The Big Compliance Issue: How to Turn FATCA into a Competitive Advantage

By Reetu Khosla, Global Director, Financial Crime, Risk and Compliance Solutions at Pegasystems

Since its very first announcement FATCA has sparked heated debates. Questions have been raised as to whether the new regulation will be enforced and the implications that this will have on financial organisations. Now FATCA is a reality. With a deadline fast approaching, FATCA will force foreign financial institutions (FFIs) to introduce significant changes to their Know Your Customer (KYC) and on-boarding systems. The European Banking Federation and the Institute of International Bankers estimate that the total cost of compliance for a large bank will be around $250 million (£160.5 million).

The over 500 page long document, outlining the proposed regulatory changes, includes numerous U.S. tax law provisions as well as multiple rules and exemptions defining the compliance requirements for US account holders and institutions who are subject to a 30 percent withholding tax if not compliant.

By 1st January 2014, FFIs will need to introduce new account opening procedures on existing customers to identify US account holders and classify them into a FATCA category. Furthermore, by the end of next year financial organisations will need to complete pre-existing due diligence for high value and low risk accounts, while establishing effective mechanisms for identifying, reporting and withholding on recalcitrant accounts and non-participating FFIs. These requirements will force banks to introduce changes to their current compliance and operational processes, while modifying global on-boarding, AML and KYC systems.

This will have a significant impact on customer on-boarding and account activation times. With the average on-boarding time for corporate customers currently exceeding 30 days, such delays can considerably impoverish customer experience. Also multiple requests for the same documentation or verification across multiple, siloed lines of business will not only impact the customer experience but create further risk and cost for an institution. As many banks are still relying on manual KYC processes and siloed IT systems, this could lead to errors and a lack of consistent KYC due diligence across different geographies and lines of business resulting in differences in classification and non-compliance.

There are further challenges due to privacy legislation and Intergovernmental Agreements (IGA’s) that are being negotiated with the US or have already been signed which will result in variations of rules within the respective jurisdictions.

So, how can financial organisations bring down time to on-boarding of new customers, while ensuring compliance across multiple lines of business, and IGA vs. non-IGA countries? And how can they ensure consistent KYC and compliance practices without ramping up IT costs?
Despite the significant challenges that FATCA poses to financial organisations, the new legislation can be an impetus for positive change. If financial institutions can streamline KYC processes into a single customer management platform that automates KYC, suitability and on-boarding requirements, they will be able to notably improve customer experience, while ensuring compliance and eliminating delays in time to revenue.

This approach will enable banks to achieve better visibility into customers’ accounts across all siloes and geographies and drive better KYC compliance for AML, suitability and now FATCA, while improving on-boarding times. And indeed, the recent product mis-selling scandals clearly highlighted the need for KYC systems that capture suitability-specific data but can be further extended to drive more efficient use of customer data for financial advice and product recommendations. More and more regulations that affect KYC processes and rules are coming down the pipe, such as Ultimate Beneficial Owner rules.

To achieve compliance while minimising the impact on-boarding times and time to revenue, banks will need to implement agile KYC and on-boarding technology that can be adapted and changed as risks and regulations change.

By integrating FATCA regulatory requirements into KYC and on-boarding systems, banks will be able to not only ensure compliance, but also greatly speed up time to on-board obtain a 360-degree view of the customer across different geographies, products and lines of business. This will enable financial organisations to automate due diligence practices and reuse existing customer data across siloes of the organisation, where privacy rules and laws do not exist. This will help eliminate multiple requests for due diligence for the same customer (if an existing US customer has several accounts across different branches of the organisation) and will minimise manual processes.

Furthermore an effective FATCA solution should address local laws and cross-border requirements, while incorporating all applicable rules and exemptions to ensure consistent compliance across the different jurisdictions spanning the organisation. Therefore every technology solution needs to provide the ability to apply sound legal advice about differences in FATCA requirements by product, customer type and geographies, such as IGA rules, exemptions and privacy issues and adapt KYC systems to these legal requirements. Each large institution will have legal interpretation differences that need to be implemented into technology and operation.

An effective solution to FATCA should not be sought in isolation. What is required is a comprehensive approach that addresses FATCA’s impact on the organisation in a holistic way.

This is a very challenging task that requires significant changes in how financial institutions tackle compliance issues. While doing ‘just enough’ may be a short term solution for FATCA compliance, this approach will not deliver satisfactory results in the long term. New FATCA-like legislation is likely to follow in the years to come and financial organisations are under increasing scrutiny to comply with an escalating number of new regulations associated with KYC. Addressing each new and evolving regulation in isolation will not only create additional operational burdens for financial organisations, but it will also result in increasing costs for compliance.

A better approach, and a solution that can create competitive advantage for organisations, lies in implementing rules and processes that are agile enough to adapt to changes in rules. Large global financial institutions are increasingly looking to adopt unified, agile technology platforms that enable easy modification of compliance requirements and support multiple IT systems such as KYC, on-boarding and suitability. This will enable financial organisations to simply extend existing KYC and on-boarding processes to accommodate the regulatory requirements of new legislations. Instead of creating a separate silo, financial organisations will be able to modify processes and drive transformational changes without incurring major costs to their business.
In the FATCA case, for example, an automated rules-driven KYC solution can be easily modified to incorporate the new compliance requirements and help identify and track multiple complex relationships with U.S. citizens. This technology can then drive due diligence to classify customers and meet the internal and external tax reporting requirements while keeping IT costs down. These automated processes can then be reused across operational silos of the organisation to drive consistent due diligence and minimise unnecessary documentation requests.

To be able to achieve innovation and stay ahead of their competitors, banks need to adopt a more comprehensive approach to compliance that addresses the issue in the context of their long term business success.

What’s even more important is that this integrated approach to compliance management will enable financial organisations to enhance customer experience and drive faster time to revenue thus moving compliance from burden to benefit. This will enable financial organisations to get an unrivalled competitive edge and achieve long term advantage in their markets.