US Regulations Will Have a Global Impact

In many cases domestic financial regulations have little impact outside their home market. New US regulations going into effect early next year, however, will have impacts felt around the globe. As they draw closer, financial institutions as well as national regulators and even corporations are scrambling to comply.

The biggest impact will likely be from the Foreign Account Tax Compliance Act (FATCA), which comes into effect in January 2013. It requires foreign financial institutions (FFIs) to report information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, to the US Internal Revenue Service (IRS).

As the deadline for implementation nears, a multitude of countries and territories have started – or in some cases concluded – intense negotiations with the US. In September, the US and the UK announced that they had signed a bilateral agreement to implement reporting and withholding requirements for FATCA. Australia is in negotiations, and the government is facing pressure from industry groups such as the Association of Superannuation Funds of Australia (ASFA) about what to include in the agreement. Other governments in Asia, as well as around the world, are also in negotiations.

One challenge for financial institutions and corporates or investment managers alike is that the regulations are still evolving. For example, the US Treasury only released its Model Intergovernmental Agreement (IGA) in July. As PwC said: “The Model IGA provides a number of new definitions and concepts that are relevant to non-US financial institutions”, such as a new definition of an investment entity and reporting through countries rather than through direct agreements between FFIs and the IRS. Further updates may well be released in the coming months.

The impact of FATCA will be huge. Along with the staff time devoted to compliance at financial institutions, BFI Capital Group chief executive officer (CEO) Frank Suess said compliance will cost an estimated US$5-10m per institution; lawyer Robert Wood wrote in Forbes that the cost could be as high as US$100m per institution. KPMG said that “financial institutions could be required to close the accounts of individuals or organisations where the account has not been positively identified as either a US or non-US account or as another FATCA compliant organisation.” Some financial institutions are limiting the types of investments Americans abroad, as well as for foreign investors considering an investment in the US, can do – if they allow accounts to be opened at all.

Along with FATCA, Section 1073 of the US Dodd-Frank Act is having a significant impact. As the American Banker wrote: “Comprehensive disclosures, hard-to-calculate fees and taxes and greater liability are all part of the new rules”, which will come into effect on 7 February 2013.

The Dodd-Frank rules apply to individual consumers who are sending funds abroad from the US. The Act requires the remittance provider to state the amount the recipient will receive denominated in the currency they will receive, the fees charged, the exchange rate, the promised delivery date, the name and phone number or address of the recipient, and error resolution rights. US financial institutions are working intensely with correspondent banks and other remittance providers to develop the complex set of information required by the Act.

It might seem as if Dodd-Frank will primarily affect individual consumers. Yet the actual impact could be broader. Along with consumer-to-consumer (C2C) remittances, the Act affects individuals who make payments to businesses abroad, whether for their own purchases or for purchases by small businesses. And as RBS said: “There is a risk that some banks may simply withdraw from providing payment services to particular countries. As a result, competition and consumer choice could suffer. While not directly impacting large companies, Dodd-Frank 1073 signals an increased level of intervention by regulators that corporates should be aware of.”

While the full impact of FATCA and Dodd Frank 1073 may only become clear in 2013 or beyond, financial institutions and corporations operating in Asia and globally are already in the midst of intense efforts to implement the changes required and to understand the impacts fully.



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