Andy Philbin, executive director, and Andrew Hunt, senior manager, at EY, examine the challenges and choices wealth managers face as the US FATCA Act continues to take effect.

As the US Foreign Account Tax Compliance Act – or FATCA – continues to be rolled out in stages, wealth managers, along with other non-US financial institutions, need to be aware of how they are affected and what steps to take. In this article, Andy Philbin, executive director, and Andrew Hunt, senior manager, at EY, examine the challenges and choices wealth managers face.  

With FATCA an imminent operational reality, financial institutions are considering the practicalities of how compliance will work when dealing directly with customers on the ground. There are aspects of FATCA that pose more particular challenges than others for each sector within financial services, and this is no different for wealth managers.

Indeed, due to a number of high-profile incidents in recent years involving relationship managers colluding with clients to evade tax, the US Treasury has arguably focused more on wealth managers than any other type of financial services provider.

The emphasis placed on the knowledge and tailored client service provided by wealth managers should, in theory, make aspects of FATCA compliance somewhat easier. Logic suggests that managers should have higher levels of up-to-date, recorded knowledge on the tax status of clients compared to their mass-retail cousins. While this is broadly true, accessing this information from systems, paper files and relationship managers may prove to be onerous and still subject to inconsistencies – particularly where FATCA requires a diligent review of paper files and records.  

To minimise or eliminate this paper file review aspect of FATCA, some wealth managers are choosing to update and back-fill any required missing “indicia” data for individuals to ensure this is fully searchable electronically for the future. This is resource intensive and may not make economic sense for all. It is, however, an attractive option for wealth managers with more manageable customer numbers and fewer gaps in existing FATCA relevant customer data, who recognise that the short term “pain” of baselining client tax status data in this will help them achieve ongoing compliance.

Similarly on the theme of practical choices, the ability to collect wider tax residency status for new clients already forms part of the HMRC FATCA regulations and its requirements are a key tenet of the recent OECD Common Reporting Standard communications.  Given the relatively comprehensive nature of information already collected by wealth managers when they on-board clients, the good news is that fulfilling these requirements may need minimal incremental effort for many.  

Each organisation will no doubt already have or be finalising their choices on the wording of self-certification statements, collection of IRS tax forms, tax identification numbers and their functional equivalents. “Future proofing” this effort by gathering tax residency information from customers from as early a point as possible is an opportunity not to be missed.

Finally, an aspect of FATCA that requires careful judgement is establishing the boundaries for relationship managers in their FATCA conversations with clients. A strong customer service instinct may tempt RMs to try to explain the “ins and outs” of FATCA and common reporting standards, and, worst still, this may stray into inadvertently giving tax advice. This has potentially serious and costly consequences.  Relationship managers will need sufficient expertise to gather the information required to understand their client’s tax status and, crucially, to ensure they recognise the limitations of their knowledge and seek or refer their client to more specialist advice.

While stopping short of constituting advice, giving clients the complete picture of their tax status and withholding exposure across their relationship would enable the client to better understand their own risk profile and the consequences of undeclared earnings. Likewise, it would be prudent for wealth managers to develop a clear view of the tax and withholding profile of their client base, so that they can demonstrate knowledge and consistent application of standards in compliance with the various information reporting regimes.

So while on paper wealth managers should be reasonably well placed to comply with FATCA, there are some quite significant practical challenges ahead. It may be stretching the point a little far, but performed well FATCA could be a relationship enhancing experience for your clients, and of course and as usual, the reverse also applies.