In our new blog article we examine how did the legal requirements shape the business and what was the response of IT after the turn of the millennium.
In the late 1990s, the Asian and Russian economic crises also affected global capital markets, warning cautious players who took daring risks with their stocks and kept their investments in an insufficiently diversified portfolio. The year 2004 was decisive in the life of the CEE region, as several countries joined the European Union as full members thanks to long preparatory processes, and this gave new impetus to the capital markets after the crisis. In addition to the financial and economic benefits, however, it is very important that the directives and regulations adopted in the EU from the moment of accession had to be implemented into national law from then on, and this significantly affected the functional operation of securities and capital markets. Following EU accession, EU regulations such as MIFID (Markets in Financial Instruments Directive) on the market in financial instruments have already entered into force, requiring transparency in EU financial markets and unifying the requirements for financial companies operating in the European Union, protecting the investors. MIFID came into force before the 2008 crisis, helyett “but not fast enough to effectively protect investors because the US economic crisis had reached Europe. As every crisis is a learning process for the regulator, the appropriate measures that really protected the interests of investors were not implemented in MIFID II until 2018. Clients were classified into client groups according to the financial knowledge of the investors and the investment protection to be provided to them.
This also determines the product range that still matches the client’s risk rating. Thus, MIFID II. already covers a lot more financial products, while MIFID I focused mainly on equities. In addition to investor protection, another such pivotal point is the GDPR, European Data Protection Regulation, which entered into force in May 2018, unifying Member States’ data protection provisions. The Regulation lays down guidelines for any operation or set of operations on personal data or files, such as collection, recording, storage. The introduction of these regulations and their mapping into background systems would have been unimaginable for capital markets without informatics. Due to MIFID I and II, significant developments had to be made in the account management systems. The GDPR went beyond the capital markets, affecting all companies, corporations, institutions, financial institutions, from the smallest to the largest, from the private sector to public offices, that process personal data. IT and digital data storage have played a huge role in the proper management of data and compliance with policies. Education about the regulations has also taken place online, as the physical processing of hundreds of pages of regulations on securities, securities trading, distribution, and the relationship of market players would take months for market experts through traditional mans. But online education has made it possible to process the information flexibly.
WHAT ARE THE REPORTING OBLIGATIONS?
The reporting service has made great progress in the capital markets in the last 10 years and is already a cross-border task. The goal of all investments in the capital market is to make profit, which makes it also the goal of the national economy, since one of the objectives of natural promotion of investments and of stimulating the economy is to tax the returns earned by investors. Of course, loopholes have always been (and are) available to avoid paying this withholding tax. In addition, it is a common concern of capital markets not to allow unlawful “money” originating from crime, drug, arms, or human trafficking to flow in the capital markets or to be laundered.
HOW CAN NATIONAL ECONOMIES CONTROL TAX EVASION?
Basically, the introduction of CRS (Common Reporting Standard) in 2014 had the greatest impact on Europe and OECD countries. It is a global flow of information between tax administrations based on an information standard (AEOI). Its purpose is to combat tax evasion. The idea was based on the agreement implementations of the US Foreign Account Tax Compliance Act (FATCA). The United States has concluded bilateral agreements with individual countries to obtain and provide information on bank accounts opened by US citizens abroad. In fact, the Foreign Account Tax Compliance Act (FATCA) is a federal law of the United States adopted in 2010 that requires all non-US foreign financial institutions to provide information about clients who are related to the United States (born or domiciled there) and to report the assets and identities of individuals to the United States Treasury Department. FATCA imposes requirements on countries that have signed a bilateral agreement, as well as on its citizens to report their nonUS financial assets annually to the US tax authority. Similarly to income tax, FATCA applies to all US citizens living in the United States, as well as to US citizens and green cardholders living in other countries. The CRS is based on the Agreement on Mutual Administrative Assistance in Tax Matters, which was signed by 97 countries (a number of countries inted to sign at a later date). Until 2014, bilateral agreements had been signed between countries in the territory of the Union. Subsequently, however, in May 2014, forty-seven countries (OECD countries) provisionally agreed to a “common reporting standard” on the automatic exchange of financial account information (GATCA).
The reporting obligations were an important milestone in the life of all account-managing banks. The “reporting service” has outgrown the capital markets because it is no longer a monthly or weekly task (it covers not only the daily securities transactions but also the portfolio, composition, clients, etc.). Extracting this information from the huge data sets of background systems is not a small task. Without IT support, it would be almost impossible to manage this amount of data and compile a proper report from it, and then submit it to the authorities.
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