Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: A very warm welcome to our listeners from myself, Vary Sandeman, Senior Product Manager for Trustee and Fiduciary Services at HSBC's Security Services.
Speaker: Now, HSBC Markets and Security Services have recently issued a paper sharing its view of some of the key global regulatory and tax developments to what in 2024.
Speaker: Today, we're going to explore the key headline themes and do a deeper delve into some of these, including sustainability, digital and tax.
Speaker: To discuss this further, I'm delighted to be joined by my colleagues, Ed Turner, Global Head of Product for Regulatory Tax and Sustainability,
Speaker: Ganesh Valakati, Director and Lead for Regulatory Services Fund Services, Sinead Stocks, Global Head of Tax Product, and Jennifer Lowe, Senior Product Manager for Regulation.
Speaker: Ed, coming to you first, the paper interestingly has the tagline, Keeping Up with a World in Flux.
Speaker: What is the backdrop that we need to consider here against the regulatory and tax developments?
Speaker: And what are the main evolving themes that we should be watching as we progress through 2024?
Speaker: Well, Vahri, alongside challenges of economic uncertainty, growing geopolitical risks and rapid technological advances, we are seeing increasing regulatory reviews and reforms.
Speaker: Digitization will continue to bring new attic losses and ways for investors to transaction financial markets.
Speaker: There will also be significant market infrastructure changes, including the shortening of settlement cycles,
Speaker: impacting investment managers and their service providers globally.
Speaker: These will also bring increased scrutiny on operational resilience.
Speaker: There will be continued focus on sustainability and standards for company disclosures and impact investing.
Speaker: We will also see ongoing global tax reforms.
Speaker: Specifically, in terms of development,
Speaker: impacting fund manufacturing and distribution, we see various regulatory regimes under review, notably in the EU and UK.
Speaker: In the EU, this includes the now published changes to the AIFMD and USITS framework, which aim to improve the management of financial stability risk, make investment funds more efficient to manage and clarify delegation requirements.
Speaker: Earlier this year,
Speaker: We also saw the revisions to the LTIF regulation come into effect, also known as the LTIF 2.0.
Speaker: The regulatory framework for the LTIF, a type of fund dedicated to long-term investments that can be distributed on a cross-border basis, has also been overhauled to reduce barriers to entry for retail investors and to make the product more appealing to professional investors.
Speaker: It's also worth noting, EU regulators are planning to make changes to existing regulations to better assist retail investors to make informed choices.
Speaker: For example, as part of the EU Retail Investment Strategy, EU regulators propose to make changes to the various aspects of the PRIPS regulation, including changes to modernise the PRIPS key information document.
Speaker: In the UK, the FCA
Speaker: is reviewing the overall regulatory regime for the asset management sector.
Speaker: Specifically, we are expecting to see updates to the AIFMD regime and a proposal for a new regime to replace UK PRIPS with the aim of improving the disclosures provided to retail investors.
Speaker: Finally, it's going to be important to keep an eye on the progress with the UK's overseas fund regime.
Speaker: The OFR, as it's known, is a new UK regime introduced to simplify the process through which non-UK funds can be marketed to UK investors.
Speaker: In December 2023, the FCA launched a consultation paper on the regime setting out how these overseas funds will be permitted to market to UK return investors.
Speaker: The FCA intends to publish a final policy statement and final handbook rules in the first half of this year.
Speaker: Thanks Ed for setting the scene and there's obviously a raft of key developments to look out for.
Speaker: You mentioned that there will be significant market infrastructure changes including the shortening of settlement cycles.
Speaker: Can you share a little bit more on that please?
Speaker: Many jurisdictions are looking at reducing their settlement times for transactions.
Speaker: The US SEC has finalized rules to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date,
Speaker: known as T plus two to T plus one.
Speaker: The proposed changes are designed to reduce credit, market and liquidity risks for investors and are with an effective date of the 28th of May 2024.
Speaker: In Europe, the UK has launched the Accelerated Settlement Task Force, which will examine the move to a T plus one standard settlement period.
Speaker: The task force published its initial report in March this year and in the report it recommended that the UK should commit to moving to a T plus one settlement cycle no later than December 2027.
Speaker: The EU is also considering a move to T plus one settlement cycle and ESMA will publish the results of a consultation assessing the benefits and costs of such a move this year.
Speaker: In 2023, India moved to a T plus one settlement cycle for listed equities and introduced same day settlements in March of this year, with instantaneous settlements phased in within a year.
Speaker: Other markets in Asia are also considering improvements to their settlement cycle, such as Malaysia, which has established the post trade and settlement working group to improve the institutional clearing and settlement process.
Speaker: The Securities Clearing Corporation of the Philippines is focused on launching a new clearing and settlement system and shifting the Philippine equity settlement cycle from T plus three down to T plus two.
Speaker: Thanks, Ed.
Speaker: Clearly, a number of jurisdictions intend to reduce their settlement cycles, which will hopefully further reduce credit market and liquidity risk in the security markets, as you said.
Speaker: And turning to sustainability now, Jen, what developments are we seeing for 2024?
Speaker: Thank you, Vahri.
Speaker: I think when we look at what's ahead this year in terms of sustainability developments, overall, globally, we're still seeing regulators continuing to develop new requirements.
Speaker: And for some jurisdictions with requirements that have already gone into effect,
Speaker: We're seeing regulators beginning to assess how well these have been adopted and may propose certain requirements to existing rules.
Speaker: And I think there's a real challenge here for firms to stay on top of all the various regulations, particularly for firms operating in and across multiple jurisdictions.
Speaker: And these firms will really have to navigate a substantial book of regulations mandated by regulators in each of the jurisdictions in which they operate.
Speaker: But I'm seeing regulators really beginning to converge in on the same key
Speaker: focus areas, which for this year, I would say are disclosures, data and mitigating against greenwashing risks.
Speaker: So some of the key developments starting in the UK this year, we'll see the beginnings of the UK's sustainability disclosure requirements.
Speaker: which introduces a series of measures to be phased in starting this year into 2026.
Speaker: And the package of rules includes sustainable investment labels, detailed product and entity level disclosures, and rules relating to the naming, marketing, and distribution of funds, as well as an anti-greenwashing rule, which firms must comply with from the 31st of May.
Speaker: I think it's also worth highlighting in relation to
Speaker: The UK government is really committed to making the disclosures of transition plans mandatory.
Speaker: It has established the Transition Plan Task Force, the TPT, to really help set the gold standard for private sector transition plans.
Speaker: And in the area of ESG data, we're expecting the FCA to consult and do course on a proposed regulatory framework for ESG ratings providers.
Speaker: And this will follow on from the consultation last year by HM Treasury on proposals for bringing ESG ratings providers within the scope of regulation.
Speaker: So moving on to the EU, I would say some of the key developments to watch are there's a fundamental review of the Sustainable Finance Disclosures Regulation, SFDR, that's currently underway, which is really looking at whether SFDR is fit for purpose, whether the firm level disclosures are useful, and most importantly, whether the Article 8 and Article 9 categories may
Speaker: On the watch list are additional requirements to the taxonomy regulation that will come into effect this year.
Speaker: There will be amendments to Corporate Sustainability Reporting Directive, CSRD, developments relating to the sustainability due diligence on large companies, which is being called CS3D, regulation of ESG ratings providers, as well as guidelines for the use of ESG or sustainability-related terms in fund names.
Speaker: So there's still quite a lot on the European watch list.
Speaker: And lastly, shifting over to Asia, I'd say we're really seeing a continued drive from Asian regulators to embed sustainability disclosures as standard practice and a real cooperation between jurisdictions to establish common disclosures and align with
Speaker: global standards.
Speaker: For example, Hong Kong aims to bring its corporate disclosure framework in line with ISSB standards.
Speaker: And we know the stock exchange has already proposed all listed issuers
Speaker: make climate-related disclosures in their ESG report and make additional ISSB-aligned disclosures starting next year in 2025.
Speaker: Singapore, Australia, and Malaysia are also among the other markets in Asia, which have declared their intention to also adopt the ISSB standards.
Speaker: Savari, overall, I think there's still clearly quite a lot of developments to keep an eye on within the sustainability thematic.
Speaker: Thanks very much, Jen.
Speaker: And if I was to sum up the areas of focus by regulators seem to be mostly on disclosures and data.
Speaker: Can you quickly give your view on what the key actions for firms are, please, Jen?
Speaker: Sure.
Speaker: I think on the data front, I would certainly highlight that firms will need to examine firms.
Speaker: the current ESG data practices and perhaps even enhance their ESG data collection methodologies and governance to really ensure that it has a reliable and robust ESG data strategy that's underpinned by strong governance.
Speaker: In relation to disclosures, I think given the regulatory scrutiny on the accuracy of the disclosures being made, firms do need to ensure that there is an adequate end-to-end control framework in place, starting from product design to sustainability performance reporting.
Speaker: And this may require a sort of risk-based review.
Speaker: across all relevant functions and activities to determine if there's any potential greenwashing risks, paying special attention to reviewing regulatory disclosures as well as marketing materials.
Speaker: Thanks very much, Jen.
Speaker: And Ganesh, bringing you in now, what are we seeing on the digital regulatory landscape, please?
Speaker: Thanks, Mary.
Speaker: I think amongst all the themes, this is a space which may have a significant bearing on the operating model of investment managers in time to come.
Speaker: and indeed on the evolution of fund structures.
Speaker: For now, we'll focus on three key themes that have emerged.
Speaker: Firstly, it's on new asset classes.
Speaker: Emerging digital assets, including crypto-based assets, are being looked at as a new asset class, and solutions are being structured to meet corresponding investor demand.
Speaker: Policymakers are also aware of the potential risks that digital assets pose.
Speaker: And to ensure that investor interests are protected, regulators are also focusing on tightening up rules, especially around any misleading marketing of digital assets, while addressing a general lack of consumer understanding on this topic as well.
Speaker: On this, a key regulatory development being tracked is the EU's Markets and Cryptoassets Regulation, MICA, which introduces uniform EU market rules for cryptoassets, including those that are not currently regulated by existing financial services legislations.
Speaker: It does include provisions covering transparency, disclosure, authorization, and indeed supervision of transactions.
Speaker: On the other hand, UK's future regulatory framework for crypto assets is comparatively less advanced than the EU, but more detailed rules are expected to emerge later in 2024 and in 2025.
Speaker: In Asia, Hong Kong is seeking to facilitate greater exposure to digital assets, with retail investors now able to directly hold virtual assets such as Bitcoin.
Speaker: Separately, the SFC in Hong Kong has approved exchange-traded funds that obtain exposure to virtual assets primarily through a futures contract for public offerings.
Speaker: In December last year, they also extended this by issuing a circular and SFC authorized funds with exposure to virtual assets, allowing authorized collective investment schemes to hold virtual assets directly.
Speaker: And more broadly across Asia, we have also seen similar discussions and developments in other markets like Singapore, Taiwan, Australia, et cetera.
Speaker: The second key theme varies around asset tokenization, which has been on the rise and likely to dominate the digital assets pilot of regulated firms in 2024.
Speaker: The EU's DLT pilot program is now in effect with simplified regulations for participants.
Speaker: And the UK also has set out its phased approach to fund tokenization.
Speaker: And 2024 sees the launch of the digital securities sandbox, marking the first step towards the emergence of secondary markets in tokenized financial securities.
Speaker: Asia also has been at the forefront of innovation with programs such as Project Guardian launched by MAS in Singapore, exploring the potential, economic potential and value-adding use cases of asset tokenization.
Speaker: The third theme alongside the creation of a stronger regulatory perimeter around digital asset is around governments and regulators in various countries reviewing the possibility of creating digital versions of their fiat currency in the form of central bank digital currencies or CBDCs.
Speaker: And many countries have either launched pilot initiatives or are consulting on proposals.
Speaker: Lastly, as Ed mentioned earlier, and I alluded to, with all these technological developments, operating model implications, including resilience of infrastructure, remains a topic of focus and importance for both regulators and financial services firms.
Speaker: Here, a key development has been the EU's Digital Operational Resilience Act, DORA, which takes full effect
Speaker: in Jan 2025.
Speaker: It is a significant new regulation related to outsourcing and use of cloud.
Speaker: In the UK also, the new operational resilience measures come into full effect in March 2025, and rules are expected on the operational resilience of critical third parties to the UK financial sector.
Speaker: In Asia as well, we have seen regulators releasing guidance on operational resilience, especially around infrastructure supporting fund operations, and that includes infrastructure supporting online and digital asset operations as well.
Speaker: Thanks, Ganesh.
Speaker: Some fascinating developments there for digital.
Speaker: And finally, Sinead, can you tell us what 2024 has in store for tax developments, please?
Speaker: Well, Barry, globally, tax reforms continue apace as tax authorities, supranational and international organisations increasingly look to enhance reporting requirements, curb tax avoidance,
Speaker: and respond to pressure to take action on global inequality.
Speaker: So firstly, we have the OECD's base erosion and profit shifting, BEPS.
Speaker: Pillar 1 of BEPS 2.0 aims to replace the various jurisdictional-specific digital service taxes
Speaker: that have emerged in recent years, with its scope now covering all industry sectors, with the exception of regulated financial services and extractive industries.
Speaker: It is fair to say that Pillar 1 is struggling to gain traction at present.
Speaker: which makes the 2024 implementation of BEPS Pillar 2 in many jurisdictions all the more impressive.
Speaker: Pillar 2, which has a much broader application than Pillar 1, introduces a 15% global minimum tax.
Speaker: aimed at multinationals with revenue of at least €750 million.
Speaker: In contrast to Pillar 1, implementation of Pillar 2 continues to gather pace globally across Europe, the Middle East, Asia-Pacific and the Americas.
Speaker: After many years of debate and significant doubts as to whether a global minimum profits tax could be realistically introduced, we are now live in many jurisdictions.
Speaker: with a global minimum profits tax of 15%, a real shift of the dial for international taxation.
Speaker: Secondly, we have withholding tax reforms in the EU with the proposed Faster and Safer Tax Excess Relief, FASTER, directive.
Speaker: This is focused on EU cross-border tax efficiency, and it aims to remove barriers to cross-border investment, improve processes for global portfolio investors,
Speaker: to prevent and combat tax avoidance and fraud.
Speaker: While the current implementation date of 2027 is expected to be pushed out, Germany continues to press ahead with its own withholding tax reforms, which will apply from 1st January 2025.
Speaker: and which will require reporting a significantly enhanced data set in order to obtain the digital serial code required to reclaim German withholding tax.
Speaker: Now, Ed and Ganesh both mentioned earlier the new emerging asset class of digital assets.
Speaker: And therefore, it will be no surprise to our listeners that the OECD and tax authorities are also focused on the taxation of this asset class.
Speaker: The OECD's crypto asset reporting framework, CARF, introduces global tax transparency reporting standards for the specific digital asset class of crypto assets.
Speaker: And it's due to be implemented in 2026 with first reporting in 2027.
Speaker: or are planning to hold crypto assets, do remember that you may have associated downstream tax reporting obligations.
Speaker: Staying with digital assets, the OECD as part of Common Reporting Standards, CRS 2.0, is expanding the scope of CRS to include digital assets that fall outside CARF, such as specified electronic money products and central bank digital currencies.
Speaker: With over 100 jurisdictions globally having already implemented CRS and exchanging information for the past six to seven years, the scale of CRS reporting is substantial and from 2026 will include the emerging asset class of digital assets.
Speaker: Finally, the OECD is increasing scrutiny on CRS compliance generally, urging tax authorities to implement reviews and in-person audits.
Speaker: to drive robust reporting and compliance.
Speaker: Thank you, Sinead.
Speaker: Definitely some interesting developments for tax too.
Speaker: Ed, Ganesh, Jen and Sinead, thank you all so much for joining me today to discuss global regulatory and tax developments to watch in 2024 and to give us an insight into all the hot topics, which we will continue to monitor closely, of course.
Speaker: We hope clients will find the paper equally interesting.
Speaker: And if there are any questions on this, please follow up with your HSBC representative.
Speaker: Thank you very much for listening.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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