Almost 25 years after the first anti money laundering (AML) regulation introduced financial services companies to the idea they must ‘know your customer’ – the KYC bar has never been higher, both in the UK and globally.
Today’s regulators are no longer satisfied with just collecting identity data: Financial institutions, including asset managers, are also expected to consider product suitability against the clients’ risk and savings appetite, requiring them to build detailed profiles of their clients, including their financial position, their family relationships and their tax status.
The range of regulation is wide-ranging and extensive – and increasingly focused on the global agenda to tackle tax evasion and avoidance. Alongside duties to combat financial crime through AML and KYC procedures, financial institutions also have to monitor anti-bribery, anti-sanction busting and politically exposed persons. Beyond this they are also required to support tax authorities through supra-national tax regulation such as the common reporting standard (CRS) and individual country initiatives such as the US’s FATCA. In addition, the asset management industry faces country specific investor tax reporting challenges with tax regimes such as the UK’s reporting funds status (RFS) and the US’s K1 requirements.
For asset managers, these mounting responsibilities have important consequences. Above all, they must learn to manage their data more effectively, collecting the right information in the first place, executing good judgement that goes beyond the tick-box mentality, and reporting key information to the authorities where necessary. Then there are the technical challenges – collecting and storing data efficiently and securely, even where legacy systems and functional silos often make it difficult to create a single reliable and usable data 'lake', and where different jurisdictions or reporting regimes require different data or different formats. With the European Union’s General Data Protection Regulation (GDPR) due to come into force in May 2018, those challenges are even more pressing.
In effect, many tax authorities are now striving to outsource the policing of their tax systems. Short on resources, they expect financial institutions to take responsibility for monitoring client compliance – and for flagging up potential failures. Meanwhile, clients are more demanding too, expecting institutions to manage their tax risk, to use their data for their benefit and to respond to tax changes quickly.