Regulatory change is a constant challenge for financial services businesses and fulfilling the demands of regulators in each jurisdiction in which you operate is a significant cost of doing business. Developing and enhancing systems to facilitate the reporting and controls needed can create complex IT challenges and these only increase as you expand your services into new markets.
The risks of compliance failure can be high: in the UK the PRA recently commented on the end to end automated processes of banks and building societies saying:
- Lack of investment in strategic regulatory reporting solutions has resulted in heavy reliance on tactical workarounds and manual adjustments. This in turn has led to a higher risk of data errors and misstatements.
Read more on the PRA’s thematic review of reporting.
Building systems that allow you to comply with CRR2, Basel 3.1, IFRS17 insurance contracts, Solvency 2, MiFID 2 amongst many others take time and bring new complexities. Many businesses have also had to build or integrate systems for:
- Remote client identification and take-on procedures;
- Managing security issues with data collection and sharing; and
- Authentication processes for transactions.
Meeting the demands of FCA’s proposed new ‘Consumer Duty’ when it is introduced later in 2022 will be the next big challenge. Providers will be required to ensure that they only offer products to customers when they are relevant and ensure that customers can understand:
- The options available to them
- The costs, risks and benefits attached to those options
- Which options offer fair value and would meet their needs.
This is likely to require significant investment to enhance sales systems to work out which options suit which customers and ensure that products are only marketed to the right individuals.
Innovate cost effectively
Automating regulatory reporting and other key procedures is clearly the best way to speed up iterative processes, reduce the risk of errors and limit the administrative burden of manual intervention – but that is not a low cost or a quick fix in many cases. Integrating reporting functions into a group’s systems and ensuring data compatibility across service lines, jurisdictions and platforms can be a daunting task. In practice, continuous development is needed and much of this can result in advances in proprietary technology that qualify for R&D tax relief. This is worth between 10-33% of the expenditure related to the qualifying software development work – including the staff costs of the IT team, compliance and other teams performing supporting activities as well as any relevant software licence and contractor costs.
Identifying what is qualifying R&D
It is important to remember that research and development work does not have to be a project to create a whole new service or even entirely new software for the expenditure to qualify for R&D tax relief. Building new systems to operate more efficiently could lead to incurring qualifying R&D costs.
Software ecosystems vary significantly from one FS business to the other, some are built internally from scratch while others purchase off the shelf solutions as a starting point. Nevertheless, in both cases, these solutions need to continuously evolve to keep up with technology and to meet new regulation and requirements. This continuous enhancement would usually result in pushing the capabilities of the software or hardware systems beyond their limits, and usually generates “head scratching” moments for the developers (whether in-house or external).
The sensible rule of thumb is that if your development team is spending significant amount of time, or you are incurring a significant cost paying external developers, in order to meet industry, client or regulatory requirements, then it is likely you will qualify for R&D tax reliefs. Some examples include system work-arounds to facilitate regulatory reporting, cross asset real time reporting and representations, reduction in execution capabilities, tools and news visualisations on platforms – only to name a few.
Are you getting your R&D tax relief claims right?
As more and more regulatory demands are placed on FS businesses, those that use technological solutions to work smarter not harder will be the most resilient. R&D on your systems and technology infrastructure is now the norm for successful FS businesses but that doesn’t mean that all your costs will qualify for R&D relief. Whenever you carry out software development projects it is always prudent to step back from the technical issues and get an independent assessment of the prospects for an R&D tax relief claim: confirming the position at an early stage can help to verify the expected cost-benefit of the project.
For help and advice on R&D tax relief please contact Carrie Rutland, Oivind Andreson or Eyad Hamouieh.