Global regulation: A multilingual morass,
by Robert Boyd.
Trains running late? Blame a company. Prices creeping upward? Blame a company. Hotel wifi crashing? Blame a company. Populism isn’t just a force at the ballot box. What’s more, it’s not just coming from voters. For 2017 and beyond, a wrathful combination of public outcry and regulatory zeal has the business world in its sights. Companies taking shelter in the cracks of globalisation will be flushed out.
Regulation is part of the global conversation at an increasing level of intensity and strategic significance. Unfortunately for businesses, the conversations in the US, Europe and in Asia are all different. Not only are they in different languages, but they are also saying different things – loosening in one part of the world, tightening in others, increasingly politicised still elsewhere. Perhaps their only common feature is a distinct lack of clarity and specifics. Navigating the regulatory landscape has never been easy for multinational companies, but in 2017 it is going to be more challenging than ever. No wonder global CEOs need a strong spine these days.
US: bonfire of regulation?
In the US, talk is of de-regulation and unwinding a decade of increasingly stiff financial services and environmental regulations. In the weeks following his election, President-elect Donald Trump said: ‘I will formulate a rule which says that for every one new regulation, two old regulations must be eliminated. So important.’ Sifting campaign rhetoric for nuggets of policy is tough: Trump does not have a track record of proposing or signing legislation. Moreover, the tone from the top is, so far, one of non-disclosure when it comes to certain types of regulation. The trajectory of regulation in critical US commercial spheres will also depend to a large degree on the relationship between the White House and Capitol Hill. For now, that remains a work in progress.
Environmental regulation looks to be at the top of the list for reform in 2017. Beyond that, the Dodd-Frank Act and its banking regulation are also up for revision, if not total repeal. Trump’s choice for Treasury secretary, Steven Mnuchin, flagged it as one of his top priorities. At this point, the difficulty lies in estimating just how trenchant the revisions will be – note the softening of Trump’s stance on the repeal of the Affordable Care Act. But for the time being, clarity in the incoming administration’s regulatory agenda is in short supply.
This in itself is a source of risk. As ever, one of the most important aspects of regulation – and regulatory risk – is the speed with which new rules are adopted (or dismissed) and the transparency of the process. At this point, the incoming administration looks more poised to ease regulation, rather than apply the hatchet full force. Elements of Texas Representative Jeb Hensarling’s recently proposed Financial CHOICE Act look of interest to the incoming administration, including changes to the structure of the Consumer Financial Protection Bureau and the repeal of the Volcker Rule (restricting banks’ ability to invest their own money in risky assets). Watch this space.
Other regulation seems likely to survive major surgery. The FCPA is a case in point. Anti-corruption campaigners and FCPA commentators would be forgiven for having concerns about the fate of the FCPA. Trump has in the past described it as a ‘horrible law’ and said that it should be changed because it puts US businesses at a ‘huge disadvantage’. But these comments came many years before Trump became a presidential candidate and were made in connection with facilitation payments – which are explicitly permitted by the FCPA. Dismantling that law would not address the underlying issue that appears to chafe.
There are other reasons to believe that the FCPA will survive intact. Among other things, the optics would be bad. The FCPA targets white-collar crime and, in many cases, wrongdoing by foreign companies. Seven of the top ten FCPA fines of all time were levied against foreign firms. And here, perhaps, we see another sort of trade-off: the balance between the desire to deregulate and the forces of economic nationalism. The potentially capricious application of regulatory enforcement is the most potent weapon of the economic nationalist.
Moreover, the OECD and similar organisations rely on the US to be the cornerstone of the global fight against corruption, and a softening of anti-corruption laws could trigger concerns and even trade friction. Finally, the FCPA generates billions of dollars in income, a source of funding that will be difficult to give up. However, there is a danger that FCPA enforcement will become much more politicised.
Asia: ever unpredictable
The politicisation of regulation will be familiar to companies operating in Asia. In China and other complex Asian markets, the challenge to business is exacerbated by the fact that the regulatory environment is opaque. The investigative and prosecutorial powers of the regulators are broad, and enforcement can have political drivers. Companies looking east for a calmer, more predictable regulatory environment – particularly in light of relaxed formal investment restrictions – will be disappointed.
The reality is that China is imposing ever-tougher restrictions on foreign companies, particularly around antitrust, the environment and product quality. Regulation in China used to be spotty, province-based and piecemeal, which meant that it was inconsistent, but at least not overwhelming. Increasingly, it is becoming national, cohesive and comprehensive. Moreover, the Made in China 2025 policy sends a strong signal that the regulatory environment will continue to favour domestic over foreign companies, though that does not mean that China will by any means be soft on its own companies.
What is happening in China also fits squarely within the global trend of regulation as a weapon of economic nationalism. Bear in mind that even while the US relaxes certain domestic regulations, it may become increasingly difficult for US companies to do business overseas because of retaliatory regulation and the rapidly changing optics of exporting jobs abroad. To further complicate matters, some of Trump’s national economic agenda may not come via regulation per se, but rather through a social media campaign of naming and shaming potential transgressors and exposing them to reputational – rather than strictly regulatory – risk.
India, Russia and Brazil, too, provide ring-side seats to the regulatory offensive. In Russia, the focus right now is on the internet. Brazil may not be using regulation as a political tool, but Brazil’s anti-corruption campaign shows that regulatory enforcement is interwoven with – and indistinguishable from – political turmoil.
In India, the widely expected rollout in 2017 of the national Goods and Services Tax - the country's biggest indirect tax reform since independence - will in theory centralise the web of federal- and state-level levies. In reality, it is likely to be accompanied by teething problems during implementation, which will raise compliance costs for businesses in the short term. Limited moves to address structural issues related to land, labour, privatisation and subsidies, coupled with disparities between individual states in the context of India's federal set-up, will mean that the country's regulatory environment will remain complex through 2017.
Elsewhere in Asia, Indonesia, the Philippines and Thailand have initiated regulatory reforms to attract foreign investment. However, the net effect of these reforms will be to (sometimes deliberately) create opaque and complex regulation that leaves companies subject to aggressive and capricious enforcement, often prompted by populist, political motives. In these countries, regulation will sometimes feel like extortion. 2017 will, if anything, see an increase in regulatory risk in these Asian markets, with actual or perceived infractions by foreign firms bringing ever more aggressive enforcement under often vague laws.
Europe: tightening up
In contrast to its transatlantic partner, the regulatory environment in Europe is becoming increasingly punitive as Brussels homes in on antitrust issues and tax legislation. The controversial ruling that Apple must pay USD 13bn in taxes in Ireland (a payment that the Irish have said they don’t want because it would reduce their market attractiveness) has sent a clear signal that the EU is looking to level the fiscal playing field. And as Uber discovers that it must give its gig economy workers in the UK the same rights as full-time employees, it is clear that ‘new economy’ tech companies will find red tape may disrupt their disruptive businesses.
In the meantime, the staples of the old economy (automotive, extractives and others) will come under ever-increasing pressure from antitrust regulation. 2017 will also see the introduction of more robust anti-corruption legislation in France (Sapin II) and financial crime regulation in the UK (The Criminal Finances Bill). Watch the UK Serious Fraud Office move up a gear with major UK Bribery Act prosecutions .
2017: Regulatory roller-coaster
With US deregulation, EU hyper-regulation and China’s twin-track regulation, the regulatory world is in danger of giving companies whiplash in 2017. In developed markets, anti-globalisation governments are changing rafts of regulation at a macro level, intending to replace one set of binding rules with another. Developing markets are less clear – they seem keen to continue to globalise, but at the same time act as if they are beholden to local elites. Global companies will have to navigate these contrasting environments – neck brace not included.