FATCA Finally Takes a Front Seat

July 11, 2012

With all the press around regulations affecting the financial services industry, asset management organizations have been inundated with trying to understand and prepare for the impacts to their business.  While the highly publicized regulations (Dodd Frank, LEI, Form PF etc.)  have received most attention, FATCA (the Foreign Account Tax Compliance Act) seems to been put on the back burner for many firms. But with recent clarifications, continued acceptance around the globe and a January 1st, 2013 implementation date, FATCA must now be front and center.

It surprises us a bit that this regulation has had so little preparation focus in the asset management community.  FATCA’s reach is one of the broadest of all regulations. It calls for financial institutions – US-domestic and foreign – to classify account holders as either US or non-US based, and foreign financial institutions (FFIs) must identify holders and provide balances, receipts and withdrawals to the US Internal Revenue Service (IRS).  And if the FFI doesn’t comply, they must pay the penalty.

 Risk Technology noted some interesting findings of a recent study by Thomson Reuters (download the complete study here):

  • Over half of the practitioners surveyed were unsure of the impact that the new FATCA requirements would have on their firm;
  • 43% of firms are still unsure of their strategic approach for FATCA and for firms with a US legal entity in the group 51% were unsure of what approach to take in relation to US customers;
  • Over a third of respondents stated that FATCA had only been discussed once or never at all at board level;
  • Overall, 59% of respondents are expecting the new requirements to have some impact on their bottom line however, for almost 60% of firms, no separate or specific budget has been allocated to resource the preparation for FATCA. 

So, with its far reaching arms, why has this regulation been so “ignored”?    Two key reasons jump out.  First, and probably foremost, the regulations have been undefined and hazy until just recently.  In February of this year the IRS published the “main draft rules” and the final FATCA rules are due out sometime this summer.  With this uncertainty,  organizations have not had the guidelines that would allow them to fully understand the impact to their organization. 

Second, it seems many global FFI’s were not really convinced that FATCA would ever take hold or that it would be truly workable.  The regulation itself provides no upside to the FFIs or their clients and it inflicts a huge internal cost (both monetary and resource) on the FFIs.  And in some cases, for an organization to comply with the regulations may be in complete conflict to laws within their country.  Many financial institutions took a “wait-and-see approach”, thinking the legislation would be diluted or die out all together.

To the surprise of many, the opposite has happened.  Early this year a substantial number of European countries signed agreements with the US to disclose the information and in June, Switzerland and Japan signed framework agreements regarding FATCA.  With this done, the race to comply with FATCA is on.

So now, with the final rules coming out soon and a large number of countries on-board, the FFI’s are starting to determine and plan for the impact.  And what they are finding is, it’s large.  The impact of FATCA reaches from the on-boarding of clients (and Know Your Customer rules) all the way through back office operations and systems.  As discussed before in our blog, being prepared is the best we can all do.  Financial firms need to be working throughout their organization to make the necessary changes to policies and procedures and system vendors need to have proper plans in place to help their clients adhere to new legislations in a timely and least burdensome manner.  At PORTIA, we’re constantly monitoring regulatory changes and adapting our solutions to help asset managers operate in an ever-changing environment.  The flexibility of PORTIA is unrivaled, and we are committed to accommodating the rules and regulations of FATCA.

The one unknown left?  The US Presidential election in November. Will the outcome of that have any impact on FATCA?  No one can know for sure and I don’t think any of us can sit back and wait.  Like it or not FATCA is coming, have you started your planning?  

 – Bethani Hipsh, Product Manager


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