The start of 2016 saw the initial onboarding requirements for Common Reporting Standards (CRS) come into force. Coupled with this, the 30th June 2016 marked the end of the Foreign Account Tax Compliance Act (FATCA) grace period. Under U.S. tax law, all foreign financial institutions must now be able to report data on existing customers.
It has always been clear that CRS and FATCA would affect onboarding, particularly the client identification, data collection and documentation processes foreign financial institutions face. What has been less clear is that it does not only affect the onboarding process.
From a technology perspective, here is exactly what FATCA means for financial institutions:
- First, FATCA requires institutions to identify and collect new information from clients. This is both a technological and procedural change for onboarding new clients.
- Next, FATCA mandates institutions screen all existing client accounts to determine if US indicia exists. This is not an onboarding issue; rather, it’s remediating all existing client records.
- Finally, this data needs to be structured in a reportable format that regulators can digest. This is a matter of making absolutely certain the institution’s software can accommodate the schemas and filing regulations of many different governments.
When we surveyed financial institutions about their CRS and FATCA readiness, roughly half of respondents had already started the process of screening existing client accounts.
Automation, as posted previously, can ensure these processes are done efficiently. It is a classic IT question: Build in-house or buy/outsource externally?
Our survey found 46% of respondents plan to build in-house solutions, with the remainder using one of several alternate tactics such as combining in-house resources with third-party solutions, using an accounting firm, or using another service provider. Among the technological concerns participants expressed were the lack of adequate software, limited test facilities, issues with data security, and uncertain costs. Other challenges included a general lack of clarity, resource constraints, and potential financial penalties related to the new regulation.
For many organisations, automating these issues in-house is not a viable option. The list of potential challenges is too long, and the regulatory requirement is now a reality. Only 15% of the respondents felt that they were “extremely confident” in their ability to keep up-to-date with individual government schemas and filing regulations. Those feeling “not confident”, who had “little confidence,” and who were “neutral” accounted for 56% of respondents we surveyed.
New regulations, shifting goal posts, and continued uncertainty regarding global tax transparency efforts such as CRS and FATCA will continue to challenge financial institutions and their ability to remain compliant. Automating on-boarding, reviewing, and reporting processes is a step in the right direction, and leveraging the experience of a trusted third party can ensure it’s done right the first time.