From FATCA to Basel, the impact of regulation will continue to be significant

January 14, 2016 – By Ed Royan, COO, EMEA, AxiomSL

From anti-tax evasion measures to liquidity metrics, the private banking industry has been kept busy with a range of new regulatory requirements over the past 12 months. With no let-up in sight, many firms are now carefully assessing the technology they will need to stay ahead in 2016.

Ed Royan, COO, EMEA, AxiomSL

Arguably the most significant regulatory milestone for private banks in 2015 was the beginning of reporting under the Foreign Account Tax Compliance Act (FATCA). This US anti-tax evasion regulation requires financial firms around the world to identify and report on accounts held by US taxpayers and citizens. In 2015, firms were only obliged to report on accounts opened between July and December 2014. As a result, many of them used short-term, tactical solutions to do their reporting. However, in 2016, the scope of reportable accounts will be expanded significantly and banks are therefore looking to technology to automate their compliance.

The US is not the only country that is toughening its stance on tax evasion. In 2016, banks in Crown Dependencies and Overseas Territories, such as the Cayman Islands, will need to begin reporting to the UK authorities on accounts held by UK taxpayers. Meanwhile, banks around the world will need to start collecting the data that will be required for the Common Reporting Standard (CRS). Often referred to as ‘FATCA on steroids’, this regulatory initiative will involve more than 100 countries exchanging data about offshore accountholders from 2017.

Aside from tax, liquidity has been one of the key areas of change in recent months. As part of Basel lll, banks have had to adopt two complex new metrics: the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). In 2016, those in the European Union (EU) will also need to begin calculating and reporting the results of the Additional Liquidity Monitoring Metrics (ALMM).

In order to run the calculations mandated by the LCR, NSFR and ALMM, and to produce an accurate picture of their liquidity, banks need to aggregate granular data from the many different systems in which it is maintained. The large volumes of data involved mean the banks cannot do the calculations manually and are instead migrating to technology solutions.

As part of the Basel reforms, in 2016 private banks will also need to prepare to use a number of new calculations that have been developed to ensure they have enough capital to mitigate different types of risk. So far the Standardized Approach for Measuring Counterparty Credit Risk Exposures (SA-CCR) has garnered the most attention. However, this is just one of a long list of calculations, and banks will need to plan strategically because many of the calculations are interdependent.

Traditionally, many banks have chosen to use separate IT systems to manage individual regulatory calculation and reporting requirements. However, with so many new regulations being rolled out, this model is becoming increasingly complicated, expensive and impractical. As a result, a growing number of banks are now looking to use a single flexible platform to manage all of the different regulatory calculation and reporting requirements. This trend is going to continue in 2016.

Regulatory change is one of the key themes in the private banking industry today. Technology’s role in helping banks to manage new regulatory requirements is increasing every year.

This article was originally published by Private Banker International.