FATCA – few days to go

Jim Muir, financial regulation expert and director of financial services data reconciliation firm AutoRek warns that with only few days until firms need to be compliant with FATCA, companies should be taking urgent action.

“The Foreign Account Tax Compliance Act (FATCA), is the the controversial legislation that has been enacted by US lawmakers in 2010, hopes to stop US citizens from using overseas investments to avoid paying tax by getting ‘foreign financial institutions’ to notify the US Internal Revenue Service (IRS) if their customers happen to include any US taxpayers, even if indirectly or remotely.

Even though the final FATCA regulations have not yet been released or clarified, firms of all sizes will obviously will need to make serious and costly modifications to their internal systems, control frameworks and, processes and in order to comply with these regulations on or before they come into effect on 1st January 2013.  For those of you without a calendar who are needing a wake up call; handy, that’s just under 250 days away.

Worse still, the latest awful realisation beginning to emerge is that every other country in the world is likely to follow the US’s lead with FATCA. BlackRock, the world’s largest asset manager, predicted last month that FATCA was essentially setting up the framework for a global tax system which other countries could then implement – costing fund managers and other financial institutions billions of dollars in compliance and updates to computer systems. This additional financial burden comes at a time when firms simply cannot afford to be careless with the allocation of capital to meet the requirements of their overall change budgets but at the same time, cannot afford to cut corners when it comes to investing in compliance solutions for the long term future.

TBut this is not simply a question of technology and somehow combining multiple product systems’ through disparate “Know-Your-Customer” modules to create a “Single Customer View”, although the enormity of that particular challenge cannot be understated or emphasised enough.

Client contact and communications will be crucial in the success of many of the FATCA programmes. It is imperative that FATCA programmes be designed to meet the evolving and changing nature of the regulatory landscape. Our advice to firms is to invest in technology to last for many years and not just to meet the ‘tick box’ requirements of the immediate future. Some really tricky questions need answered operationally and from a compliance perspective including:

• How many times will we need to ask a client to respond before classifying them as recalcitrant? Will the frequency and duration of the attempt pass the “Treating Customers Fairly” test?
• Can we combine accounts and send one communication for them all or do we need to ask the same client the same question for each account? (operational limitations due to a lack of a single customer view may leave us no choice)
• Do we write to all addresses held on system or just the designated primary?
• Can we write to a joint account holder or disclose that the co-holder is a possible US taxpayer?
• Do we start a widespread communications programme ahead of the start of data gathering?
• What if clients provide the information now, before we are ready to capture it? Will this create a backlog?
• Where will we store physical (original?) documents, how do we retrieve and return when we have processed them?
• How do we phase the communications to the clients without being inundated with telephone enquiries?
• What length of time is reasonable to allow the client to present evidence?
• How do we start information gathering from new clients and cross refer it to existing clients?
• When do we start staff training to deal with queries?
• Do we have central teams capturing data or a distributed model? Access and ownership of relationships are related issues?

For many of the larger institutions these questions are very complex indeed. The lack of existence of robust master customer data management systems may mean that data has to be transferred between several systems and physical locations to avoid the customer being contacted several times. There will be a real risk of increased complaints and a concern about reputational damage and customer attrition. Many institutions will be very aware that their customers have accounts with other institutions and that they will not want to be compared unfavourably in terms of processes with other providers.

 I have a slight worry, perhaps not so slight, that many of the tactical and pragmatic first steps that can be taken are being delayed. One very recent phenomenon is that some of the FATCA programmes are being swallowed up into a larger “Financial Crime” agenda and forming a part of these larger programmes. That is all very well. Unfortunately too many programmes become too big (and too expensive) to deliver and if FATCA becomes relegated to a “workstream” in an enormous consultant fest then inevitably focus will be lost. Of course our institutions should look for synergies. Of course FATCA, know-your-customer, and single customer view are all closely(!) related but the more moving parts to this programme, the greater risk of failure.

And the world doesn’t stand still! What about the huge amount of “corporate activity” going on. LBG’s branch disposal (“Verde”) and RBS’ “Rainbow” are tricky enough without the extra complexity of cut-over for FATCA (for example: at which point does the customer become the property of the receiver?). Even the consolidation of smaller mutuals will present challenges. The technology and the operational bandwidth will need to be flexible and scaleable.

The advice for UK firms is therefore simple: don’t wait until these rules become effective to begin assessing your needs and associated costs for compliance. Instead, you should be starting the evaluation and analysis of various case scenarios and records right now in order to identify which clients are at likely to be covered by FATCA, as well as the resulting tax implications.

One thing is for sure:  ignoring FATCA won’t make it go away.  In fact, the clock is already ticking.”

Jim Muir, financial regulation expert and director of financial services data reconciliation firm AutoRek warns that with only few days until firms need to be compliant with FATCA, companies should be taking urgent action.

“The Foreign Account Tax Compliance Act (FATCA), is the the controversial legislation that has been enacted by US lawmakers in 2010, hopes to stop US citizens from using overseas investments to avoid paying tax by getting ‘foreign financial institutions’ to notify the US Internal Revenue Service (IRS) if their customers happen to include any US taxpayers, even if indirectly or remotely.

Even though the final FATCA regulations have not yet been released or clarified, firms of all sizes will obviously will need to make serious and costly modifications to their internal systems, control frameworks and, processes and in order to comply with these regulations on or before they come into effect on 1st January 2013.  For those of you without a calendar who are needing a wake up call; handy, that’s just under 250 days away.

Worse still, the latest awful realisation beginning to emerge is that every other country in the world is likely to follow the US’s lead with FATCA. BlackRock, the world’s largest asset manager, predicted last month that FATCA was essentially setting up the framework for a global tax system which other countries could then implement – costing fund managers and other financial institutions billions of dollars in compliance and updates to computer systems. This additional financial burden comes at a time when firms simply cannot afford to be careless with the allocation of capital to meet the requirements of their overall change budgets but at the same time, cannot afford to cut corners when it comes to investing in compliance solutions for the long term future.

TBut this is not simply a question of technology and somehow combining multiple product systems’ through disparate “Know-Your-Customer” modules to create a “Single Customer View”, although the enormity of that particular challenge cannot be understated or emphasised enough.

Client contact and communications will be crucial in the success of many of the FATCA programmes. It is imperative that FATCA programmes be designed to meet the evolving and changing nature of the regulatory landscape. Our advice to firms is to invest in technology to last for many years and not just to meet the ‘tick box’ requirements of the immediate future. Some really tricky questions need answered operationally and from a compliance perspective including:

• How many times will we need to ask a client to respond before classifying them as recalcitrant? Will the frequency and duration of the attempt pass the “Treating Customers Fairly” test?
• Can we combine accounts and send one communication for them all or do we need to ask the same client the same question for each account? (operational limitations due to a lack of a single customer view may leave us no choice)
• Do we write to all addresses held on system or just the designated primary?
• Can we write to a joint account holder or disclose that the co-holder is a possible US taxpayer?
• Do we start a widespread communications programme ahead of the start of data gathering?
• What if clients provide the information now, before we are ready to capture it? Will this create a backlog?
• Where will we store physical (original?) documents, how do we retrieve and return when we have processed them?
• How do we phase the communications to the clients without being inundated with telephone enquiries?
• What length of time is reasonable to allow the client to present evidence?
• How do we start information gathering from new clients and cross refer it to existing clients?
• When do we start staff training to deal with queries?
• Do we have central teams capturing data or a distributed model? Access and ownership of relationships are related issues?

For many of the larger institutions these questions are very complex indeed. The lack of existence of robust master customer data management systems may mean that data has to be transferred between several systems and physical locations to avoid the customer being contacted several times. There will be a real risk of increased complaints and a concern about reputational damage and customer attrition. Many institutions will be very aware that their customers have accounts with other institutions and that they will not want to be compared unfavourably in terms of processes with other providers.

 I have a slight worry, perhaps not so slight, that many of the tactical and pragmatic first steps that can be taken are being delayed. One very recent phenomenon is that some of the FATCA programmes are being swallowed up into a larger “Financial Crime” agenda and forming a part of these larger programmes. That is all very well. Unfortunately too many programmes become too big (and too expensive) to deliver and if FATCA becomes relegated to a “workstream” in an enormous consultant fest then inevitably focus will be lost. Of course our institutions should look for synergies. Of course FATCA, know-your-customer, and single customer view are all closely(!) related but the more moving parts to this programme, the greater risk of failure.

And the world doesn’t stand still! What about the huge amount of “corporate activity” going on. LBG’s branch disposal (“Verde”) and RBS’ “Rainbow” are tricky enough without the extra complexity of cut-over for FATCA (for example: at which point does the customer become the property of the receiver?). Even the consolidation of smaller mutuals will present challenges. The technology and the operational bandwidth will need to be flexible and scaleable.

The advice for UK firms is therefore simple: don’t wait until these rules become effective to begin assessing your needs and associated costs for compliance. Instead, you should be starting the evaluation and analysis of various case scenarios and records right now in order to identify which clients are at likely to be covered by FATCA, as well as the resulting tax implications.

One thing is for sure:  ignoring FATCA won’t make it go away.  In fact, the clock is already ticking.”