FATCA, or the Foreign Account Tax Compliance Act, is in danger of going the same route as most other regulations -- regulator expectations mismatched to financial institutions' motivations, a declaration of imposition on business competitiveness and the repeat of another expensive data integration endeavor with a point solution that solves the regulatory report, but adds little transparency that the regulators demand nor the competitive agility that the firms need.
No wonder FATCA (IRS Website) is seen as so pointless by many, particularly by the foreign banks. Yet, if we tackled regulations and FATCA differently, saw them as a competitive opportunity -- rather than just another tube to look through when trying to understand risk -- then the end result could be completely different, even competitively exciting. Simply put FATCA, and regulations in general, are challenges in integration before anything else. It is our argument that it is within this integration and deployment that needs the greatest change.
FATCA is a far reaching regulation that impacts financial organizations and foreign entities with high value U.S. customers and assets. Whether it is the reporting of information to the IRS for certain U.S. taxpayers holding financial assets outside the United States, foreign financial institutions (FFI's) reporting information about accounts held by U.S. taxpayers, or foreign entities (NFFE's) in which U.S. taxpayers hold a substantial ownership interest, the penalty for non-compliance could be steep. While the regulation is still being solidified, withholding and payments up to 30% have been cited for accounts that do not have the proper documentation.
Suffice to say, everyone is moaning about FATCA. Surely, it's time for something new, something that solves the problem quickly, gives the transparency needed but focuses on using that transparency for competitive and customer service value.
So the question is: what's missing in all this? Why are we spiraling into the same processes, exercise and expense that we have done in the past? As we see it, what's missing is something that simply and intuitively connects data without the burdensome, expensive and time-consuming data mapping. Instead we need a project that also drives down cost, stimulates new ideas and can be leveraged by more than the original project.
One can be forgiven for making the mistake in thinking that FATCA should mean a fairly simple management and analysis of a customer's relationship. Indeed, one would think that after pouring billions of dollars in data integration, CRM systems, reference data models, compliance, Patriot Act and credit risk regulations over the past decade, a clear understanding of the customer relationship is a simple query.
It's not, because each regulation and new application has been approached and deployed as a separate project, often independent from others. That seems counter-intuitive, since many projects and endeavors rely on the same underlying data -- transaction, customer, product and accounting. Yet the way applications have been developed and deployed, and regulatory solutions addressed, has resulted in a plethora of independent and poorly leveraged silos with tremendously low return on investment (ROI).
Disparate Data Sources
One of the most significant changes to current practices imposed by FATCA is the requirement to look across what have, perplexingly, been silos of information of customer and account data to identify indicators of U.S. status. Requirements call for the collection and review of disparate sources of account information for new and pre-existing accounts as part of a financial institution's account classification under FATCA. Now, financial institutions must monitor account data across relevant systems for changes that impact the classification of the account, e.g., introduction of U.S. address, U.S. telephone, etc., and will also be required to reports new information under FATCA, e.g., aggregate recalcitrant reporting, closed/transferred accounts, etc.
To comply under FATCA, a financial institution must establish a sustainable solution for tying together the patchwork of disparate systems in a way that can be quickly implemented to meet the aggressive FATCA timelines with minimal impact on core business platforms.
As a result, FATCA becomes an exercise of onerous proportions: -- find and identify the customer; -- make sure they're the right customer; -- determine where the customer, deposit and investment information is linked; -- normalize the customer, deposit and investment data to a multiple reporting formats; -- perform indicia checks across the linked databases to identify U.S. financial accounts, which may not have been properly documented during on boarding; -- optimize the aggregation so it doesn't take too long to run; -- reconcile the results so when a high net-worth customer receives their annual FATCA reporting and the IRS gets their concomitant form, the reporting financial institution got it reporting right.
This process is not dissimilar to the process that credit risk asked for in 2000, the same for CRM systems and cross-selling opportunities as well as Patriot Act and know your customer requirements. So why FATCA is so onerous is not a regulatory issue -- it's a deployment issue.
Of course, FATCA is more than a look-back exercise. For example, on new accounts it relies on a "standards of knowledge" requirement. This essentially mandates that data from all relevant, disparate data sources get to the tax operations team. To do this do you either modify numerous core systems and hope to complete the project in time, or you can create an external repository to capture and process the data, which still could present obvious data integration/quality/cross-referencing requirements.
Going forward, all accounts will need to be monitored for changes in status. This covers potentially more than 20 attributes across many different systems, monitored not just for changes but whether any change introduces something that potentially requires additional documentation from the client.
Again, this all sounds fairly straightforward and are more or less an exact repeat of what has been asked by multiple other regulations. Yet, analysts estimate the industry will spend between $1-5 billion on compliance. Why?
Finding A Better Way
It's the way we solve business solutions in general. Integrate global data; make it look the same, move it, store it in some sort of data construct, then try to optimize it to it can deal with volumes. Oh, and then buy some analytics to run the math, get a process engine to make sure documentation and process is remediated and use huge numbers of consultants to deliver this one off regulatory report. I would be frustrated with regulators if every time something new came out I had to go through this exercise. But respectfully to the readers, it's not the regulators issue. It's ours -- the way to access and extract value from our organizations (regulatory or otherwise) has not changed in 20 years. The technology might have evolved a little but we are still stuck from a technology deployment perspective in the dark ages -- whereas our customers and regulators are expecting so much more agility. Don't shout at the regulators, change the way you solve the regulatory puzzle.
It is our, and our customers, conclusion that what we are missing is a connective tissue that uses essential data relevant from any data source, any system, any technology, anywhere in the world and make it available in real time for analysis and reporting. Crack that code and FATCA, or any business challenge, becomes a manageable project. Indeed, FATCA can become a platform for innovation. The interesting thing about FATCA is that it's forcing function to understand a global relationship of high net-worth customers (including their ownership structure) within a financial institution. If the relationship can be dynamically harnessed rather than held in a rigid, burdensome technology silo like other projects and regulatory responses in the past, considerable opportunities begin to open up.
Of course, understanding your client enables cross-selling to be more effective, gives more issues for the relationship manager to discuss and enables testing and building of new products and ideas. In essence, CRM technology again begins to get exciting, linking product innovation to transformational technology that has been somehow relegated to an electronic rolodex.
Let's also not forget the data that is accessible and easy-to-work-with for FATCA will also address significant parts of Dodd-Frank, begin to simplify the process of on-boarding and KYC and allow for the testing of new products and innovations that can be expanded to other customer segments.
The problem is, however, that the agility is still lacking and this knowledge isn't yet available. So either we make the same mistake as we have in the past, or we build for the future -- one that enables agility in product development, flexibility in use of data and transparency across the enterprise. FATCA, indeed, is an interesting test for us all innovation.
The key is do this quickly, cost effectively and with a design that enables intelligence created to not just go to the IRS but also contribute to your strategy, product innovations and competitiveness.
About The Author:
Simon Moss is the Chief Executive Officer and Board Member for Pneuron Corporation. In this role, Moss is responsible for overseeing the management, strategy and operations of the business on a global basis. Under Moss' leadership, the company was founded, capitalized and the strategic platform developed, transforming Pneuron into a global technology provider. Simon brings over 20 years of successful strategic leadership at CEO, Partner and Board of Directors executive levels in the financial services industry, and has a proven track record as a successful entrepreneur.