When it comes to determining which industries are sensitive across the globe, most companies don’t have the luxury of having all the answers in one place. Why? Well you pretty much have to gather the criteria from each country directly - so that’s over a 100 countries. Not only that but there isn’t a clear pattern across industries, regions or issuers. To give you an idea, we created a handy infographic where you can test how good your knowledge of this complex landscape is.
Whether it’s media companies in Spain, utility companies in France, or telecoms in Malaysia, Sensitive Industries regulations are another lens from which monitoring and reporting needs to be viewed from.
But just how complex is it? How difficult is it to stay on top of? Let’s break down a few areas we typically see causing challenges for compliance teams.
Layers and Layers of Rules
You don’t know what you don’t know. The old maxim rings doubly true when there’s a lot to know. In our previous piece on Sensitive Industries we shared how rules fall into one of three categories: hard stops, pre-approvals, and thresholds. Each gives a certain scope to managers to invest in the industries they choose. But it doesn’t stop there. Those categories are then further segmented by investors, issuers, and industry,
But what does it mean for investment companies? How should compliance officers keep close tabs on sensitive industry monitoring? Well, the compounding categorisation and sub-categorisation means that the sensitive industry's library of rules quickly balloons to the thousands. In fact, there are about 25% more Sensitive Industry rules than shareholding disclosure ones across more than 100 countries with restrictions on nearly 6500 sub-industries.
Some countries, like Italy, France and Sweden have more than 100 sub-industries that require pre-approval before investing. Then there can be issuer specific restrictions within a specific industry - that is definitely often an unknown unknown.Then the rules might be slightly different depending on whether you are a local investor or a foreign investor.
No Benchmarks to follow
As countries look to maintain control over different areas of national interest like agriculture, defence, aviation and more, uniformity isn’t on offer. In fact, such is the degree of variance that can cause significant problems for compliance teams.
Standard benchmarks used in other areas of regulation like shareholding disclosure - 2%, 5%, 10% - are cast aside when it comes to Sensitive Industries. Industries in scope vary enormously, and what’s regarded as integral to one country’s economy is often of limited concern elsewhere. Investors are subject to levels ranging from 0% - yes, 0% - all the way to 50%, with no discernible pattern to aid in the mapping of these thresholds. Of all the areas to check assumptions at the door, Sensitive Industries sit at the top of the list.
Beyond the economic implications, Sensitive Industries also capture areas of cultural significance, adding to the one-off nature of the monitoring. For example, make sure your team is making note of restrictions on waterfalls in Norway and monk alms bowls in Thailand!
And of course, these rules are constantly refreshing and moving to match political changes and developments around the globe. With such a large blanket of coverage and so many rules in place, regulators are frequently fine tuning and adjusting. Industry bodies like S&P Global can also play a role, like they did last year when they announced changes to GICS.
Making it out unscathed
Not only are the rules not centralised - good luck mapping all of them - how exposure is calculated varies from one country to the next. Also compliance teams need to keep an eye out for changing calculations within the same industry, for example, rules utilising voting rights and total capital in Belgium might be issued voting share capital in Japan.
Just getting started
While we have talked through a few common missteps and difficulties in Sensitive Industries, we’re only scratching the surface. One thing that is an absolute though is, when it comes to protecting a country's national interests, regulators draw a hard line in the sand.and there’s no wiggle room. Countries are setting more barriers and tightening the ones they already have so there is a need to constantly stay on top of everything. That’s a big ask of individual firms. Failure to do so means harsh penalties, including fines and trading bans, for offences and mistakes in monitoring and reporting.
So what can firms do to keep on top of this intricate web of rules and regulations? Regulators across the globe are constantly talking about transparency and this goes hand-in-hand with automation.
In the next part of our series we will look at how firms can leverage automation to deal with both the known unknowns and unknown unknowns.
