Achieving compliance and creating a positive customer experience are not mutually exclusive.
Many financial institutions still rely on disconnected, incomplete approaches to regulatory compliance, preventing them from gathering accurate, up-to-date information about clients and creating a customer experience crisis. Institutions are damaging relationships by repeatedly asking clients for the same information.
There’s no better, or timely example of the mounting pressures on financial institutions than the Foreign Account Tax Compliance Act (FATCA), which aims to stop Americans from using offshore accounts to evade tax by requiring foreign financial institutions (FFIs) to report information about accounts held by U.S. taxpayers.
Central to FATCA is customer due diligence (CDD) outreach and documentation, which depends on efficiently collecting, validating and reporting client data. If financial institutions get this right, they’ll have a well-run FATCA program; if they get it wrong, it will nosedive into a remediation program.
Creating a systematic, client-driven FATCA program
A last-minute approach to a program that requires iterative CDD outreach, combined with status quo data management solutions, is woefully impractical. Dismal, delayed response rates and incomplete, unreliable client input will disrupt the flow of business and lead to additional, intrusive customer outreach.
As a result, financial institutions need to prepare for CDD immediately. In addition, a structured, consistent approach to client outreach can ease the path to compliance and simultaneously support interactions that contribute to, instead of detracting from, strong client relationships. A client-driven FATCA program is characterized by systematically collecting customer information, then validating, reporting and provisioning it to counterparties, clients and regulatory agencies. It should include centralized access to all client-related information assets, a persistent communication link with clients, and secure information rights management for all compliance-related information exchanges.
Once a client-based program is in place, financial institutions can also leverage it for driving efficiencies and insight into client analytics. This allows firms to then engage with clients in new ways that grow the business, even amidst widespread and changing regulations.
FATCA regulatory requirements are onerous and deadlines are imminent, making 100% compliance unlikely for most banks. While FATCA CDD response rates and validation may be outside institutions’ control, documenting outreach is within their control, and can be a proactive defense against enhanced regulatory scrutiny, fines and reputational damage.
Rather than “smiling and dialing,” institutions should implement a system that provides a full audit trail detailing every attempt to reach out to the client and the handling of every customer attempt to reach back. Therefore, institutions will always be able to prove at any level (e.g. IGA scenario, jurisdiction, client) where they are on their journey to compliance.
Mitigating withholding requirements
Under FATCA, institutions are required to terminate the relationship or impose a 30% tax withholding on Non-Participating FFIs and Recalcitrant Account Holders in Non-IGA countries. To address this, many institutions are spending tens of millions of dollars on a withholding engine in order to be FATCA compliant – a capability that, while necessary, shouldn’t be the first line of defense.
Instead of focusing on the penalty, institutions will benefit from focusing on the solution: what customers to retain and under what circumstances. By whittling down the pool of clients for which outreach is required and focusing resources on the right clients, the population on which the 30% withholding is imposed will be smaller; and in turn, the withholding engine will be used less.
To understand the scale of an outreach campaign, the first step is to get a “first cut” FATCA view of the institution’s client base to size and scope the extent of an iterative outreach campaign. The delta between outreach and getting a valid response (as required by FATCA) means that some customers and countries may present a particular burden. Non-Excepted NFFEs, for example, can take six times more outreach effort compared to an FFI already familiar with FATCA.
Secondly, institutions should create a judicious off boarding program. This doesn’t mean simply pursuing a “zero tolerance” approach to off board all non-participating institutions and recalcitrant account holders, and thereby avoid withholding altogether. Instead, institutions should review which customers and jurisdictions to retain, and under what circumstances the bank would retain a non-participating/recalcitrant customer. Since withholding and closing accounts do not always apply in IGA countries, for example, it probably doesn’t make sense to apply resources in those areas.
Thirdly, institutions will have to make well-informed assumptions about IGA status.
Contrary to popular belief, financial institutions do not have two years commencing from July 1, 2014 to complete FATCA CDD. In non-IGA countries, CDD must be completed on FFIs by December 31, 2014. As a result, institutions will need to use their best judgment as to what jurisdictions are likely to become IGA countries (e.g. G20 and OECD countries) before July 2014.
Finally, it’s important to start FATCA education early enough to give those clients who may not know how to comply – e.g. a local bakery in Europe, who rarely talks to the financial institution and has never heard of FATCA – time to understand what they need to do in order to respond. Because financial institutions have control over when to start this process, delays are arguably unfair to the client. The later the outreach, the lower the conversion rate, the larger the population of unhappy clients, and the larger the extent of withholding that could have been avoided with better customer care.
By building a proactive, client-focused FATCA program, financial institutions will simplify compliance without burdening the client for repeat information. In turn, institutions will be better positioned to quickly and predictably achieve regulatory compliance, while driving long-term customer satisfaction and business growth, even as requirements evolve amidst the tsunami of new regulations.