The 5 Complexities of Sensitive Industries

  • Andrew White, CEO at FundApps

  • 30.04.2021 12:30 pm
  • RegTech

A retreat into protectionism, already evident as a trend for some time, has been further exacerbated by the COVID-19 pandemic, resultant economic instability, and the EU vaccine rift. As countries scramble to protect businesses considered essential to national interest, attitudes to foreign investment are becoming increasingly stringent.

The last year saw many investment limits drop, leading to additional disclosure thresholds for investors buying assets in industries that have special significance. Japan, Italy, and France, for instance, have recently been blocking foreign investment in banking, real estate, energy, as well as other sectors deemed high-risk.

On top of this, we are also seeing an emerging protectionist trend around 21st century technology industries, including AI, advanced robotics, and self-driving cars. This is evidenced by the UK Government’s latest update to the takeover rules under the National Security and Investment Bill expected to come into force later this year.

Governments are not only setting tighter barriers to entry – they’re setting more of them. And with a lack of standardisation around how sensitive industries are regulated, increasing protectionism will add a layer of complexity to what is already a highly intricate area of regulatory compliance.

Here are five key reasons why sensitive industries could catch fund managers out on disclosure requirements this year:

1. Unique industry thresholds per jurisdiction 

The differences between each industry defined as ‘sensitive’ varies according to jurisdiction. For example, Bulgaria applies a 1% notification threshold in insurance companies, while Greece applies a 1% threshold in media companies and a 10% threshold for insurance companies.

2. Same company, different industry 

A single company can operate in a wide range of industries within a given jurisdiction. Many of these forbidden investments are easy to spot: utilities for example, will always raise a flag. So will banks. But what if that bank is also a supermarket? Or a mobile phone company? Or a search engine? As these conglomerates continue to blur sectors at the edges, keeping up with new protectionist regulations is going to become increasingly challenging.

3. Issuer specific limits per industry 

Many compliance teams are unaware that there are issuer specific restrictions within a specific industry. For example, in Brazil there is a 30% hard stop for three banks: Banco Bradesco S.A, Itaú UniBanco Holding S.A and Banco do Brasil.

4. Foreign ownership complexity

Foreign ownership within specific industries will require further regulatory scrutiny. In Denmark’s defence industry, for instance, Danish investors have a limit of 59% ownership, whereas foreign investors have a limitation of 20% ownership. 

5. Safely navigating cultural regulation 

Some jurisdictions enforce uncommon laws based on culturally specific values and customs. Thailand, for example, imposes restrictions on companies that make Buddha casts and monk alms bowls. And in Norway, there is a 20% pre-approval for waterfalls. 

It is clear why firms are calling out complexities around sensitive industries and shareholder disclosure as one of the biggest compliance challenges of 2021.

To keep up with tight trading limits and intricate rules, outdated order management systems and legacy compliance systems are no longer sufficient. Instead, fund managers need an automated service that provides clear insight into real-time alerts on changing thresholds, and then maps this out against their own position information. Without it, navigating the post-pandemic protectionist landscape will be, at best, a compliance headache– and, at worst, a serious threat to reputational damage.


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