KPMG: Investment Management Industry Underprepared for FATCA

A report from KPMG examining the investment management industry’s readiness for the US Foreign Account Tax Compliance Act (FATCA) reveals that a significant amount of work remains to be done prior to its commencement on January 1, 2013.

Only one-third (32 percent) of fund managers surveyed expect to be ready in time for the deadline, and a significant 42 percent have not yet assessed the time needed to comply.

While it appears the industry has a great deal of work left to do, most investment managers are not underestimating the effort or amount of change required to implement this requirement. Thirty-nine percent (39 percent) expect to change their distribution model and 32% expect some level of change to the structure of their product range to implement the requirement.

Georges Bock, global chairman of KPMG’s funds tax group, commented, “At this stage it appears that unless the implementation date is postponed, a large part of the industry risks being unprepared. While investment managers accept that the cost of compliance will be significant, with more than a third (35 percent) expecting to spend more than €1m to implement and comply with FATCA, we predict that a significant proportion of the industry have completely underestimated the cost impact or are assuming that generous carve outs will be available.”

“FATCA represents a major challenge for the investment management community. It impacts product and market strategy, distribution strategy and business models, as well as the fundamental configuration of funds and legal entities. Its scope is significantly broader than the current qualified intermediary regime and its requirements cannot be met with existing processes and systems. In order to comply with FATCA, fund operators will have to fundamentally change their operating models, from the identification and documentation of customers, through the product portfolio, to internal processes and IT systems. Many are finding this process incredibly complex and time consuming.”

Tom Brown, European head of investment management at KPMG in the UK, commented, “If you consider FATCA in the context of all the other regulatory requirements currently facing the industry, it can seem very overwhelming. For many, compliance will be a major headache – but one that cannot be avoided. Individual firms need to thoroughly think through the strategic implications of FATCA as a matter of urgency. While 2013 may seem way off, most US financial institutions and foreign financial institutions (FFIs) have predicted that implementation will take up to 24 months. Time is running out.”

Complying with FATCA will be necessary for any FFIs that plan to continue investing in the US economy. In order to be FATCA compliant, investment funds will have to identify US persons that hold affected accounts or financial instruments on a direct and indirect basis – across the global business. Identifying and providing the relevant information to the IRS will pose a major challenge. Non-participation with the FATCA regime will be expensive and customer relationships will be at risk if clients are unnecessarily subject to withholding or have confidential account information provided to the IRS.

For some players the primary FATCA strategy will be to seek cost efficient solutions; for others, mitigating non compliance risk will be of prime importance; still others will focus on the search for new business.