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FATCA limbo

News Business 17.07.2012 Aaron Grunwald
Photo: David Laurent/Wide (archives)

Financial data: Luxembourg fund managers are awaiting details of new US regulations before committing to IT investment plans, a leading investment industry executive has told Delano.

While the US tax-avoidance regime FATCA is due to go into effect in 2013, America’s Internal Revenue Service is not expected to publish definitive guidelines for financial institutions until September. That is leaving the financial firms in a quandary, Marty Dobbins, managing director of State Street in Luxembourg, said in an interview last week.

Dobbins cited a State Street sponsored study, conducted this spring by the Economist Intelligence Unit, which polled 160 asset managers in 25 European countries. Forty-five percent of respondents said they were waiting to see how regulatory changes--including those issued by the European Commission and other authorities--would unfold before making further IT investments, while a nearly equal number, 41%, said they were already investing in in-house systems to stay ahead of anticipated changes.

In Dobbins’ view, “we really can’t underestimate the amount of information and documents that you have to go through to” be considered FATCA complaint, as the process involves every part of a fund’s operation.

He also stressed that FATCA will not be a one-off filing, but rather a certification that needs to be regained each year. To earn the IRS’ stamp of approval, you have to “demonstrate that you have a policy and a process in place. That’s why [fund companies] are relying on their partners like State Street, and that’s why we’re modifying our systems so that we can automate as much as possible in the annual review process.”

State Street runs its own fund family and provides administrative and data services to other investment managers.

Indeed, Dobbins reckons that a fair amount of scale can be achieved, at least in the traditional retail fund space. “On large volume UCITS processes, we anticipate that we can automate a good amount. Eighty to 90% is our goal.” However, that estimate could easily change, as “we’re still waiting for the final foreign financial institution agreements [the IRS rules] to come out and you don’t know what additional information might be required that we’d have to go out and get. And we haven’t seen the intergovernmental agreements yet.”

The agreements are the “FATCA partnerships” announced earlier this year between the US Treasury Department announced and seven nations--France, Germany, Japan, Italy, Spain, Switzerland and the UK--although the specifics of the deals have not been finalised. The agreements in theory address the privacy and sovereignty issues raised by many fund managers and governments around the globe.

Luxembourg’s finance minister, Luc Frieden, has held talks with US officials about reaching a similar accord, but so far no agreements has been reached.

“When the IRS starts to publish [the exact rules] and the intergovernmental agreements come into place, only then can you make a long term solution,” Dobbins said. “So the surprise [for some] will be that some of cost that they spent can be reinvested, but there will be some throwaway work, unfortunately, to get to that point.”