Misplaced Confidence? Financial Institutions Could Be Underestimating the Challenge of CRS

This blog was last updated on June 27, 2021

In the iconic 1997 movie Wag the Dog, Hollywood producer Stanley Motss — played by Dustin Hoffman — has the same reaction to every problem he faces. “This is nothing!” he says repeatedly in his quest to get an unpopular president reelected. His overconfidence, however, ends up having serious consequences as the movie’s dark plot unfolds.

Fast forward 20 years, and the echoes of Stanley Motss seem to be ringing around financial institutions — but this time the challenge is remaining compliant with FATCA and the emerging Common Reporting Standard (CRS) for tax information reporting. New reporting standards are a major concern for financial institutions because running afoul of CRS or FATCA could lead to significant financial penalties, damaged reputations and ultimately a loss of both customers and profit margins.

A Relatively Positive Outlook

Sovos conducted a survey in May — just before UK’s CRS transmittals were due for submission — that revealed technology professionals at financial institutions felt pretty good about their firms’ first UK CRS submissions. Is their confidence misplaced? A comparison to an Aberdeen Group survey from a year earlier suggests it might be.

In June 2016, Sovos commissioned and Aberdeen conducted a survey of leaders at 100 top financial institutions subject to AEOI rules developed by the Organisation for Economic Co-operation and Development (OECD) to combat tax evasion. Respondents to the Aberdeen survey still had a significant amount of time to prepare for CRS filings and to make plans for centralizing compliance procedures.

Almost a year later, the most recent Sovos survey used responses from Banking Technology readers. While the audiences for the two surveys varied slightly, they did share many common characteristics — including a reach of over 100 top financial institutions. The Banking Technology survey took place just before the UK CRS 2016 tax year reporting deadline of May 31, 2017.

Despite a prediction by Sovos that 60 per cent of filings submitted to ‘early adopter’ tax jurisdictions for the first CRS exchange may be rejected, more than half of respondents to the Banking Technology survey felt no more than 20 per cent of their transmittals would be rejected.

Fewer than 10 per cent of respondents thought the number of rejected transmittals could reach 60 per cent. Furthermore, 60 per cent of respondents thought they would only need to re-submit their filings once before achieving acceptance.

Potential Trouble Ahead?

However, some of the numbers in Aberdeen’s survey should perhaps serve as a warning. Aberdeen found only 44 per cent of FATCA filings were accurate, despite the fact that 64 per cent of survey respondents considered themselves “significantly prepared” to deal with FATCA.

Perhaps most tellingly, 97 per cent of Aberdeen respondents said they would be subject to FATCA, while just 65 per cent said they would be subject to CRS. The kicker? All institutions that must comply with FATCA must also comply with CRS.

Even though the two surveys show some large discrepancies, there are areas of agreement. Keeping up with changing compliance regulations is a major concern for financial institutions represented in both surveys, as is collecting and reporting data to multiple jurisdictions. Financial institutions in both surveys are in agreement as to how they plan to stay in compliance with evolving standards, too.

Prioritising Centralisation

Both the Aberdeen and Banking Technology surveys reveal centralising compliance procedures as a major priority. However, numbers from the second survey should raise some questions as to how effectively financial institutions are carrying out the centralisation process.

In the Aberdeen survey from 2016, 94 per cent of respondents said they would centralise compliance procedures. One year later in the Banking Technology survey, only 70 per cent of respondents reported having an initiative in place to centralise and automate compliance functions.

Nevertheless, it is safe to conclude centralising compliance is a high priority for many organisations. Of the 70 per cent of Banking Technology respondents who reported having plans to centralise and automate compliance functions, 75 per cent said their organisations’ boards of directors were directly involved in the initiative.

Financial institutions in both surveys are on the right track to keep up with new compliance standards in that they are at some stage of centralising compliance teams and automating reporting processes. But the firms involved in the more recent survey should perhaps tone down their confidence a bit and exercise some caution. After all — spoiler alert — things did not end well for Stanley Motss. These organisations will need to work hard to avoid a similar fate.