The Dodd-Frank Act in the US, which gave a boost to technology spending by banking and financial firms after the economic slowdown, was a let-down for Infosys in the fourth quarter of 2011-12.
According to company sources, the deadlines to comply with some of the regulations under the Act got deferred, which is why many of the projects by its US based financial services clients could not begin in time.
Dodd-frank, also known as the Wall Street Reform and Consumer Protection Act, requires banking and financial services companies in the US to comply with various new rules to ensure they don’t face a Lehman-like situation. Named after the head of the US Senate Banking Committee, Christopher J Dodd, and the chairman of the House Financial Services Committee, Barney Frank, the Act seeks to correct structural weakness in the US financial services industry,like the risk posed by activity that falls outside the iew of direct regulatory supervision.
“Dodd-Frank has been very helpful for IT (information technology) companies and that (helping financial services firms in meeting the compliance requirements) is what we have also been doing. But for a lot of the components of Dodd-Frank, the timelines have been relaxed. For example, what they had to deliver in October 2012, they now have to do by March 2014,” said Ashok Vemuri, head of Infosys in America and member of its board of directors.
“So, obviously, whatever money had been pumped in that direction, clients have now pulled those back, as they have now got some more time,” he added.
Infosys, India’s second largest IT services company, missed its fourth quarter and its annual revenue expectation in FY12, for only the second time in its history. The company attributed that to the delay in project starts and ramp-ups, especially among its banking and financial services clients in the US.
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According to Infosys, apart from Dodd-Frank, some other regulations in the areas of credit cards and consumer protection were earlier being interpreted “much more rigidly than what they needed to be”.
The US regulators have now made the deadlines to comply with those regulations more flexible.
“They have extended the timeline by which the banks need to comply. As a result, the banks have taken an eye off and cut spending on those,” said Vemuri.
| REGULATORY COMPLIANCE BOOST FOR IT FIRMS |
| * Dodd-Frank Act: A major US regulatory directive aimed atbetter monitoring, reducing systemic risk, improving consumer protection; |
| * Basel-III: Pertains to increasing capital and liquidity requirements for global banking institutions; |
| * AML: Anti-Money Laundering regulations require financial institutions to prevent, detect, and report money-laundering activities, mandated through country-specific security laws; |
| * KYC: Know Your Customer rules requires financial institutions to maintain quantitative customer identity frameworks, to help identify issues in dealing with high-risk individuals, businesses; |
| * UCITS-IV: Undertakings for Collective Investment in Trading Securities- IV aims at boosting cross-border management of funds among EU states; |
| * MiFID II: Markets in Financial Instruments Directive-II aims at increased investor protection through better reporting and transparency measures and introducing a single market regulatory regime for the financial services industry across the EU. |
| (*Source: Everest Group) |
Banking, financial services and insurance is a major business segment for most offshore-centric IT services firms. Among the Indian ones, Tata Consultancy Services has the highest exposure to BFSI, which accounts for 43 per cent of its overall revenue. The share of BFSI revenue for Wipro is 27-28 per cent.
In the financial year ended March 31, Infosys’ revenues from BFSI came down to 35.1 per cent from close to 36 per cent a year before. The company says while some of its US-based clients in the BFSI space have deferred their projects for the time being, many of the new clients it had signed in the fourth quarter could not start. Of the 52 clients the Bangalore-headquartered company had added in the quarter, 15 are in BFSI.
“There are a lot of regulatory changes in the US or Europe and Dodd-Frank is one. Most of these are ongoing. While regulators will come and clarify from time-to-time, these Acts and compliance requirements are very much there will continue to provide a stimulus to IT spending,” said Amneet Singh, vice-president, global sourcing, Everest Group.