Chief operating officers at Asian asset management firms see implementation of the US Foreign Account Tax Compliance Act (Fatca) as one challenge that is most-underestimated by the industry in terms of the implications it could cause to their operations.
Slated to be introduced in 2014, COOs say there has been little industry discussion about how Fatca should be implemented in Asia. While global organisations might be more aware of how to stay compliant if they choose to, Asian asset managers and local distributors which do not have international scale are still grappling with what it means to be certified as compliant.
“The impact on this industry in Asia will be hard," says Kevin Chan, chief operating officer at Baring Asset Management (Asia). "While the Hong Kong Investment Funds Association organised a seminar on Fatca at the end of March, the industry has not been widely discussing this.
"We manage offshore funds and don’t feel like we can solve these issues by ourselves. No one yet knows the extent to which this will impact the industry in Hong Kong, Singapore or other markets.”
Probably one of the most unwelcome pieces of legislation to emanate from the US – at a time of other sweeping reforms such as the Dodd-Frank Act, which seeks to bring greater transparency and better risk mitigation to over-the-counter derivative trades – Fatca seeks to prevent tax evasion by US citizens conducting business outside the US.
Participating non-US financial institutions that choose to certify as foreign financial institutions (FFIs) will have to report to the IRS details of any clients linked to the US with more than $50,000 in an account. The law is expected to create huge compliance costs to certified FFIs.
The complexity of implementing the changes led to a decision by the IRS last year to delay implementation from the initially targeted date of January 2013.
“Large international firms have an idea of Fatca; distributors at big global banks know all about it; but local-market counterparts lack the same feedback, and they don’t understand what it means to be certified as compliant," says Dean Chisholm, regional head of operations for Asia-Pacific at Invesco.
"So there’s going to be a scramble. At the minimum, you need distributors to do a client mailing to ask people if they’re US passport holders.”
Other uncertainties at the local operating level pertain to how regulators and governments will respond to Fatca's implementation.
Already Swaminathan Balasubramanian, regional funds COO for Eastspring Investments, anticipates challenges related to data management.
“The latest drafts of Fatca suggest that any client possessing a US telephone number has to sign a statement saying they are or are not a US citizen," he notes. "And we have to maintain that record. It’s going to be a real challenge for the retail sector. There are a lot of people in the region with dual citizenship.
"Also, local securities companies may not think they need to deal with the IRS or with Fatca – and if they decide not to, then we as a global organisation have a regulatory challenge to continue doing business with those entities,” he says.