Some of these hurdles are market driven, while others are regulatory in nature - and they are by no means small reforms. They cover a vast array of issues such as anti-money laundering (AML) legislation, additional tax evasion reporting, and new soundness and safety regulations, with arguably the most significant of these being AML.
In February of this year, the intergovernmental body tasked overseeing the development and adoption of appropriate anti-money laundering and terrorist financing legislation globally, the Financial Action Task Force (FATF), placed Thailand on a "grey-list" along with 14 other countries for its failure to make significant progress on anti-money laundering legislation and policy implementation. This list includes the likes of Cuba, Nigeria, Pakistan and Turkey, as well as two other Asean member states, Indonesia and Myanmar.
While debate rages in the press as to what being on the grey-list actually means, one thing is clear: being on this list is not good for Thai banks facing increasing competition from neighbouring banks in jurisdictions such as Singapore and Malaysia. The reputational impact to Thai banks of Thailand's being on such a list should not be underestimated. As the movement of capital is freed up under the AEC, Thai banks could suffer from capital flight to jurisdictions that are perceived to be safer and less risky.
There is some good news on this front in that this uncertainty associated with being on this list can be reduced by the passage of AML legislation. Such legislation is reportedly under consideration currently by the Thai parliament. When, and if, it will be passed is uncertain, but passage of this legislation would go a long way to alleviating potential pressure on Thai banks and financing costs for Thai businesses, which are already burdened by the uncertainty of what this year's flood season may bring. The time to pass this legislation is sooner rather than later.
In addition to the AML issues, there is the added pressure from the US to force foreign financial institutions (FFIs), including Thai banks, insurance companies and asset management companies, to agree to disclose information about accounts or entities owned by US persons. The Foreign Account Tax Compliance Act, FATCA, has seen much press of late and yet Thai Banks are finding themselves at a loss as to how they should approach this new legislation.
Few banks have dedicated adequate resources to the problem to-date. The Bank of Thailand is aware of this issue and has indicated that most Thai banks will have to comply with FATCA.
The third major regulatory reform that Thai banks are facing is the adoption of new, tougher regulatory standards for both capital and liquidity. These new requirements are part of the reforms that have come out of the global financial crisis and require the banks maintain greater amount of liquid assets on-hand in case of financial troubles. Thai banks are well positioned from a capital perspective as they built up substantial capital reserves after the so-called Tom Yum Kung financial crisis of the late 1990s. The issue for Thai banks going forward will be the new liquidity requirements.
Banks are now required to ensure they have adequate sources of funding to protect against a liquidity crisis. The task of meeting these additional funding requirements may be complicated by reduced sources of funding from overseas as financial institutions in Europe and the US pull back funding from Thailand and other Asean countries to satisfy the additional capital requirements placed on them by home market regulators. Markets need to ensure that sufficient capital and liquidity sources exist to allow Thai banks to comply with these new requirements, or else there could be a drying up of funding sources available for investment and rebuilding in Thailand.
When viewed separately, each of the above reforms presents potentially major modifications to banking operations, customer relations, funding relationships and the banking business model in general, but when taken together, they add significantly to the uncertainty that Thai banks have been facing since the global financial crisis hit in 2007. All these improvements and reforms will increase banking costs while at the same time impacting client revenue. Steps should be taken now by the Thai government, the banks and the markets to ensure that Thai banks can overcome these hurdles in time to compete in the AEC open market in 2015.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.