS") come into effect. The regulations introduce a range of new requirements, and together they will stretch the ability of banks to manage their compliance obligations at a time when resources remain limited.

The PSD – regulating payments

The PSD is a key component of the Single Euro Payments Area ("SEPA") initiative to harmonise the way payments are made within the European Union, and regulates payment services such as current accounts, e-money accounts, card issuing and merchant acquiring services, money remittance, some mobile phone payment services, and some models of bill payment services. The PSD applies to national currencies as well as the euro, and to all payment services, not just SEPA payment instruments. SEPA itself continues to be implemented, with the SEPA Direct Debit also going live on 1 November 2009, which will allow cross-border Euro direct debits anywhere in the EU (although France has announced it will delay implementation).

In the UK, the Financial Services Authority ("FSA") will be the competent authority responsible for supervising firms who have operations that fall within the scope of the PSD.

The PSD aims to promote competition and will result in three types of payment service provider structures: banks (and building societies), electronic-money institutions and a new class of regulated entity called 'payment institutions' which will be able to offer payment services in competition with other providers. For various PSD-impacted firms it will be important to consider other areas of consumer legislation that interact with the PSD, such as the Electronic Money Directive and the forthcoming Consumer Credit Directive.

BCOBS – bringing Banking Code requirements into the FSA Regime

At the end of 2008, the FSA launched a consultation on its proposals to regulate retail banking conduct of business, through a new Banking Conduct of Business Sourcebook ("BCOBS") which would largely replace the voluntary Banking Code, which has been overseen by the Banking Code Standards Board. This move was prompted partly by the fact that the FSA have calculated that the PSD will supersede approximately 40% of the Banking Code anyway, along with a desire to regulate this important area of financial services in a consistent way to other FSA-regulated areas.

The FSA has recently published the outcome of their BCOBS consultation, confirming that the proposals will go ahead with an implementation date of 1 November 2009. This start date is earlier than hoped for by some of those in the banking industry, who had made it clear that they would favour a delay of 6 to 12 months to the planned implementation.

The impact on banks – BCOBS

Although the changes from the contents of the current Banking Code (to which most banks in the UK subscribe) are not radical, banks will now be subject to FSA regulation on the requirements. They will need to be prepared to deal with the greater scrutiny they will receive from the FSA, the higher standards they will be expected to achieve in order to evidence compliance, and the larger downside of any breaches, in the form of fines and enforcement action.

Examples of key impacts on banks are:

• they will be required to provide a prompt and efficient post-sale service to customers, e.g. to help customers switch accounts quickly (for example, there has been much recent negative media coverage about delays in the transfer of cash ISAs from one provider to another); and
• they will be required to provide certain information to customers at an earlier stage than currently required, i.e. when someone is considering opening an account, rather than once he or she has become a customer.

The impact on banks – PSD

The PSD is broken down into four key areas: scope and definitions (Title I); the regulation of payment institutions (Title II); conditions for transparency and information for payment services (Title III); and, rights and obligations of users and providers of payment services (Title IV).

Under these headings, the legislation requires a high volume of potentially complex changes to be made to existing systems and customer documentation. In addition to the logistical challenges there are a wide range of technical issues, including:

• Definition of "payment account": there is still confusion around which 'borderline' products may fall in scope, such as some flexible savings accounts and mortgage accounts (e.g. offset mortgages).
• Framework contracts: banks operating current accounts will need to review and amend their terms and conditions, and all of the systems supporting those accounts need to be aligned to ensure PSD compliance. In addition, the PSD also impacts the way in which a bank may vary or terminate its contractual agreements with customers.
• Value-dating and availability of funds: for example, cash placed on a payment account must be available to a customer immediately; many firms are having to alter their batch-based systems where accounts are currently only updated overnight. The requirements to value-date funds immediately also pose implementation challenges for many firms, having various impacts on different payment channels.
• Corporate opt-out: the PSD enables banks to agree with larger corporates to opt-out of all the information requirements and some of the Title IV provisions. This applies to business customers which are larger than a micro-enterprise (defined as firms that have an annual turnover/balance sheet of less than €2 million and that employ less than ten people). In order to take advantage of this provision, firms face a significant data and systems challenge to maintain accurate records of which customers would fall within this definition.
• Charges: the PSD only allows providers to make charges to customers in certain scenarios (e.g. if a payment is revoked). Payment service providers may only apply such charges if agreement has been reached with the customer accordingly, and they must be able to justify any charges in relation to the actual costs incurred.
• Execution times: the PSD requires that payments are made within a guaranteed time (payment execution times will be reduced to next working day by 2012). This will increase the pressure to perform AML and sanction screening checks within a shorter timeframe.
• Exchange rates and interest rates: the PSD sets out various requirements which standardise the basis upon which exchange rates and interest rates are calculated for payment services, and the means by which these are communicated with customers. As a result, firms are having to consider various customer communication processes in order to comply.
• PSD transposition progress: a number of key definitions in the PSD that affect implementation in EU member states still need to be clarified during transposition. The UK was the first European country to transpose the PSD into national law (February 2009) and other countries, namely Bulgaria, are starting to follow. Many European Member States are behind schedule in transposing the PSD into their national laws, and Sweden has publicly stated that it will not be ready for transposition until Q1 2010. The expected delay in PSD transposition is causing growing concerns among firms which operate on a cross-border level that are dependent on understanding national variations in order to centrally manage their PSD-implementation programmes.

Transposition hurdles aside, the implementation of the PSD is aimed at establishing a modern and coherent legal framework for payment services across Europe. In the medium term this may create a positive outcome for businesses and consumers. However, many firms are still struggling to establish the extent to which their products will fall within the scope the Directive, and then face substantial practical challenges in marshalling the resources required to achieve compliance by 1 November 2009.

These challenges are multiplied for pan-European firms. The PSD is intended to be a maximum harmonisation directive (i.e. the directive cannot be 'gold-plated' by member states), but the twenty-three provisions allowing member states to disapply certain requirements (e.g. the application of the corporate optout) mean that in practice variation is occurring. This problem in compounded by many countries releasing little guidance, and it is possible that other countries will join Sweden in delaying roll-out over the forthcoming months. The result is that banks are having to make educated guesses on how they implement the PSD whilst remaining uncertain as to what the detailed requirements will be.

The implementation of BCOBS in the UK is intended to align with the PSD to support the FSA's new Banking and Payment Services framework ("BPS"). There are indeed synergies between the PSD, BCOBS and the existing regulatory obligations banks are subject to on a daily basis. As a result banks can consider all the changes required to a product or a process, rather than look at an area twice. However, the 1 November deadline for both PSD and BCOBS compliance means that banks may well be short of time as well as available resource to implement these requirements. A busy few months lie ahead for banks between now and 1 November.

Simon McDougall

Costs and considerations for the regulation of short selling

June 2008 saw the start of the latest round of attempts to constrain short selling in the UK, when the FSA introduced disclosure requirements for short positions in companies undertaking rights issues. Then, on 18 September 2008, as the sector encountered an unprecedented crisis of stability and public confidence, the FSA introduced an emergency ban on the short selling of certain financial sector stocks.

The FSA ban expired on 16 January 2009, however the disclosure requirements for net short positions in certain financial services stocks and in respect of rights issues have since been extended indefinitely.

Around the same time as the FSA ban, other regulators took their own steps to control shorting (the SEC, for example, implemented a short selling ban for 799 financial companies over a period of three weeks), however, the divergent measures implemented by global regulators both, during and since this period, have exposed a lack of consensus as to how, and indeed whether, short selling should be regulated.

In January and June 2009, the FSA released consultation papers to consider what the UK's longer term approach to regulation of short selling might be.

Despite recent controversy, shorting is recognised by regulators and the majority of market participants as a legitimate market practice with many perceived benefits. Firms employ short selling techniques for risk management, structuring fund portfolios, hedging principal or client positions or to reduce transaction costs. Shorting can also increase liquidity and act as a control against irrational price inflation.

Critics of short selling, however, suggest the practice creates disorderly markets, leads to disproportionate settlement failures and increases scope for market abuse. It is argued that short selling creates disorderly markets by giving misleading information about supply and demand while at the same time artificially driving down prices as related movements in spreads, and credit ratings, create higher funding costs. Short sellers on the other hand would state that they are simply looking to profit from falls in stocks which are fundamentally overvalued by the market.

Responses to European level consultations appear to support the view that any risk of settlement failure from shorting can be largely mitigated by better, more widespread use of existing measures such as contractual settlement, buy-ins or settlement failure penalties. While such measures don't prevent settlement failures, they do have the potential to discourage naked shorting by making it economically less attractive.

Much of the debate around short selling has focussed on the potential for market abuse but it is important to remember that short selling itself is not in any sense abusive per se. Short selling can be used alongside behaviour that is abusive such as insider trading or the spreading of rumours, however, these behaviours would constitute market abuse whether trading was long or short and the Regulator already has extensive powers to deal with market abuse. The FSA defended the September 2008 shorting ban by stating:"We were concerned by the heightened risks of market abuse and disorderly markets posed by short selling in these conditions". It will be interesting to see whether any enforcement action is taken by the FSA for "abusive" short selling but the question remains, if short selling is just one of many tools available to someone intent on market abuse, is it appropriate to ban or even restrict short selling on market conduct grounds?

Interestingly, the FSA implemented its September 2008 ban via the Code of Market Conduct, however, the Turner Review has since signalled that the Regulator is looking to distance itself from the notion that the regulation of short selling is primarily a market abuse issue. The Review suggests that any legal powers granted to the FSA to ban or limit short selling in future will stem not from the market abuse regime, but from the Regulator's statutory obligation to promote orderly markets and financial stability.

The Turner Review identified two objectives for the regulation of short selling: "(i) the need for a disclosure regime which guards against market abuse; and (ii) the need to maintain the flexibility to impose short selling bans in particular sectors and in particular periods if there is a danger of self-fulfilling market disruption".

There is some evidence to suggest that the FSA's September 2008 ban actually had a negative impact on market efficiency. Research commissioned by the London Stock Exchange following the ban showed a decrease in market quality (as defined by volatility and liquidity) in affected stocks during the ban. Similarly, an FSA study commissioned in February 2009 showed that the ban led to an increase in mean relative bid-ask spreads of 231% for stocks on the "banned list" compared to the period 30 days before the ban. Over the same period there was also an increase in spreads for non-protected stocks, however, the increase was only 62%.

Similar trends were observed on the other side of the Atlantic following the SEC's own shorting ban. In December 2008 after the three week ban had ended, Christopher Cox, then Chairman of the SEC, said: "While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the Commission would not do it again."

An attempt to ban short selling may therefore be counter productive even before you take account of the additional compliance costs of such a ban (approximately £6,500 per firm per month according to the FSA's study) and the potential lost profits for firms.

At this stage, the FSA has suggested it is seeking to avoid any future ban on short selling as it believes the costs outweigh the potential benefits, however, future action has not been entirely discounted and the Regulator will retain the right to implement "emergency measures" in future.

The FSA now considers improved transparency through public disclosure of relevant short positions to be the key to regulating short selling. Responses to CESR's consultation on short selling, however, have argued that public disclosure of short positions may in itself mislead the market, expose short sellers to potential short squeeze or 'herding', or even encourage frontrunning of positions. Respondents argued that increased transparency could be achieved through non-public reporting to regulators without the need for market disclosure which was perceived to be costly or inefficient, as well as counter productive.

It is clear that the way forward for regulation of short selling will continue to be the subject of debate and the FSA's current regime is not expected to be a permanent one. Responses received to the FSA's June discussion paper are likely to be published in the third quarter of 2009 including feedback on possible alternative methods of increasing transparency. The industry is also looking towards international bodies to bring a consensus to the complex and divergent regimes that exist globally. Both CESR and IOSCO have established working groups to look at the issue and clearly the output from these groups may well lead to the establishment of an international standard that would supersede the current FSA requirements.

John Hammersley

The regulatory response for tax: the UK and beyond

Responding to the 'financial crisis' and building on previous efforts to engage banks on the subject of tax, tax authorities and regulators in the UK and globally are now setting our their expectations for the appropriate management of tax by financial institutions (amongst others).

UK: 'Tax Code of Practice' and the Senior Accounting Officer

Published by HMRC on 29 June 2009, the Tax Code of Practice requires those banks who voluntarily sign up to:

• adopt adequate governance measures to control the types of transaction they enter into (both for clients and on their own account);
• only undertake tax planning that is in accordance with the 'spirit' of the law, supports genuine commercial activity and that the bank reasonably believes results in a tax outcome that is not contrary to the intentions of Parliament;
• comply fully with all their tax obligations, including structuring employee remuneration packages to ensure that correct amounts of tax and NICs are paid; and
• maintain a relationship with HMRC that is collaborative, transparent and based on trust – including the early and full disclosure of all significant uncertainties on tax matters.

More broadly, legislation is being introduced for the largest UK corporates, including banks, whereby the Senior Accounting Officer (usually the CFO) is required to personally sign-off on the adequacy of the company's tax accounting arrangements. Failure to comply can result in a personal penalty for the CFO (as well as, most likely, tax-geared penalties for the company). It is noted that UK branches of overseas banks are outside the scope of this legislation.

Globally: G20, the OECD and the US

At the G20 summit in April 2009, measures were announced which aim to strengthen financial supervisory and regulatory regimes both nationally and internationally, including increased examination of the activities and disclosures of offshore financial centres and their use by financial intermediaries such as banks (see also the 'Foot Review' in the UK which is looking specifically at British financial centres).

This was followed on 2 June 2009 by the publication of 'Building Transparent Tax Compliance by Banks'. This study examines the role of banks in designing complex structured finance transactions that can be used to reduce tax payments through aggressive tax planning schemes for themselves or their clients. The report calls for action from the banks in terms of improved governance standards, greater transparency and, similarly to the expected UK code of practice, a move away from 'aggressive' planning.

In the US, President Obama announced in May wide-ranging changes to the US international tax system. Whilst these changes are targeted at increasing the tax yield from US-based multinational corporations, particular focus has been placed on financial institutions with increased resource being given to the IRS to investigate both legal tax planning and illegal tax evasion.

Conclusion

New regulatory requirements in the UK, US and globally are aimed at intensifying the focus of Boards on tax, requiring businesses and particularly financial institutions, to review their approach to tax management.

Tim Sharp

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.