Experts predict continued global regulatory complexity: What it means for businesses and investors

12 April 2023
Multinational businesses, investment firms, family offices and other organisations have been subject to an increasing number of country-specific regulations in recent years. We’ve seen new and updated rules related to anti-money laundering, economic substance, ESG and more.

As multinational organisations know, the cost of complying with these rules is high and rising. One study found that the total cost of financial crime compliance among financial institutions was USD274.1 billion in 2022, up from USD213.9 billion just two years before. This is of course just one element of compliance costs in one industry. Typical compliance costs include those related to data protection, labour, direct and indirect taxation, and more.

For multinational organisations, there is effectively no choice but to comply in every country of operation. The financial and reputational risks of non-compliance are simply too great.

The question of regulatory convergence

Important questions relating to regulations include whether proliferating, country-specific rules will converge into a common set of tax, data protection and other regulations, and whether or not this would be desirable. In theory at least, developing a single set of, for example, ESG reporting rules or accounting principles across borders could significantly reduce compliance burdens for multinational organisations, as it would reduce the number of country-specific rules to follow.

Since 2010, we’ve charted the sentiment surrounding regulatory developments across countries in our Vistra 2030 research series. Our early surveys showed that many business leaders predicted regulatory convergence in certain important areas. This trend rose year on year until 2020, when it declined for the first time.

Our latest Vistra 2030 report reveals a further decline in predicted global alignment on important regulatory initiatives in the next five years.

A complex patchwork of regulatory standards

As we’ve mentioned, laws and regulations are overwhelmingly country-specific. There is no such thing, for example, as a global labour law.

That said, there are certain organisations or bodies that set global regulatory standards, guidelines and recommendations, such as the Organisation for Economic Cooperation and Development (OECD) or the Financial Action Task Force (FATF). Many countries adopt these standards into their own rules. For example, over the last decade many jurisdictions have implemented the OECD’s common reporting standard (CRS) and elements of its Base Erosion and Profit Shifting Action Plan (BEPS). Together, country-specific rules based on these standards have helped fight tax evasion and enabled greater information exchange.

Even in these cases, however, it’s important to bear in mind that individual jurisdictions still create their own unique rules. The implementation of the OECD’s Pillar Two framework is an example. Pillar Two seeks to set a standard on a global minimum tax rate on large multinational groups. But the standard is not necessarily applied consistently in each country. The US’s corporate alternative minimum tax, for instance, is similar to Pillar Two but differs in significant ways.

There are many reasons for this regulatory divergence between countries, from a desire to compete with other countries for inward investment to an unwillingness to cede what individual jurisdictions regard as their sovereign right to create their own rules. Whatever the reasons, the result is that, even with global standards and recommendations, global regulatory complexity persists and must be addressed by any multinational organisation.

Regulatory convergence in the age of a new globalisation

Our latest Vistra 2030 survey was held during a time of significant global upheaval, including the winding down of the pandemic, US-China trade wars, regionalisation, the war in Ukraine, and rising energy costs and inflation.

These geopolitical and economic realities may have contributed to our survey participants’ increased doubts about further international cooperation on important regulatory initiatives.

For example, less than half (49 percent) of survey respondents expect to see full implementation of the common reporting standard by OECD members, down from 55 percent in 2020 and a high of 77percent in 2016-2017.

Expectations for alignment on beneficial ownership disclosure also declined. In 2018, for example, 67 percent of survey respondents thought central, non-public beneficial ownership registries were likely, while 52 percent thought publicly available beneficial ownership information was likely. Those numbers reached their lowest levels in this year’s survey, at 46 percent and 40 percent respectively.

On the other hand, over half of this year’s respondents (56 percent) predict economic substance legislation will become the global norm in the next five years. This is the first year we asked about economic substance, so there is currently no basis for like-for-like comparison across surveys, but 56 percent is a relatively high percentage compared to expectations related to CRS and beneficial ownership in this year’s survey.

Compliance in a new era of globalisation

The good news for global businesses and investors is that, while the pace of legal and regulatory change may be dizzying, legal and regulatory divergence between countries is nothing new. Furthermore, the fund and corporate services industry is increasingly adept at helping its clients understand and adapt to cross-border regulatory change.

A partner in an offshore law firm we interviewed for the latest 2030 report said of the introduction of the common reporting standard and the US’s similar FATCA legislation: “They really didn't make any difference. There are more forms to fill in and there's reporting that has to be done, but we’re well into those regimes now and they have become part of the wallpaper.”

Global businesses have proven to be highly adaptable in the face of digital commerce, emerging ESG demands, the normalisation of remote work, rising protectionism, inflation and other challenges.

As cross-border trade and investment evolve, regulatory complexity and country-specific laws are here to stay. That said, regulatory convergence will likely continue in fits and starts. Russia’s invasion of Ukraine, for example, rapidly led to widespread sanctions. Other disruptions could lead to similar unexpected and coordinated efforts. If nothing else, the December 2022 agreement by EU member states to implement Pillar 2 is a reminder that cross-border regulatory convergence is not dead.

Just as regulators and lawmakers must balance geopolitical and economic realities, fund and corporate services providers must help their clients balance compliance risks with operational efficiencies. Given proliferating rules, and related financial and reputational risks, many organisations will want to move compliance higher on their list of priorities.

To learn more about why global regulatory cooperation is expected to slow, download the complete Vistra 2030 report.