Brace yourself!

With the implementation of FATCA fast approaching, the challenges for fund administration companies are proving significant. Liz Salecka talks to some companies on the front line about the impact the legislation is already having.

Having guided their clients through the registration process for the Dodd Frank Act, the 86 fund administration companies in Jersey and the 52 in Guernsey now have to come to grips with a trickier piece of US legislation: the Foreign Account Tax Compliance Act (FATCA). This requires all Foreign Financial Institutions (FFIs) to identify investors who are US citizens and report on their holdings and transactions to the Internal Revenue Service (IRS).

The compliance task is so huge, according to Barry McClay, Chief Operating Office at Ipes in Guernsey, that it’s likely to prove one of the biggest challenges that the financial services industry has faced worldwide. “It’s not just an onshore/offshore issue, and it’s not exclusive to the funds industry,” he says, pointing out that it applies to banks and insurance companies too.

“FATCA is much more onerous than Dodd Frank as it is very likely that many more funds and trusts in Jersey will be caught by it,” adds Tui Iti, Group Risk and Compliance Officer at Ogier in Jersey. Richard Hughes, Senior Manager in Business Development at Vistra, takes the view even further. “FATCA will a"ect everybody 100 per cent. We have all had to accept that FATCA will impact all of us – no-one is outside it or not caught by it,” he says.

According to Hughes, one of the biggest challenges presented by FATCA is the lack of clarity, and the protracted period of time it has taken to produce the level of granular details needed to work from. All FFIs are required to register with the IRS by 30 June 2013, despite the IRS only releasing its proposed regulations and guidance in February this year.

Iti agrees, and notes that there is still some uncertainty with FATCA and the strategy that should be pursued. “Until those requirements are !nalised, that uncertainty will remain to some extent,” he says. “We do need to make our fund clients more aware of FATCA, to advise them and guide them through the registration process with the IRS, and we’re in a better position to do this now that the latest FATCA regulations have just been released.”

However, at Whitmill Trust, Claire Keeney, Senior Manager in the Funds Department, believes her company’s client base of expert or institutional investors are aware of the changes and requirements emanating from FATCA. “They are proving very easy to work with in this regard,” she says. “I believe FATCA presents bigger problems for private clients, who are also affected by the legislative changes, and I expect there will be a percentage of these clients that have been less exposed to its technicalities so far.”

Work is underway

The publication of proposed regulations for FATCA has enabled many fund administrators to implement major projects to prepare for the new regime.

“FATCA is very broad-based regulation that will have an impact on the industry as a whole. We have signi!cant resources aligned to it and fully expect it to involve system changes and technology changes as well as changes to our overall business model,” says Paul Cutts, Country Head, Channel Islands at Northern Trust, the largest fund administrator in Guernsey. He also points out that his company has put a global project team in place to work on FATCA’s implementation across multiple jurisdictions.

One of the first objectives for many companies has been to conduct a detailed gap analysis, which is particularly pertinent given that the FATCA regime brings new information gathering and reporting requirements. For example, all funds will be required to not only identify and report on primary US investors in their funds, but also US citizens who are indirectly investing in their funds.

Ogier has already conducted an analysis to identify the data that it holds on behalf of clients, and is implementing processes to gather other information that is needed. Similar work is underway at Ipes, where Operations Director Karen Haith points out: “We must remember that FATCA is not just about considering whether investors in funds are from the US or not. You also have to look through the investors to !nd out who the bene!cial owners are. With Dodd Frank, we didn’t have to introduce new systems or processes, but FATCA undoubtedly calls for new processes, greater IT functionality and enhanced reporting by our systems.”

Vistra has also started a data-analysis project. “I believe that one of the biggest challenges will come from having to seek more information from individual private-client investors in funds, who have already been integrated in the course of due diligence, and who may see this as a further invasion of their privacy,” says Hughes. Many fund administrators also foresee major changes to their internal processes and documentation as well as a need for additional resources and investment in staff training. “At Whitmill, we will need to have new compliance (policy and procedures) manuals in place; introduce a standardised system of reporting; and ensure that all our staff have the appropriate training,” says Keeney, noting that FATCA also calls for the appointment of a Chief Compliance Officer.

Weighing up the costs

FATCA also looks set to bring significant costs for all fund administrators. “It is anticipated that for us as a group, the costs could reach hundreds of thousands of pounds – if not millions,” says Hughes, who points out that all of Vistra’s 20 offices worldwide will be affected. “FATCA is definitely going to be a very costly project, and will have a huge impact on our resources, as well as being a distraction to our daily business.”

Meanwhile, Keeney points out that there will be a real cost to each and every financial services business. “From a compliance perspective, FATCA will be expensive both for clients and their service providers, but we will both the share the burden of these additional costs,” she says.

However, Ipes believes that end investors may take the brunt of additional costs. “At the moment we don’t know what the full cost ramifications will be, but it is very likely that end investors will be the ones who end up paying for this. However, this will also be the case in other sectors – banks will pass on the costs of FATCA to their end customers,” says McClay.

There are also suggestions that FATCA may lead to further consolidation in the industry. “Ultimately I think that consolidation across the fund administration sector will continue. The landscape has changed considerably over the last 10 years – and the barriers to entry have increased substantially. FATCA is yet another hurdle to get over and larger more established players will be better equipped to rise to the challenges it presents,” says McClay.

However, Keeney discounts the possibility of consolidation: “What we have seen since the high-profile failures of the large financial institutions during the financial crisis is that many people now prefer to deal with smaller private independent companies, as opposed to the larger companies, and this change in attitude has also been evidenced among our client base over the last two years,” she says.

While views may differ on quite what impact FATCA is going to have in the short and the long term, there’s no escaping the fact that it will be far-reaching, and fund administration companies are going to have to be on their game to meet it.

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