By Nadine Choe, 14 December 2012, www.prohedge.co.uk
New regulation, following the global crisis is a challenge investors and financial institutions face as these regulations threaten to stifle creativity and competition.
An example of the direct consequences of increased regulation is the number of proprietary traders at tier 1 banks leaving to start their own funds. Last week, at the 3rd Pan-Asian Regulatory Summit in Hong Kong, leaders in compliance and governance from financial institutions and regulatory bodies discussed the implications for financial institutions. The full spectrum of financial regulation was discussed and overwhelmingly, the FATCA (Foreign Account Tax Compliance Act) was singled out as a key concern.
FATCA, a US ruling taking effect on 1 January 2013, aims to closely monitor US citizens with overseas assets, such as offshore accounts, in an attempt to clamp down on tax evasion.
The regulatory effort following the global financial crisis led to a prioritization of investor protection, fraud and tax evasion, and will lead to major changes for both US and foreign institutions.
Globalisation and the facilitation of liquidity within global markets means that it is now easier than ever to transfer money. Linking FATCA to Obama’s recent proposal of $1.6 trillion in tax hikes, it seems as if the US government is taking extraordinary measures to address tax evasion specifically.
The main aim of FATCA is to encourage transparency in money trades and transfers, exerting pressure on financial institutions to identify US taxpayers or face penalties. According to Asian Investor, participating foreign financial institutions (FFIs) “will have to make ‘pass-through payments’ by withholding 30% tax for any payment linked to US assets made to a non-participating FFI”.
A criticism of FATCA expressed at the summit was how the regulation delegates responsibility to foreign banks to play US offshore tax agents. In turn, FFIs are struggling to find suitable solutions for their clients, such as global offerings.
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