Tackling FATCA compliance: using new regulations to win a competitive edge
There has been a lot of hype around FATCA in the past two years. With the January 2014 deadline looming on the horizon, financial organisations are realising that fast action is needed, and needed now, in order to be able to meet the first FATCA deadline for new account on-boarding, writes Reetu Kohsla of Pegasystems.
By the start of next year, Foreign Financial Institutions will need to introduce new account opening and Know Your Customer procedures to identify US account holders. The additional checks and documentation required to complete this process will mean that on-boarding times can be further extended, resulting in unnecessary delays. With an average time to on-boarding of corporate customers varying between 30 and 60 days this could significantly impoverish customer experience.
The next few stages set out in the regulation agenda will require financial organisations to review existing customer data and perform due diligence on new and current customers. Other significant changes will include establishing effective mechanisms for reporting certain information about US account holders to the US tax authorities and withholding a 30% tax on certain payments.
As financial organisations are required to introduce significant changes to their KYC, AML and on-boarding systems, becoming compliant risks incurring huge costs to their business. Moreover, the increased regulatory pressure and tough economic environment are forcing many FFIs to resort to manual KYC processes. This could lead to involuntary non-compliance and lack of consistent on-boarding and customer service across different geographies, lines of business and product types.
So what can financial organisations do to achieve compliance, while keeping down IT costs and maintaining a competitive edge? Many organisations are seeking out-of-the-box solutions to cut down on FATCA compliance costs and to achieve quick results. Complex FFIs believe they will need to spend more than €100 Million (£86 Million) to become compliant. In addition, technology providers and consultants claim to offer ‘out of the box’ FATCA compliance solutions that are cost effective and ensure compliance.
FATCA requires FFI’s to evaluate complex regulatory rules depending on their lines of business, countries (IGA Model 1 vs. IGA Model 2 vs. non-IGA), product inclusions and exemptions, pre-existing account rules, local law conflicts, privacy and disparate on-boarding systems and process. A FFI will also need to evaluate their legal entities to register or enter into an FFI agreement where applicable. For large complex institutions there will be multiple legal entities to register and manage.
Adding a newly developed out-of-the-box solution will not provide compliance, as ‘out of the box’ FATCA compliance simply does not exist and exposes an organisation to significant regulatory risk and potential penalties. Out-of-the-box solutions are not able to address the differences in law by product, line of business and jurisdictions for complex organisations.
What is needed is a more comprehensive approach that encompasses three critical components – legal advice, agile technology and consulting – that are specifically tailored to a financial institution’s specific operations, regulatory obligations and able to interface with existing on-boarding, transaction monitoring and KYC systems.
Integrating these three components into their FATCA compliance strategy will help financial organisations to not only achieve compliance but to do so efficiently. For instance, using a technology platform that enables a FFI to implement legal advice directly into agile technology, with consultants evaluating the operational impact and managing changes to rules, processes and operations, will enable financial organisations to implement new legislative and regulatory changes faster and cheaper. This approach will enable FFIs to comply with the current regulatory requirements without having to buy a different out-of-the-box solution for every new regulation, including new KYC rules and FATCA-like laws.
Moreover FFIs are now using FATCA as an opportunity to enhance KYC systems which will subsequently result in faster time to on-boarding and a more consistent customer experience across product types, geographies and lines of business.
This transformational change can only be delivered by incorporating FATCA requirements into rules-driven KYC solutions that wrap around existing on-boarding and CRM systems and processes and take into account local legal requirements.
There are a couple of essential steps organisations need to take to be able to implement a comprehensive FATCA compliance strategy. First of all they need to be aware of the potential impact of FATCA on their business. This will require a review of existing KYC, AML and on-boarding systems to identify the scale of the changes required and the operational impact. It is essential to involve legal counsel, IT, business management and consultants as a managed service from the start to ascertain how FATCA will affect existing policies, practices, systems and customers, and what will be the best approach to address these changes.
For instance, FFIs will need to consider all applicable FATCA legal implications, local laws and cross-border requirements that will affect their compliance, on-boarding and operational strategy. Working with global law firms to understand jurisdictional impact and conflicts with local laws is critical to understanding the technology implementation approach and requirements that are specific to an organisation.
Another essential step is integrating data across multiple jurisdictions and lines of business and deciding if data should or can be aggregated. This is critical in identifying and managing customers who may meet minimum thresholds or exemptions and implementing those rules into FATCA and on-boarding technology.
Applying a unified approach to operations, legal, compliance and IT ensures global and local laws can be adhered to and streamlined. Moreover, this approach guarantees that systems can be implemented to leverage existing infrastructure that can be further extended to other KYC and FATCA-like requirements. By using flexible IT solutions that allow easy modification of rules and processes, financial organisations will be able to sustain long term compliance with both existing and new regulations. Moreover, this approach will enable FFIs to streamline KYC, on-boarding and AML processes and speed up on-boarding times, while creating a 360 degree view of the customer.
Large complex financial institutions are now looking at driving business benefit through automation of KYC and on-boarding and leveraging these systems to drive product suitability rules to gain a competitive advantage. The investment in a unified approach to FATCA compliance ensures significant business benefits, including time to market, faster on-boarding and improved customer experience.
Ultimately, FFIs will be able to benefit from higher compliance standards, improved business agility and better services that will result in an unrivalled competitive edge.