FACTA rules could cause banks to cut back on external asset managers

A campaign by the US authorities to reach the estimated 6.5 million US persons living outside the US who have not filed a tax return could have far-reaching consequences for the Swiss banking industry.

New rules introduced under the Foreign Account Tax Compliance Act (FATCA) regime in the US could force Swiss and other European banks to revise their fund management outsourcing policies in a bid to control the increased compliance risk inherent in exposure to US investments or US clients arising from FATCA requirements.

FATCA rules require that all revenues from investments in US securities be declared, whether by US persons or non-US persons. Theoretically, third party asset managers could expose Swiss banks to a flat 30% withholding tax from the US authorities if they deem the asset managers to be non-compliant.

“Banks will be reluctant to have external asset managers because they will be liable anyway,” says Swiss tax expert Hans-Joachim Jaeger, speaking at a Swiss Finance Institute conference held in Lugano.

Jaeger, a partner at Ernst & Young, who is involved with the FATCA negotiations currently under way between the Swiss and US authorities, added: “This does not mean necessarily that all banks will take asset management in-house, but that they are likely to make changes [to the current arrangements].”

Under FATCA’s Expanded Affiliated Group system, a system of collective responsibility grouping together banks with all their subsidiaries and affiliates, the stakes have been raised significantly as the whole group will be deemed non-compliant if a single one of the group fails to meet fully all requirements.

In response to the increased compliance costs and the heightened risk of fines, some banks and asset managers have already decided to end relationships with US clients. UBS, Julius Baer, Wegelin & Co and Zurcher Kantonalbank among others have either scaled down or discontinued their US business. A partner at a Lugano-based wealth manager said that he no longer used US fund managers.

Faced with this new regulatory environment, some of the smaller banks will merge with other bigger banks or simply ‘liquidate’, says Jaeger. He expects the Swiss banking sector, currently more than 350 strong, to consolidate by up to a third.

FATCA is already law in the US but negotiations are under way to enshrine it in national law of countries around the world. Jaeger was hopeful that some ‘carve-outs’, or exemptions, could be negotiated for pension funds and custodial banks in Switzerland. However, he thought the possibility of getting a foreign law accepted in a Swiss referendum was ‘unlikely’.

 

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