Monday 19 November 2012

FATCA Survey Results - opinions deeply divided on impact on trust company profits

It seems that trust companies are starting to get to grips with what FATCA will mean for them.  In October I ran a survey of trust companies to test their preparedness for the new regulations.  The results have now been collated and seem to show that plans are further along than some might have feared, but that there is a real lack of clarity regarding whether FATCA will have a positive or negative financial impact on the trust company industry.

7% of respondents had little or no idea how FATCA would affect their business and a further 7 % had only a basic understanding of what FATCA was about and did not yet have a clear idea of how it would impact the business.  However, a creditable 86% had at least a fairly detailed understanding of the regulations and their impact, with 29% believing they had a thorough understanding and were already well into their implementation preparation.  One respondent commented that they had a dedicated programme office to handle the regulations, had already analysed the entire client base and were well into the process of gathering any missing data items - a commendably thorough approach.

There seems to be some doubt as to whether time costs will be billable for FATCA work - 39% of respondents thought that revenue would increase because of FATCA, but the majority (62%) felt that income would be unaffected.  None of the respondents felt that revenues would actually decline, which seems to indicate that practitioners do not feel that many clients will close their structures as a result of the new regulations.  

The picture with regard to profits shows more of a divergence of opinion - 39% felt that profits would decline as a consequence of FATCA (citing amongst other things the cost of implementing the necessary controls), 39% felt that they would increase as the additional time costs would be recovered, and 23% felt that they would be unaffected.  It is clear that there is a great deal of uncertainty regarding what proportion of the costs of FATCA compliance can be passed on to clients, but it is a matter of crucial importance for fiduciary businesses.  My own view is that in the first year or two profits are likely to decline, because I do not feel that all of the costs of adjusting IT reporting procedures and systems can or will be passed on to client, and nor do I expect non-US clients to pay for the privilege of being able to prove that they are not caught by the regulations, without a great deal of resistance.  However, once new systems and procedures are in place for the efficient gathering of data and reporting to the relevant authorities in the future, then I would expect that these ongoing costs could reasonably be expected to be passed on to the US clients maintained by each trust company.  

FATCA will require trust companies to gather data on the 6 indiciae of a US person.  43% of respondent trust companies believe that they already have the data they need to test the 6 indiciae for each client, but that the data was not stored electronically, implying that there will be a big manual task involved in implementation.  Just under one third of respondents believed that they had all the required information and it is stored already on an IT system.  Perhaps surprisingly, only 29% of respondents believed that they were missing necessary information.  In my experience, I have never come across a trust company which recorded the data required to consider all 6 elements of the US person test prior to the introduction of the FATCA regulations, which seems to suggest that either trust companies still do not understand the depth of information that they need, or that there has been a very large amount of data gathering in the last year.

There was complete unanimity that the FATCA rules would not prevent trust companies from representing US clients.  100% of respondents said that they do currently have US persons amongst their client base, and none proposed to change this view.  This is in contrast to some of the larger banks and investment managers (particularly those based in Asia), who have announced an intention to cease to service US persons as clients.

And in a final bit of good news for the consultants who work in the field, 57% of trust companies felt that they would need to pay for external help in implementing FATCA, with the remainder believing that they could manage with internal resources and knowledge sharing within their industry bodies.

The survey does seem to suggest that FATCA is now getting the attention of very senior individuals within the trust company sector.  In 55% of respondent companies the CEO/Managing Director was taking direct responsibility for the new regulatory project, with the Head of Compliance taking control in 36% of cases, and only 9% of trust companies having delegated the task to business unit directors.

After a slow start it seems that trust companies are now making real efforts to get to grips with the impacts of FATCA, and to prepare themselves for implementation.  The task is not made easier by the fact that certain key grey areas remain, and that the US is currently negotiating IGAs with up to 50 different territories.  Until this process is complete, it is difficult for companies to be sure that they have done everything that needs to be done.

Many thanks to all of those trust companies who participated in the survey.






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