Small firms of independent financial advisers could fold under the financial stress of complying with the US FATCA laws.
The Foreign Account Tax Compliance Act (FACTA), due to start from January 1, 2013, is designed to make foreign financial institutions tip off the Internal Revenue Service about offshore accounts and earnings of clients who are US taxpayers.
However, global consultancy PricewaterhouseCoopers argues a recent tax information agreement between the UK and US aimed at cutting red tape for banks, investment funds and insurance firms shifts the burden of compliance to IFAs.
Under the rules, IFAs will have to write to each of their clients requesting they confirm whether they are US taxpayers at a cost of around £100 per client.
IFAs will have to chase clients
IFAs will have to contact all their clients to compile the list of US taxpayers.
PwC tax partner Teresa Owusu-Adjei said: “In the original version it was quite clear that it is the fund itself that the regulations apply to. In the UK version it’s not clear that it’s the fund, and actually it seems to drag in the IFA.
“Everybody has to know who their investors are so they can identify who US investors are. If you are coming from an IFA, it comes down to the IFA. Fund managers are suggesting IFAs will have to chase the majority of clients.”
FATCA comes behind the UK retail distribution review (RDR) by the Financial Services Authority which tightens up compliance and consumer protection when dealing with financial advisers, including IFAs.
Fund managers ready to pass buck
Many firms are already under financial stress coping with the requirements of RDR, without adding the additional administrative and financial burden of FATCA.
“I’ve been talking to some of the biggest asset managers in the industry and one of the biggest issues is that once the summer was out of the way they will be going out to IFAs to tell them they need certification of some sort in relation to their investors,” said Owusu-Adjei.
“An IFA who deals with some or all of the big asset managers is over the next few months going to be getting a lot of requests. Small advisory firms will be disproportionately affected.”
“Everyone has been focussed on RDR because it is such a game changer, but this is coming very fast behind.”
Recently investment house Schroders managing director Robin Stoakley predicted FATCA would cost financial institutions $500 billion to implement worldwide and $10 billion a year to run.
“We will have to write to 70,000 or 80,000 customers to get the information required under FATCA, and how many times will we have to write to them before we get a reply?” he said.
