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Dividends Magazine

Impacting financial institutions

Michael Drinkwater  Global Head of ONESOURCE FATCA and CRS Global Tax Compliance, Thomson Reuters

Tomer Siegal  Senior solution consultant, Thomson Reuters ONESOURCE® AEOI

Michael Drinkwater  Global Head of ONESOURCE FATCA and CRS Global Tax Compliance, Thomson Reuters

Tomer Siegal  Senior solution consultant, Thomson Reuters ONESOURCE® AEOI

Common reporting standards and technology trends

The G20/EU drive for global tax transparency continues to gain speed while financial institutions (FIs) also grapple with emerging disruptive financial technology (FinTech) innovations and growing threats to data security. Building on the United States-led Foreign Account Tax Compliance Act (FATCA) regulations, the first wave of reporting for the Organisation for Economic Co-operation and Development (OECD)-led initiative, the Common Reporting Standard (CRS), includes 50 jurisdictions undertaking the first exchange of financial information this year, with the second wave of 51 countries to follow next year. CRS has increased the compliance burden for FIs worldwide, which now have a larger number of requirements to track, develop a solution for and comply with. FIs and governments have been under a time crunch to prepare. Meanwhile, the converging tax transparency rules and innovations in big data, analytics and security have profound implications for how FIs are harnessing technology to stay compliant.

What are the global trends affecting FIs use of technology?

Accelerating advances in infrastructure, communications, software and hardware are disrupting traditional business models and providing new opportunities for FIs with enhanced abilities to collect (and process more data) and interact with clients remotely. Data transmission technology and the adoption of mobile devices and applications have also changed the behavior of customers and interactions with them, forcing even traditional, change-resistant organizations to evolve in order to survive. Regulators worldwide have not been blind to these changes. They now demand electronic audit trails andare eager to collect huge amounts of data, sometimes more than they can process. The last few years have shown a steep inflation in the regulatory requirements that FIs are obligated to comply with through multiple tax regimes. The regulators have also increased the pressure through audit crackdowns, widely publicized penalties on offending FIs and increasing emphasis on the  personal responsibility of senior managers in FIs. These efforts have effectively ended secret foreign bank account practices and have moved the regulators and the industry to attempt to standardize coordinated multilateral approaches toward tax compliance such as the CRS and Base Erosion and Profit Shifting (BEPS).

Demography and culture are also strong agents for change. FIs are increasingly mindful of public opinion, now formed and fueled in online forums as well as the traditional press, and the increasing intolerance toward tax evasion. They are now willing to invest more resources to avoid adverse news and reputational risks associated with it. These global trends are driving FIs to seek innovative ways to reduce costs, invest in automation efficiency and shift from a tactical view to looking at both tax and technology through a more strategic lens.

What are the challenges FIs are facing due to these global trends?

In order to respond to these fast-evolving changes, FIs are presented with difficult and costly challenges to upgrade and maintain their data and technology.

Collecting and managing data

FIs are facing serious challenges with the sourcing, volume and accuracy of their data. These issues derive from data existing in legacy systems and distinct data structures across multiple systems, businesses and jurisdictions. Such issues affect the accuracy of reporting, increase internal risks and affect customer experience. Fixing these requires large investment in robust data infrastructure, as well as a painstaking process of data cleanup, standardization and remediation.

Data analytics

Regulatory pressures demand stronger ownership and control over the data and the maintenance of more detailed audit trails. FIs now need to improve their data analytics capabilities, extract information from various sources, filter reportable data and perform calculations on account transactions – activities which were never before required.

Data protection

PwC, a professional services firm, found in its Global Economic Crime Survey 2016 that cybercrime climbs to the second-most reported economic crime affecting 32 percent of organizations. FIs are prime targets of such attacks with risks including theft of financial or personally identifiable information, money laundering and financial fraud. Such risks only exacerbate with the increasing pressure from clients to provide more services through digital channels and from regulators to report electronically.

In its “2016 Financial Industry Cybersecurity Research Report,” SecurityScorecard points out, “IT systems are increasingly becoming a risk factor, especially in the financial industry. Many financial organizations rely on legacy IT systems that are expensive to maintain, prone to more unpatched vulnerabilities and the general challenges of software integration and architecture upgrading compound when mergers and acquisitions are in place.” FIs are required to invest significant resources in improving the security of their systems, as well as to comply with new regulations and standards for cybersecurity.

How do FIs respond?

For many FIs, the first year of CRS reporting is still reliant on manual labor and tools due to data quality issues and short time-frame implementations. Some FIs have begun investing in new automation technologies and flexible, robust data infrastructures. FIs are also increasingly focused on standardizing and centralizing the data throughout their organizations in data warehouses and employing new data management tools to facilitate large-scale data remediation and cleanup projects, as well as utilizing machine learning and big data technologies to identify patterns and facilitate reporting.

Some FIs have resorted to outsourcing parts of the reporting process as an interim step, in order to complete the ongoing IT projects or to avoid the build and maintenance of new technologies altogether.

What can expect to see in the future?

According to a survey by Thomson Reuters, The Cost of Compliance 2016, “The rise of financial technologies such as virtual currencies, robo-advice and digital ledger technology (such as blockchain) will continue to challenge FIs to adapt to new forms of digital technology.” FIs are also likely to utilize technology to leverage new information acquired and machine learning to identify complex nonlinear patterns in large data in order to generate new business. This will enable them to shift the increased investment in compliance from a cost center to a revenue generator and relieve some of the pressures on their operational margins.

More changes are on the way for the financial industry as new regulations are passed every year. FIs are increasingly viewing CRS and global tax regulations as obligations requiring the global alignment of tax, technology and organizational strategies to ensure compliance.

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