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FATCA Compliance – an achievable goal

Davide Ferrara

Among the many new regulatory requirements financial institutions are facing, FATCA has potentially the longest term impacts and the least amount of specific compliance requirement information available. The challenge for C-level executives/compliance officers is to understand what they can do now to ensure cost effective and timely compliance is achieved in the full life cycle of what is required. Davide Ferrara from CSC believes there is an effective way forward.Davide Ferrara

As it stands, the US initiated Foreign Account Compliance Act (FATCA) will require all Foreign Financial Institutions (FFIs) to report any income earned by their American clients to the US’s Internal Revenue Service (IRS), regardless of where earnings are accrued.

This has significant implications for most financial institutions as a new set of reporting, and most importantly aggregation and identification of the required data to derive such reporting, is required.  The costs of compliance to FATCA for FFIs are likely to be significant and generally in inverse proportion to the extent to which information management policies and related data solutions are up to date.

Responsibility for compliance is required to be assigned to a specific individual within the FFI – usually the Chief Compliance Officer – who can ultimately be held responsible by US authorities. The FFI also remains responsible however, with non-compliance resulting in a 30 percent withholding tax on any income gained by the FFI from US sources.  Additional penalties and sanctions can also be applied by US authorities so as to directly target an errant FFI or those that trade financial instruments deemed to be subversive to FATCA’s intentions. To make matters even more challenging, FATCA is intended to be applied globally and ubiquitously across all financial sector participants.

So the challenge is very real, with direct share-value impacting consequences and is pervasive to all areas of an FFI’s operations.

US driven FATCA is the first of many

Unfortunately for FFIs, that is not where it ends. Rather, the current US driven FATCA is likely to be but the first of many FATCA-like tax regulations that other countries will direct towards their own expatriate communities. After all, in these times of large budget deficits, a new source of government income can only be welcomed, if not outright pursued as an opportunity.

As a result, several countries are already drafting FATCA-like legislation or in preliminary reviews that will ultimately see them do so. This not only includes the UK, but also most European countries. Furthermore, several international organisations – including the OECD – have strongly advocated the wider adoption of FATCA-like tax regimes as a route to achieve additional international oversight in areas such as money laundering and corruption. The way the US driven FATCA is being implemented through bilateral agreements, also makes the eventual reciprocity easier.

The reality is therefore that the current FATCA will not exist singularly as a US driven effort relating to American citizens abroad, but rather, will be a first step towards new tax regimes for the citizens of many countries, wherever in the world they may reside.It is ultimately for this scenario that FFIs need to plan as this is the real challenge faced from FATCA.

The response so far

FFIs have not been sitting still. Several approaches are already in the process of being implemented. In short, the acceptance that something must be done is not in question. The current topic of debate is instead identifying what the most cost effective way to achieve compliance is, now and for the future.

One approach which has gained some following, especially from FFIs with relatively limited international footprints, is to simply cease accepting business from new American clients and potentially close the accounts of existing ones. For organisations where such clients are in the hundreds, or even low thousands, and where such business is not strategic, this can seem like a worthwhile approach to achieve immediate FATCA compliance.

However, a closer look at the longer term application of this approach – as more FATCAs are implemented by other countries – quickly shows the problem: with each additional country adopting a FATCA regime, the FFI will lose an additional set of clients. Ultimately the FFI will only be left with national clientele in whatever country they are operating, thus significantly hindering their ability to offer cross-border or higher value services such as wealth management or private banking.It is also the case that the FFI will still need to be able to demonstrate to relevant authorities that it is achieving compliance through a “client reduction” process. This will require similar reporting effort to that required for FATCA compliance achieved without reducing the client base.

The effectiveness of this approach is therefore premised on the current US led FATCA being the only FATCA and on a misconception of what proving compliance requires. The result is an approach that is both misinformed and destructive to shareholder value.

A more common approach being adopted by FFIs is to “focus on the now”, with an emphasis on minimum investment and timescales, so as to achieve compliance to the US driven FATCA with minimum disruptions to operations and as cost effectively as possible.This sounds sensible and shareholder value enhancing and explains why a majority of FFIs are adopting this route. After all, the argument often follows, how can we plan to do something that has not yet been defined? How can we put together a business case for FATCA solutions that there are no actual requirements for?

The complexity equation

Valid points, until one considers the inevitability of further FATCA-like legislation on the one hand and, on the other, how such legislation will be applied to FFIs.

For a start, for each new country implementing FATCA like regulation, the complexity of the data required for compliance increases geometrically, rather than linearly. It is therefore estimated that by the time the fifth country rolling out FATCA-like reporting requirements comes to fruition, the data management complexity of compliance to that country will be at least 24 times what it is for the current US only FATCA. While this applies only part of the logic behind the geometric progression, compliance to multiple FATCAs becomes a huge data management, reporting and compliance management issue.

Secondly, as the implementation of FATCA-like regulation starts to gain more steam, it will be increasingly easier for countries to adopt versions of their own, since precedent – legal and operational – will have been set. This means that once the FATCA train leaves the station, it will pick up speed quickly, resulting in FFIs being faced with numerous compliance requirements – and implementations – all within a short period of time. Each implementation will have its own sanctions and penalties and its own specific variations of what FATCA means.

The right approach, at the outset

For a FFI to achieve cost effective FATCA compliance in the short, medium and ultimately longer term, it needs to fully appreciate the context in which FATCA is occurring. This means understanding that the current FATCA is the first of many FATCA-like regulations and that each of these is likely to have its own specific requirements. It is also important to realise that those same regulations will be subject to changes over time.

This means that a strategy for FATCA must be premised on the fact that a FATCA compliance solution is not a ‘one size fits all’ in respect of FATCA requirements, but rather should supply a working framework and solution which provides the flexibility and the information management structures to enable quick and cost effective changes to be made continuously.Additional aspects of the strategy will need to consider integration with legacy systems and processes – such as customer on boarding – and the ease, flexibility and accuracy required in reporting.

It is also the case that as compliance to FATCA gains steam, the volume of processing required – especially at the start, to process existing clients– will be considerable. It therefore makes sense to think in terms of achieving economies of scale in such processing, such as through the creation of one or more shared service centre(s) where all FATCA processing can be centralised. This has its own implications for the framework and solution to be put in place to support compliance, as it implies that it must be scalable and centrally managed, with regional and even sub-regional (branch level) instances.

A further issue which is quickly becoming a concern to FATCA commentators is FATCA’s potential to conflict with data protection legislation in specific countries. In handling this, the compliance strategy should ideally aim to separate the actual customer account data from the processing of on boarding or completion of required compliance forms, such as the W-9 Form for US FATCA.

It should also look to separate reporting on the extent of compliance to process, such as reporting on numbers of customers being processed, from actual reporting of specific tax liability information. These two issues of operational separation have direct impact on eventual architecture, business processes and technology elements of a solution.

Finally, the strategy needs to allow for an exhaustive audit capability. This will be essential as any eventual audit by the IRS or any other regulatory body will need to clearly demonstrate how compliance is being achieved; will need to be able to track any specific exceptions arising (of which, there are likely to be some at each FFI) and will need to be able to prove that the FFI has generally complied and has made best efforts in doing so to independent third parties, such as a court. An FFI’s Chief Compliance Officer should be especially focused on this aspect as he / she will always remain personally accountable. It is an interesting point of the US legislation that responsibility for FATCA compliance cannot be delegated.

Once a clear FATCA compliance strategy is derived, secondary aims, such as improved customer service through customer access to the FATCA solution (self-serve) and new tax related services or value adding provisions to customers, such as, reporting and improved data availability, can also be considered.  These need not divert from the compliance goal, are relatively easy to achieve and can significantly enhance the FATCA business case.  This will turn required FATCA compliance from a short sighted ‘point in time’, reactionary approach, to a strategic on going means to deliver enhanced shareholder value.

Keep up to speed with FATCA by joining the debate on Twitter #csc-fatca and for more information on CSC’s offerings related to FATCA, go to http://www.csc.com/financial_services.

Davide Ferrara, partner, CSC

Davide is a partner, who works with CSC banking and fund management clients, helping them leverage business assets through solutions that add real value, without increasing costs.

He is the CSC lead consultant for FATCA and is actively engaged with clients to help them prepare to comply with this forthcoming complex and far-reaching legislation.

Davide’s many years’ of experience in financial services ranges from investment banking and fund management, to strategic consulting for venture capitalists.  His experience includes restructuring and M&A, to shared service implementations, decoupling of investments, to integrating private equity investments.

Davide is passionate about the creative use of technologies to improve business processes, devise new markets and to bring about product innovation.

 

 

 

 

Finance

Younger generations drive UK alternative payment method adoption for online transactions

Younger generations drive UK alternative payment method adoption for online transactions 1
  • 42% of Millennials and 35% of Generation Z feel confident using alternative payment methods, or have used them previously
  • 81% of consumers agree security of their data and money is the most important aspect when choosing a payment method

UK London, 11th August 2020 – As the migration away from traditional payment methods in the UK accelerates, younger generations are leading the adoption of alternative payment methods (APMs) such as bank transfers and e-wallets, reveals a new study from PPRO. According to the findings, 42% of Millennials (born between 1980-1993) and 35% of Generation Z (born between 1994-2001) feel confident using, or have used, these methods of payment before.

In the UK, any payment method other than credit or debit cards is viewed as an alternative payment method (APM). However, across the globe, these forms of payment are considered local payment methods (LPMs) due to their broad adoption. In fact, there are over 450 significant local payment methods currently available worldwide, which account for more than 70% of global e-commerce transactions.

Ongoing COVID-19 restrictions have seen a surge in e-commerce in recent months, with many consumers forced to shop online for everyday goods. As a result, UK consumers have been more inclined to try a range of digital payment methods to enable a convenient transaction experience. Currently, 89% of UK consumers are confident using PayPal, whilst a further 31% express the same confidence in using mobile wallets such as Apple Pay or Google Pay. This form of payment is particularly high for younger generations, with 68% of Generation Z stating they use mobile wallet technology.

For younger generations, seeing a buzz about new payment methods in the news and on social media has been a key driving force for local payment adoption, 31% of Generation Z consider this the biggest motivation to try new payment methods. For Millennials, 37% said that merchant acceptance is their main driver.

For the overall UK population, however, security was ranked the top adoption driver, even above reputable brand image, with over half (59%) of UK consumers stating security is the most important influence on their usage of new payment methods. This highlights the growing need for online merchants, Payment Service Providers and FinTechs to address consumer perceptions around trust and assure the security of payment methods at checkout.

“Local payment methods, such as direct bank transfers and pay later schemes, are considered new ways to pay in the UK. However, for online merchants that sell to consumers across borders, these local methods are the norm and must be offered at the check out to reach international consumers,” comments James Booth, VP Head of Partnerships, EMEA at PPRO.

“Traditionally, the UK and US alike have stuck to using credit and debit card payments for online transactions. However, for merchants, local payment methods (LPMs) are much more secure in comparison to card payments, due to chargebacks and being prone to digital theft and fraud. LPMs, such as bank transfers, are more secure and a lot cheaper for merchants to process,” adds Booth.

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Finance

Teaching children about wealth management and why there has never been a better time

Teaching children about wealth management and why there has never been a better time 2

By Annabel Bosman is Managing Director and Head of Relationship Management at RBC Wealth Management

As we approach the end of week sixteen in lockdown, I am breathing a sigh of relief at having successfully navigated another week of juggling work and client commitments with the increasing demands of my children – age six and nine.

My day job is to lead RBC Wealth Management International’s relationship management efforts in the British Isles, but my toughest challenge right now is educating and entertaining my new junior co-workers each day.

While my children’s school has done a great job at setting up daily tasks and learning activities, there is only so much ‘teaching’ they can take from me without World War III breaking out. So instead of rigidly sticking to the school curriculum each day, I have taken the opportunity to educate my young children about a topic that is often not discussed enough in school — money.

Why now?

What I do for a living has become a central discussion in our co-working space — also known as the dining table. I have found that investment concepts can be grasped quite well by young children and this has led to some interesting conversations about which businesses are doing well in the current situation, and those that are not. Children are often more logical than adults, and in my house, this logic is helping them grasp the basics of an investment philosophy. As a result, I have even passed conversations around stock markets off as maths classes!

For young children like my own, helping them learn the basics of managing money is something that will hopefully set them up well in life. There are some great tools to help them do this – we use GoHenry, which provides children with a pre-paid card to learn about budgeting. Likewise, encouraging conversations around how they spend virtual money whilst gaming on apps like Roblox can give some really important lessons around how you look after the money you have earned – and how if something seems to be too good to be true, it probably is.

The most important thing is not to underestimate your children. Whether it is the application of a “mummy-tax” when they want chocolate or applying interest rates (albeit nominal!) if they want to borrow money, teaching our children the basics around money is something we can all do.

Incorporating new lessons

The first step is to identify the best way to approach teaching these topics in a way they will understand. Resources such as the Usborne Money for Beginners are really helpful to start conversations. There are also several YouTube clips and even TikTok channels dedicated to helping children think about money. I tend to think about what is important to them and use that as a catalyst to start conversations; for example, it could be how they can monetise their love of the gaming app Roblox.

Ending the taboo

Any conversation that leads to a greater awareness around financial discipline and security has to be a positive, no matter what the age – and there are certainly parallels with my experience and that of my clients. There seems to have been a shift in HNW and UHNW families’ willingness to talk about money. Whereas previously it was seen as very un-British to speak about money, the pandemic has meant that a more open conversation is taking place.

Whatever our financial position, we often bury our heads in the sand when it comes to money, and don’t always have a clear financial plan, but when we start to put down on paper what’s going in and out, we immediately start to feel more in control, thus becoming more engaged. It can be uncomfortable to have that conversation with your family, but we regularly speak with our clients about all manner of sensitive subjects including putting wills in place, inheritance and protecting loved ones. Naturally, this is also bringing conversations to the fore around succession planning, legacy, philanthropy and even one’s own mortality. When times are good, it’s easy to not have these thoughts at the forefront of your mind, but in challenging times like these, it highlights how essential it is to talk. And just as with my children, there are plenty of apps and websites that can help you take the first steps.

Varying generational approaches

There is no one way to educate your children about money — what worked for one generation will not necessarily work for the next. Different generations have had to address the different approaches they might take in thinking about money and try to reach a common language to agree on common goals. Whilst many of us grew up with physical pocket money from our parents after completing household chores, today’s young children rarely even touch money, they receive their allowance on an app.

A 2019 study commissioned by RBC Wealth Management and conducted by The Economist Intelligence Unit found that seven in ten younger affluent respondents think that their beliefs about wealth are very different to those of their parents; with a similar percentage, 78%, believing that wealth is less easily attained or preserved today. Early, open and continuous dialogue can only help confront obstacles head on and smooth the path ahead.

These talks also allow HNW individuals and their families to talk about how they can address their non-financial goals, such as fighting climate change or supporting social agendas – something that the younger generation is acutely focussed on. Indeed, more recent social events have led to an ongoing and overdue debate around what privilege looks like and how society needs to change.

What next?

With the summer holidays fast approaching, the struggle to keep children occupied will continue, but without the pressure of the school curriculum. This is an opportunity to continue discussions with children about where money comes from and where its value lies.

I have found it tremendously empowering to talk to my children about money and getting back to basics — it may not be school learning, but it is real life learning. And as I say to my clients, the initial step to start a conversation is always the hardest.

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Finance

From accountants to advisors: changing roles and expectations

From accountants to advisors: changing roles and expectations 3

By Chris Downing, Director for Accountants & Bookkeepers at Sage

The line between strategic advisor and traditional accountant is blurring. Over the last year, 82% of accountants said their clients were demanding a wider service offering, including business and technology implementation advice. In the current climate this transition has only been accelerated.

Clients increasingly expect their accountants to take a more active role in change management and predicting their cashflow months into an uncertain future. This is enabling businesses to tackle the challenges of day-to-day operations, while keeping an eye on what the post-COVID world will look like, and the support they will need to return to strength.

To solve these new and complex, expectations accountants must develop a different way of working. They will be required to increasingly supplement the traditional, compliance and reporting aspects of their work with business advice and consultancy. To do this, accountants need the ability to move quickly and efficiently, with a firm grounding in technology and data control.

Get straight to the point

The priorities of yesterday are very different to the goals of today. Where businesses once focused on driving growth and efficiency, the objective for many now is continuity – understanding what government support is available and for how long. In the current climate, speed of delivery and client care are top of the agenda.

But the way accountants go about this is very important. Rules are changing every day – the definition of an ‘essential business’, government support and bank loan programmes are constantly in flux. In normal times, an accountant’s role is to ensure their clients are aware of and reactant to these changes. Yet, how much value does this create for them in the ‘now’?

To be valuable, new information must be delivered quickly but it should also be succinct. It isn’t useful for clients to be bombarded with email updates, or reports running into hundreds of pages, trying to explain the week’s changes. With so much present noise, it’s the accountant’s task to break through the information overload and provide the client with crucial resource only.

To understand client pain points and get to the heart of what they really need, a running dialogue is essential. Building individual client relationships will unlock the potential to deliver tailored experiences that meet their business demands. Armed with this insight, accountants can then distil complex information into digestible chunks.

A more entrepreneurial spirit 

Sharing insight is only the start.  The other half of the story relies on consultancy. In the Covid-19 environment, the routine aspects of an accountant’s work are being supplemented with the transformative changes they can make for clients. Cashflow projections for the next six months are crucial, but even more so is the advice an accountant can offer on improving the financial outlook of a business.

Chris Downing

Chris Downing

To provide this balance, accountants should embrace a more entrepreneurial way of thinking. Not only advising on how clients can meet current challenges, but also how they can innovate to drive new revenue streams in the future. Part of this means being willing to step outside of their comfort zone. Many firms are already investing in the skills and technologies they need to service novel demands – like advising on relevant accounting and finance technologies.

While many businesses remain closed to the public, even as lockdown eases, they have increased capacity and flexibility to shift operations towards what will be most effective and profitable. Clients will be open to changing their business focus to meet demand spikes in other areas as they do not have to account for a disruption to customer service. For example, many distillers shifted production from beverages to hand sanitiser while bars and restaurants were closed.

With their contextual understanding of client finances, accountants are uniquely placed to advise their clients on change and guide them through the transformation process. Though this requires a more innovative model of accounting, and one that is willing to embrace the latest technologies.

Truth in the cloud

Business advice needs to be backed by data, especially for accountants engaging directly with the CFO. Scenarios need to be modelled, analysed, tracked and compared over time to arrive at the most effective proposal for the client. This is outside the wheelhouse of traditional accounting, but it’s becoming necessary in an industry heavily disrupted by new technologies.

To keep up with the ever-growing need for rapidly available data and analytics capabilities, more and more accountants are turning to the cloud to consolidate and use their data estate, while automating the time-consuming tasks of data management. Indeed, the majority (91%) of accountants have said new technology has delivered fresh value to their business in the last year, whether it increases productivity or frees up more time to focus on client needs.

Against the backdrop of coronavirus and technological disruption, a new breed of accountant is quickly emerging. Innovation is possible for those who stay ahead of client expectations and are aware of their needs, embrace an entrepreneurial mindset and adopt the latest cloud and automation technologies. In this way, an accountant becomes an integral part of their client’s business.

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