Enhancing CX in Financial Services via Open Banking
Open banking enables customer financial data, including transactions and payment history, available to financial service providers and third-party payment services. While this approach focuses on improving new financial services and products and ensuring transaction security, adoption is heavily reliant on a positive customer experience.
Open Banking Implementation Entity (OBIE) established the Customer Experience Guidelines which are intended to make it easier and safer for people to use products and services that support Open Banking. It combines the regulatory requirements and customer insights to create the Standard for TPPs and ASPSPs.
Open Banking regulation has made a significant revolution in the payment services industry, not only from a compliance perspective but also bringing a better experience to the customers. It mandates that banks develop APIs for digital banking transactions that can be used by value-added revolutionary service providers to inculcate competition and innovation among financial institutions across the industry. Open Banking also aims to prevent customer lock-in by standardising account switching capabilities and simplifying payment processing.
Customers are now exposed to a new business model where they must consent for their financial information to be shared with third parties. They can only consent if they feel well-informed, safe, and in charge throughout the entire process.
Open Banking builds healthy competition in delivering a better customer experience
The opportunity to create better customer experiences has been made possible by open banking. As per recent research, well-established or traditional banks are falling short in the eyes of customers when it comes to customer experience. However, smaller, or new banks are excelled in offering a better customer experience.
Customers laud the more niche digital banks for their user-friendly online services, appealing products, and superior customer service in general. But the gap is not caused by products or attractive interest rates. Existing banks are capable of matching both.
Customer service and digital transformation are more highly linked. With the rise of newer technologies such as mobile, big data, and enhanced real-time analytics, businesses can now create new, personalised offerings for their customers and prospects. Achieving customer expectations today includes intuitive user interfaces that allow them to accomplish their desired tasks quickly and easily across multiple devices, as well as customized value-added services based on their specific needs, backed by data and advanced analytics that offer useful insights and recommendations.
They are more customer-centric and provide a more consistent, convincing experience for the end-user thanks to the resulting agility and decreased costs of change that allow them to move quickly from idea to reality.
Traditional banks may be compelled, in the face of increasing competition, to concentrate on enhanced user interface design, giving current services slick interfaces. Customer experience, though, goes beyond the surface.
Behind appealing interfaces, a truly connected enterprise beats at the core of an intriguing customer experience. A customer journey is made or broken by the seamless integration data model and the aligned business process. Customers who self-serve and a hyper-enabled customer support function are simultaneously created by giving internal staff and customers access to the information they need when they need it.
The reliance on quick and unrestricted access to data will become incredibly valuable for traditional banks that are aiming to establish and defend a competitive advantage. The commoditization and implementation of advanced analytics have already spawned a new generation of enterprises known as FinTech, which leverage open APIs and standards while focusing on customer-centric innovation for new financial products and services.
Bringing Business & Technology together
With the evolution of FinTech, the effective implementation of new generation intelligent platforms improves, and the appetite for the predictive analytical techniques of the data will grow.
To deliver a superior customer experience, banks should consider all the possible architectural aspects such as processes, services, data, and technology. Customers will appreciate simple, fast, and sophisticated core services for multiple channels and user-friendly interfaces. All these actions necessitate the meticulous orchestration of architectural changes and fundamental architectural elements. This is where enterprise architecture comes into play. By connecting these touchpoints to business process models and information technology systems, the experience is optimally orchestrated and transformed to deliver targeted outcomes for customers – and results for the bank.
Open Banking fosters the banks to redesign their products and services for improved customer experience, improved processes, and faster time to market to avoid being relegated to “lowest common denominator” account servicing roles.
Simultaneously, banks can broaden their reach through fintech challengers by providing innovative API services that drive adoption in the fintech ecosystem. Adoption in the fintech ecosystem, of course, provides incumbent banks with sources of innovation through acquisition, fostering long-term growth and profitability.
Cloud Migration
Traditional banks are finally embracing the cloud to accelerate their digital transformation goals. Cloud migration is neither practical nor cost-effective. In contrast, the institutional agility and flexibility gained by embracing cloud infrastructure and services justify the required investments. Existing banks can provide new services, increased capacity, and ongoing modernization in ways that earlier attempts focused on delivering on-premises solutions could not.
Macro Global has achieved “Gold Partner” status with Microsoft. Most of our products are now being scaled up to Cloud Platforms, and customers will soon be able to upgrade to “Cloud Only” or “On-premises with Cloud Adoption” to address BCP and cost constraints. The cloud option allows our customers to pay a single set of fees for the entire solution, including hardware, operating system, Development Framework, and product, all of which are managed by us.
It’s simple to manage and scale up with the push of a button, and it’s accessible from anywhere on any device.
Accelerate IT modernisation and digitisation efforts
Open Banking emphasises transparency, security, and access, which provides banks with an opportunity to fast-track their digitization and IT infrastructure modernization efforts. Banks can compete as technology innovators by leveraging their vast resources and massive amounts of available data, using powerful advanced and predictive analytical tools to extract valuable insights. These insights can be used to broaden the service portfolio, gain more customers, increase revenue, and improve internal efficiency. Banks should focus on continuous innovation by improving technology infrastructure, introducing new processes, and optimising current processes to enable seamless customer journeys.
Macro Global’s Open Banking (PSD2) solution, Tavas enables banks to create a connected experience while also allowing them to adapt to emerging opportunities to position themselves in the new era of consumer-centric banking. Tavas – Open Banking Product Suite & Solutions instils innovation in banks by redefining account and payment aggregation via a game-changing Open Banking API Framework that addresses all compliance requirements while providing a best-in-class user experience.
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Security & Privacy in Open Banking: Risks, Challenges & Solutions
Open banking is crucial in developing and delivering new revenue-generating services that today’s customers require. Financial institutions (FIs) around the world are increasingly making Application Programming Interfaces (APIs) available to a growing number of Fintechs and other third-party technology providers, such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), as part of open banking initiatives.
The primary concerns for anyone involved in the open banking environment are financial privacy and the security of consumers’ finances. According to research, 48 per cent of consumers had negative opinions about open banking due to data and cybersecurity concerns. Malicious third-party apps could gain access to a customer’s account, data breaches could occur, and fraud, hacking, and insider threats are all possibilities.
To secure their businesses, protect their customer relationships, and consumer privacy, financial institutions should indeed re-evaluate their data privacy and security practices in tandem with their open banking initiatives.
In this article, we deep dive into key security and privacy challenges around open banking and the proactive steps that every financial institution should take to intensify and strengthen its open banking initiatives.
1. Adherence to Regulations and Standards
It is essential that each participant in the FI ecosystem follows the same set of guidelines and adopts a standard that can be relied upon by all. Access to open banking APIs is only available to apps that have undergone an independent audit and proven that their processes and security controls meet the FCA’s standards.
They must do this regularly after the initial audit to maintain authorization. Simultaneously, open banking regulations, such as the European PSD2, and local and regional protection laws, such as the GDPR, establish equal rules for all and enforce a high level of security.
Adherence to compliance and regulations not only helps them provide security but also frees them up to focus on innovation can be aided by an industry-wide proactive defence strategy based on the evaluation of FIs (including banks, Fintechs, regulators, and government agencies), security controls, and compiled threat intelligence data.
2. Giving Control to the Customers
Customers should be fully conscious of how their data is being used, how they can handle it, how it is being stored, and how the business is regulated, according to open banking security. The rules have already been established. Financial services, such as FinTech apps, have recently become more proactive in informing customers about their data and encouraging them to interact with it. Promoting data accessibility and transparency builds trust and ensures users have control.
3. Know Your Customer
One of the most difficult challenges that open banking faces are detecting suspicious activities in transaction monitoring that indicate cybercrimes or money laundering. KYC (Know Your Customer) is a process that every bank must go through with every customer, both initially and regularly, to identify and verify their identity.
Banks must understand their platform consumers and the partners they are connecting with. This includes their identity, as well as more detailed information about the endpoint devices from which they’re connecting (to ensure they’re not vulnerable to hacking), geographical location, and other factors. All of this is required to safeguard sensitive data, the user journey, and comply with financial sector regulations. The first step in preventing financial crime and money laundering is rigorous customer identification.
4. Evolution of Advanced Authentication and Authorization methods
For the protection of APIs, content filtering is crucial. Financial institutions require a comprehensive vulnerability management strategy that considers people, processes, and technology. As well as frequent scanning measures to identify real-time or potential threats, risks and the ability to address them in near real-time.
Access control is the main justification for using API gateways, though. With the advent of biometrics technology and multi-factor authentication (MFA), there is a significant evolution in recent times. In addition to a strong password, which is also crucial, multifactor authentication mandates an additional step for users to log into their accounts. These may involve asking the account holder one more question, sending a text message to their phone, or using a biometric scan like a fingerprint to unlock the account. According to studies, MFAs successfully thwart 99.9% of all potential hacks.
Additionally, open banking made APIs more secure. Standards like OAuth 2.0 or OpenID Connect must be used to secure API access, and it is frequently necessary to maintain support for SAML for access control on existing solutions. Implementing Single Sign-on (SSO) and Identity and Access Management (IAM) add additional security layers.
An authentication system that combines artificial intelligence (AI) and human intelligence can also assist in addressing the issue of managing multiple passwords.
Furthermore, technological solutions such as biometrics tokens (OTP) can be beneficial. It can help banks improve security and provide a better customer experience by utilising more effective processes and workflows.
5. Strong Data Encryption Techniques
Encryption is the stepping stone in ensuring data security. Data sharing in Financial Institutions should be permission-based or risk-based, with proper audit trails based on regulations and risk management standards. FIs can improve their security while running their operations more smoothly by using identity and authorization validation, Know-Your-Customer (KYC) capabilities, and fraud detection techniques.
While API management, security, and integration are the unsung heroes of open API implementations, speed and compatibility with bank infrastructure are critical to success. Banks can simplify processes for their customers and gain more control over security by implementing risk-based and permission-based security. Furthermore, it will assist banks in streamlining their security infrastructure and making it more efficient and customer-centric.
6. IT Security Governance
Cybersecurity is more than just robust. It constantly looks for threats, weak spots, scans for vulnerabilities, and flags problems before they even arise. This process is improved by information sharing between businesses and cooperative intelligence within the banking environment.
Increasing demands in Web Application Firewalls such as user experience and service networking, are causing traditional web applications to die. APIs are typically built as RESTful web services and use data formats that differ from those used by traditional web applications. As a result, the basic interaction paradigm between client and server has changed also protecting these APIs necessitates the development of new technologies.
FIs can increase the security of their operations by taking stringent measures like implementing strong customer authentication (SCA) through multifactor authentication (MFA), implementing risk-based MFA throughout the entire infrastructure, and enabling minimal role-based access.
7. Establish a secure digital platform
While implementing open banking, it is required to have a secure digital platform as banks must transfer and consume certain data with third-party providers. A secure digital banking platform serves as a central location for connecting, storing, working with, and securing your open banking data.
All of this is made possible by microservices such as security solutions, which can be easily built on the digital platform and are already integrated into the Macro Global Digital Banking Suite, Calculus.
8. AI & ML for Behaviour analysis
Artificial Intelligence has greater potential in open banking. Based on more data, it learns and creates a more realistic assessment of the customers and their transactions. Banks can forecast customer behaviour which helps the banks to serve best to their customers. It can also help them spot odd or suspicious activity.
Banks can assess and manage the behaviour of their third-party providers (TPPs) as well as capture the patterns with the aid of AI and ML-driven solutions. Real-time verification is necessary for real-time payments. Therefore, having access to advanced analytics, AI, and ML learning tools can aid FIs in identifying fraudulent and cybercriminal activity. It is not surprising that FIs are adopting new technologies more quickly than ever as it gives them the chance to improve their ability to adapt to any future changes. For instance, natural language processing (NLP) can be used to capture and process regulations, which can then be applied to gain a sizable competitive advantage. If an incident occurs, banks can track the transactions which is critical for risk and compliance.
ML can support the detection of abnormal behaviours in fraud and system breaches. Commencing with a sample set of data, the machine is trained to spot fraudulent activity, identify the fraud, and eventually predict and stop threats.
Both FIs and consumers have a lot to gain from open banking and to profit from it, FIs must maintain consumer confidence and safeguard private information.
9. Dismantling rigid organisational structures
Another significant challenge is less technical and more organisational, namely many companies’ SILO thinking. Who is the point of contact and decision-maker when multiple technologies converge to form one large whole? Is it the CISO, because security concerns impact IT infrastructure and application operations? Is it the Business Group, because integrated solutions have a substantial advantage and a shorter time to market? Is it necessary for Marketing to take the lead because intuitive user guidance and lesser bounce rates are, after all, the domain of marketing communications?
10 .Regular Control and monitoring
Once everything is in place, it is time to monitor and control. At this point, banks will typically set up alerts for access, users, transactions, locations, amounts, and other factors. If there are any anomalies, the bank will be notified.
Final thoughts
The challenge of API security in a financial ecosystem is not simple. It necessitates a lot of work and the constant attention of the architects of a banking ecosystem. Open APIs are crucial to the growth of open banking, but they also raise more security issues.
Open API security is critical because it can prevent the leakage of previously inaccessible and even secret data points. Therefore, it’s crucial to have a secure system that can evaluate each open API in real-time and quickly and flexibly verify its security throughout its lifecycle.
Currently, only a select few organisations and experts have the necessary expertise to build a performant, future-proof security framework for open banking. Macro Global is one such organisation. MG’s Open banking and other financial software are built with the primary goal to establish secure, open, and reliable interactions between banks, customers, and businesses.
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MG’s views on the Joint statement from HM Treasury, CMA, FCA, & PSR on the future of Open Banking
A joint statement was released on March 25, 2022, by Payment Systems Regulator (PSR), Financial Conduct Authority (FCA), CMA, and HM Treasury, announcing their collaboration on the future vision & governance of open banking and the formation of a Joint Regulatory Oversight Committee (the Committee). Further, on December 16, 2022, the committee discussed the update on the progress, the vision and innovative ideas for how the future entity should function.
This is expected to bring major changes and reforms in Open Banking, enhancing development across various spheres. Open banking has increased the UK’s international competitiveness and leadership and has also benefitted customers, businesses, and the broader economy, promoting economic growth.
Let us elucidate on what would be the impact of these statements, and how Tavas, a new-gen, platform is fuelling the development of open banking, and leveraging the future of the FinTech Industry.
The impact of the Joint Statement
Three priorities identified are to unlock the potential of Open Banking payments to support competition and innovation, and to adopt a scalable model for future data-sharing propositions. Further, the focus is also on establishing a sustainable foundation for the ongoing development of the Open Banking ecosystem.
The Strategic Working Group (SWG), convened by the Joint Regulatory Oversight Committee (JROC) and independently chaired by Bryan Zhang, is providing a comprehensive analysis that reflects the variety of stakeholder perspectives on Open Banking’s current gaps, potential short- and long-term solutions, and the structures required to further develop Open Banking and define a future roadmap. The final report of the SWG, which will be given to the Joint Regulatory Oversight Committee by January 2023, will be a crucial factor in JROC’s deliberations.
In the interim, we anticipate the future entity to begin delivering priority non-Order activities, with cooperation from regulators, as necessary. The transitional state will terminate when a permanent regulatory framework is in place. The framework will be supported by all applicable legislation.
The blueprint of the future entity includes
The Joint Regulatory Oversight Committee has a key vision for the future:
- Empower Open Banking products and services. Drive competition in financial services that benefit both consumers and businesses
- Strong technical infrastructure and services enhancing new standards
- Ensuring cohesive collaboration with partners like Pay.UK concerning Faster Payments Scheme rules.
There are three essential components that the work addresses
- To enable Open Banking to thrive, a long-term regulatory framework needs to be established and will include the relevant regulator
with powers of review, variation, or withdrawal (subject to CMA judgement). - The CMA Order is in effect before permanent regulations are set up an interim state will exist.
- To ensure usability across all users of services and capabilities, it is important that financing for this future entity comprises broad-based equitable funding which efficiently distributes costs proportionally
- In the interim state, various principles implied on non-order activities, encompassing new activities, services or infrastructure would be discussed.
- The purpose of the entity, including playing a significant role in the development and growth of Open Banking, should be reflected in its governance arrangements.
- Any fees/liability arrangements should also take into consideration these same factors.
Interaction with further open banking operations
Joint Regulatory Oversight Committee’s work and transition planning to assess any legislation required to underpin the long-term regulatory framework for Open Banking will ensure the objectives are met.
Next actions
- CMA will announce the completion of the present road map.
- In the first quarter of 2023, the Committee will make public its suggestions
About the design of the new institution, both during the interim stage and once a long-term regulatory framework is in place, as well as its vision for Open Banking.
The Committee will continue to coordinate to ensure all activities align to achieve the vision set.
MG's View on the Joint statement
The joint statement, focussing on emerging thinking, which encompasses the design of a future Open Banking entity has been revealed lately. This joint statement has added additional focus to ensure that the operation reaches more people effectively, along with a technical roadmap envisioning a broader schema of design, implementation, effectiveness, and operations of open banking. The SWG’s extensive analysis would reflect the range of stakeholder views it has gathered during a series of “strategy sprints” in recent months. Also, a further statement is yet to be released in the first quarter of 2023. This will open the views, and recommendations with futuristic insights.
In the series of Sprint Strategy, the committee consists of a range of industry representatives, subject matter experts’ consumers, businesspeople, and other prominent stakeholders who have given their views addressing the current gaps, short-and long-term solutions, along with the structures required to further develop Open Banking and define a future roadmap. According to the latest announcement, two expert panels from the SWG’s team will be set up to lead the payments strategy sprint and the data strategy sprint. The duration of each sprint would be for three weeks, starting with a one-hour “kick-off” session and followed by a two-hour sprint discussion agenda. We expect that JROC would prioritise existing issues rather than getting narrow with topics regarding ESG amongst other considerations during this period.
The advent of this joint statement is to promote the prominence of quick, efficient, and convenient data transmission methods to the third-party banking service provider, enhancing greater competition and innovation that would benefit consumers, businesses, and the wider economy. As a result, a boom in boosting the economy of the UK and fostering international leadership in this field can be achieved swiftly. This fuels the unlocking of Open Banking payments to enhance a plethora of newer options for payments, and tailored services that would reinvent a plethora of possibilities, and bring more prospects into open banking that would help invoke newer opportunities.
In addition to unlocking Open Banking payments, HM Treasury, the FCA, PSR, and CMA are focused on “Adopting a model that is scalable for future data sharing propositions”, and “Establishing a sustainable footing for the ongoing development of the Open Banking ecosystem.”
Increased impetus toward open banking – What Financial Institutions should do?
There are almost five million active users in UK. The trajectory had gained momentum in the last five years. According to the Statista Research Department, Europe has almost 12.2 million, open banking users, and is expected to reach 63.8 million by 2024. As of 2020, 24.7 million individuals worldwide used open banking services, a number that is forecast to reach 132.2 million by 2024. It is important to note that, the growth reached a great momentum between 2020 to 2024, at an almost 50% increase.
When much of the emphasis is on the security of all the transactions, where most of the data are exposed to several vulnerabilities, it is highly mandatory to enable comprehensive protection. Various financial regulatory boards and organisations are constantly working towards bringing holistic effectiveness to increase operability, facilitate ease of transactions, offer seamless operations, and strengthen the open-banking system.
The backbone of the Open Banking system lies in the modern platforms that offer a plethora of options including robust dataflow, advanced API, and adherence to strict compliance and regulations. With advanced options to choose between cloud-based architecture or an on-premises, it opens newer choices for the clients to choose efficiency and cost-effectiveness compared to the traditional methods of banking.
How Tavas will help achieve the vision?
As a comprehensive Open Banking product suite, TAVAS focuses on creating a consumer-centric digital payment transformation, encompassing advanced features with great security. Adhering to strict compliances, and regulations to achieve interoperability and stay in control of the endlessly changing payments ecosystem. TAVAS supports a robust data flow serving the Open Banking security conformance and accelerating an array of features for secure deployment of open APIs compliant with OBIE API Specifications. Along with that, it has an integrated developer portal and Open API sandbox that helps third-party providers to build and develop Open Banking APIs. Feature-rich platform with vital Data-quality controls and integrity checks offers resilience and complete end-to-end open banking solutions
As being highly inter-operable, and efficient to handle massive accounts of transactions along with a high volume of payment requests ensuring the integrity and validity of every transaction has made TAVAS, the most reliable solution.
Encompassing all the features required to build a comprehensive platform, Tavas has become a boon for banks, to expand and enhance customer satisfaction, and bring futuristic advancement proactively. To partner with us, call us at +44 (0)204 574 2433 or mail us at salesdesk@macroglobal.co.uk. Our executives will stay connected with you to understand your requirements.
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PRA Consultation Paper CP9/22 – Depositor Protection Updates
As you may be aware, the Bank of England released a few important updates to depositor protection following PRA Consultation Paper (CP9/22) which has been published in Q3 2022. Our SCV experts have done an extensive impact analysis on the proposed changes by PRA, both from the Technical and business perspective. The major effect and relief is the COA (Continuity of Access) & Dormant Account Scheme rule been removed for the immediate term thus removing the ambiguity around these two rules.
We have covered all the items and necessary remediation or action required from a financial Institution (FI’s) standpoint in this article. Please read on further to learn more about each item in detail and see if you need to proactively plan to bring the changes either to your internal reporting platform or functional/operations level change to address these regulatory “must have” implementations at the earliest and stay fully compliant. Through our quarterly and seasonal patch upgrades, we automatically take care of our customers who currently use our solution.
As a result of the aforementioned changes, we anticipate that all FI’s may soon experience a new round of FSCS drills to reaffirm assurance on their readiness by PRA. Hence, it would be an excellent opportunity to make pro-active plans to implement these changes ahead and conduct stress tests on your internal systems and processes to prepare to withstand the storm.
Updates to the depositor protection following the PRA consultation paper
Background
The CoA Rules were implemented in 2015 to support the resolution and the PRA’s safety and soundness objective by reducing the adverse effects of firm failure on the stability of the UK’s financial system. The CoA Rules aimed to support the continuity of covered by maintaining a depositor’s access to deposits and banking services while a deposit taker was undergoing resolution using a Bank Insolvency Procedure (BIP) or a Building Society Insolvency Procedure (BSIP), via a transfer of covered deposits to a purchasing institution.
Following the introduction of the CoA Rules, the Bank of England’s (‘the Bank’) approach to resolution evolved, causing the Bank to reassess the transfer of FSCS-covered deposits using CoA functionality. As a result, in advance of the 1 December 2016 effective date of the CoA Rules, the PRA provided a WBC to a broad set of firms. This WBC substantially narrowed the scope of application of the CoA Rules for three years to exclude small BIP/BSIP firms and bail-in firms and allowed the Bank to consider the longer-term policy requirements for transfer resolution strategies. The original WBC expired in 2019. This was extended for a further three years to 1 December 2022 due to the possible impact of the Bank’s review of its approach to setting a minimum requirement for own funds and eligible liabilities on the scope, functionality, and necessity of the CoA Rules. During these six years, at any one time, only around 13 firms have been required to comply with the CoA Rules. Approximately 140 firms currently hold a WBC.
The Bank, alongside the PRA, has recently initiated work to develop alternative solutions to reduce disruption to transactional accounts in the event of an insolvency procedure (See PRA statement – ‘Improving depositor outcomes in the bank or building society insolvency’ (IDOBI)). This work will look to provide depositors with improved access to their deposits throughout such an insolvency procedure, and the PRA may consult in due course on proposed future rules in this area.
Proposal
The PRA is proposing to revoke the CoA Rules and amend other rules referring to CoA before the expiry of the current WBC and amend SS18/15 accordingly. The PRA considers that revoking the rules would ensure that, in the future, firms that would otherwise have had to develop systems to comply with the CoA Rules would not be disproportionately burdened by rules that are currently not being enforced for the majority of firms.
In addition to the proposal to revoke the CoA Rules, the PRA is also proposing that firms that have already developed CoA system capabilities should consider maintaining or archiving those systems. While the outcome of the IDOBI workstream is not yet known, it may lead to a consultation with proposed new rules that impose similar requirements to the CoA Rules. The PRA proposes that as part of this process, while such firms should maintain the capability to complete field 48 of the Single Customer View (SCV), which requires details of a customer’s transferable eligible deposits when completing the SCV, firms should leave it blank so that it acts as a legacy field retained as a placeholder. This may reduce any future costs should the outcome of the IDOBI workstream require firms to develop systems with similar functionality.
The PRA has previously stated that it would ensure that firms had at least 18 months to implement changes in connection with the re-implementation of the CoA Rules. The 18 months notice period was designed to give firms sufficient time to build the required systems. As the PRA is revoking rather than imposing additional rules on firms, which is intended to prevent new firms in scope of the CoA rules from investing in building new systems that may turn out to be redundant, the PRA does not consider that firms would require 18 months’ implementation time.
Action Required
Based on Macro Global’s analysis of the COA requirements, it has been observed that FI’s neither needs to get COA waivers from PRA nor implement COA activities at the CBS level.
In SCV Report, the transferrable eligible deposit field (field 48) must be reported with a blank value henceforth which Macro Global will be rolling out a new patch in the SCV Automation process shortly. In case you have not been onboarded with Macro Global’s SCV Automation for the SCV submission file generation, please ensure your existing application can handle this.
Background
The Dormant Account Scheme (the ‘Scheme’) was established under the Dormant Bank and Building Society Accounts Act 2008 and was originally launched (in respect of dormant bank and building society accounts only) in March 2011. The Scheme enables money that is held in dormant accounts to be distributed for the benefit of the community while protecting the rights of owners or beneficiaries to reclaim the value of their assets.
Under the Scheme, participating institutions can transfer money held in eligible dormant accounts to a dormant account fund operator. The dormant account fund operator manages the money received so that it can meet repayment claims from owners or beneficiaries should they come forward in the future, and distributes surplus money for the benefit of the community.
Under section 213 of the Financial Services and Markets Act 2000 (FSMA) and the FSMA (FSCS) Order 2013 (S.I. 2013/598), the PRA was required to make rules establishing a scheme for compensating persons in cases where a dormant account fund operator is unable, or likely to be unable, to satisfy a repayment claim against it. These rules, which are set out in the Dormant Account Scheme Part of the PRA Rulebook (the ‘DAS Rules’), provide for FSCS compensation in respect of repayment claims made in connection with a dormant account fund operator that is in default.
The Dormant Assets Act 2022 (the ‘2022 Act’) modified and expanded the Scheme to cover additional assets such as insurance, pension, investment, and securities assets. footnote [13] As part of the changes made by the 2022 Act, the 2013 Order was amended to exclude repayment claims made in connection with a dormant account fund operator that is in default from the scope of FSCS protection. Accordingly, the PRA no longer has the power to provide FSCS protection on repayment claims under the Scheme, and the DAS Rules have become obsolete.
Instead, HM Treasury is committed to ensuring consumer protection in the event a dormant account fund operator footnote [14] is or looks likely to be unable to meet its liabilities, and to upholding the core principle of the Scheme (i.e., that owners or beneficiaries can reclaim the amount of their dormant asset balance owed to them at any time). If there was a considerable risk that a dormant account fund operator could not fulfil its reclaim obligations, HMT would assess the most appropriate course of action in line with these principles, which may include the use of a loan to the dormant account fund operator.
Proposal
The PRA proposes to remove the DAS Rules from the PRA Rulebook, given that the PRA no longer has the power to provide FSCS protection of repayment claims under the Scheme. The deletion of the DAS Rules necessitates some consequential amendments to other Rulebook Parts which refer to the dormant account scheme.
Following the removal of the DAS Rules from the PRA Rulebook, the FCA will be making associated changes to the Fees manual (FEES) in the FCA Handbook to remove obligations relating to dormant account fund operators and the Scheme.
Action Required
This CP change is only applicable to FSCS. As per the PRA rulebook, if the dormant account operator is in default status, then the repayment claim will be handled by HMT directly.
Background
The PRA has become aware that the rules on Temporary High Balances (THB) in Depositor Protection 10 in the PRA Rulebook need to be amended to reflect the underlying policy intent and remove any ambiguity.
The PRA considers that the THB rules are unclear as to whether a trust can claim a THB on behalf of a beneficiary. When a trustee operates a bank account on behalf of a beneficiary, it is the trustee and not the beneficiary that is the legal account holder. The current definition of a THB refers to a ‘depositor who is an individual’. The PRA considers this could be interpreted to exclude corporate trustees and potentially all trustees from bringing a claim for a THB. This causes tension with the underlying policy intent as evidenced by the SoP – DGS which envisages trustees being able to claim THB protection on behalf of beneficiaries footnote [15] and the ‘look through’ concept that applies to trusts in the context of the DP Part of the PRA Rulebook. Moreover, in the case of a trust, the policy intent is that it is the individual beneficiary rather than the account holder/depositor who is of relevance in determining whether or not the rules on THB apply.
The PRA also considers that there has been some confusion as to how the rules on THB apply to joint accounts, specifically when one of the account holders dies. The existing rules in DP 10.2 provide for the THB regime to apply to sums paid to a depositor connected to a person’s death or which are held on the account of a deceased’s representative. However, the PRA considers that they do not set out how the THB regime applies in the event of a death of a joint account holder.
Currently, joint account holders are each entitled to FSCS protection up to the relevant limit, either £85,000 or, if the deposit is attributable to a THB, up to £1 million (unless the THB relates to payment in connection with personal injury or incapacity in which case there is no limit). This means, for example, that where there is a joint account with two account holders the account holders receive either £170,000 or £2 million FSCS protection in total. However, this protection is reduced to £85,000 or £1 million when one of those account holders dies, which means that if the firm then fails, the surviving account holder will have a substantial portion of their deposit not protected by the FSCS. This is not our policy intent.
Proposal
To ensure that FSCS protection continues to function in the way it was intended, the PRA proposes to amend the rules on THB to ensure that (i) trustees (whether individuals or corporate trustees) claim on behalf of eligible beneficiaries and (ii) the criteria for determining whether the THB rules apply are assessed about the individual beneficiary rather than the account holder/depositor. The PRA proposes that in line with the existing rules in the DP Part of the PRA Rulebook, the trustee of a bare trust would be able to bring a THB claim on behalf of each beneficiary, and the trustee of a discretionary trust would be able to bring one THB claim per group of beneficiaries.
To remove the current gap in protection for joint account holders, the PRA proposes to amend the rules in DP 10.2 to explicitly cover situations where a joint account holder dies. The PRA proposes to amend the rules relating to THB to provide that for a joint account, the FSCS protection limits of the surviving account holders would be increased by an amount calculated by dividing between the surviving account holders the limit applied to the deceased account holder at the date of death. The table below provides an example of the proposed changes where one depositor dies.
| Depositors | Amount of deposit in a joint account | Proposal |
| 2 Depositors | £170,000 | FSCS protection is limited to £85,000 per depositor. The deceased’s protection is not split as there is only one remaining account holder so the surviving account holder receives £170,000 if failure is within 6 months of the death |
| 3 Depositors | £6 million (The deposit does not constitute a THB) | FSCS protection is limited to £85,000 per depositor. The deceased’s protection is split between the two remaining account holders so they each receive £127,500 (£85,000 + £42,500) if failure is within 6 months of the death |
| 3 Depositors | £6 million (The deposits are attributable to three separate THB events that have a £1 million limit) | FSCS protection is limited to £1 million per depositor. The deceased’s protection is split between the two remaining account holders so they each receive £1.5 million (£1 million + £500,000) if failure is within 6 months of the death |
The PRA considers that this would provide the surviving account holder(s) with THB protection for six months, giving them time to arrange their financial affairs and transfer any amounts over the relevant FSCS protection limit to another deposit taker.
Action Required
The THB is an exclusive FSCS internal separate process managed by them which is currently not to the scope of FI’s FSCS file submission. In case of any THB claim FI’s can deal with FSCS through their regular resolution channel.
Background
Under the Electronic Money Regulations 2011 (EMRs), the Payment Services Regulations 2017 (PSRs) and FCA guidance, e-money institutions (EMIs) and authorised payment institutions or small payment institutions (together PIs) and credit unions, in respect of e-money, footnote [18] are required to safeguard funds received from customers. One commonly used method is to segregate the relevant funds from all other funds held by the firm and deposit the funds in a separate account with a PRA-authorised credit institution. While FSCS protection is not available in the event of a failure at the level of the EMI or PI, the PRA had historically considered that these firms’ safeguarded funds deposited into a PRA-authorised credit institution would fall within the scope of FSCS depositor protection if the credit institution were to fail, as eligible end customers of EMIs and PIs would be deemed to have an absolute entitlement to those safeguarded funds via a statutory trust.
Following recent court cases, footnote [19] it is harder for the FSCS to establish that the end customers of an EMI or PI have an absolute entitlement to the safeguarded deposits. This creates a risk that the FSCS is unable to provide compensation to end customers if a PRA-authorised credit institution were to fail while holding deposits safeguarded under the EMRs/PSRs, which was not the intention of the original policy.
Proposal
The PRA is proposing to amend its rules to make FSCS depositor protection available to eligible customers of an EMI/PI in respect of their relevant proportion of safeguarded funds should the credit institution holding the safeguarded deposits fail. The proposed amendments would protect to end customers in respect of safeguarded funds which the PRA had understood to have existed before the decisions in the recent court cases. Ensuring that safeguarded deposits are FSCS protected at the point of failure of the credit institution is consistent with the logic of safeguarding.
As is currently the case, the proposals would not provide FSCS protection in the event an EMI/PI itself were to fail in an event unrelated to the failure of a safeguarding credit institution.
Eligibility
The proposed rules allow a look-through to eligible end customers of financial institutions that, under the EMRs/PSRs, deposit safeguarded funds into PRA-authorised credit institutions. Existing eligibility requirements in PRA rules will apply at the level of the end customer so not all customers of EMIs/PIs will be entitled to receive FSCS compensation. Customers would also not be eligible if they are unidentifiable (eg the e-money is anonymous) or the customer cannot be verified under AML rules.
Payment options
The proposed changes are designed to create an entitlement to depositor protection in respect of safeguarded funds for end customers to avoid an almost complete loss upon failure of a safeguarding credit institution. The PRA recognises, however, that a failure of a safeguarding credit institution combined with a requirement that the FSCS pay compensation directly to the end customers of an EMI/PI could ultimately lead to the demise of the EMI/PI. While a consequential failure may be unavoidable in certain circumstances, allowing the FSCS an option to pay the compensation amount into a safeguarding account held by the EMI/PI with an alternative credit institution may minimise the impact of the credit institution’s failure on the EMI/PI as well as the end customers. Therefore, the PRA is proposing the FSCS can pay compensation either:
into a new safeguarding account of the EMI/PI, provided the EMI/PI is not subject to a formal insolvency procedure and the FSCS is satisfied that each eligible end customer would be in no worse position than if the compensation was paid directly, or directly to the eligible end customers of the EMI/PI or to another person as directed by the end customer, if there has been an insolvency event at the EMI/PI.
The no worse off provision means that if the amount of compensation calculated by the FSCS is less than the total amount of safeguarded deposits shown in the failed credit institution’s exclusions view file (because, for example, there are customers that are ineligible for protection under PRA rules or amounts more than the deposit protection limit), the EMI/PI would need to contribute its own funds to make up the shortfall.
Calculating compensation
The calculation of compensation due to end customers of EMIs/PIs upon the failure of a safeguarding credit institution is challenging because of real-time transactions occurring at levels in the chain separate from the failed credit institution and possibly even after the time that the safeguarding credit institution has failed.
From the failed credit institution’s exclusions view file, the FSCS will know the amount of total safeguarded funds that were deposited in the failed credit institution. However, to compute the compensation due to EMI/PI customers, it also needs to receive customer data from the EMI/PI to determine the eligibility of end customers and each eligible customer’s proportion of the safeguarded funds.
Generally, depositor protection compensation is calculated by reference to eligible deposits held on the date the credit institution is in default. However, where the EMI/PI has also failed, and the FSCS compensation will go directly to the end customer rather than to a new safeguarding account, the FSCS will need to calculate entitlements to the amount of compensation on the date of the EMI/PI’s failure. This will allow for adjustments in the amount of compensation payable by the FSCS if the customer has spent some of its e-money in the intervening period, for example.
Each end customer would be considered against the eligibility requirements and eligible customers would be separately protected up to the deposit protection limit (£85,000).
Time limits and maintenance of customer details
In order for the FSCS to assess eligibility and operationalise pay-out on a timely basis, it would be important for EMIs and PIs to maintain up to date customer information in a usable format that can be transmitted to the FSCS quickly upon the failure of a safeguarding credit institution. While the PRA cannot make rules requiring such firms to maintain such customer details, it is in the EMI/PI’s interest to enable the FSCS to pay compensation quickly. The PRA considers that due to the lack of SCV requirements on EMIs/PIs, and the potentially large number of end customers due compensation, the pay-out timelines for FSCS will likely be longer than the targeted seven days for direct depositors. In recognition of the complexity of the determinations and reliance on third parties, the PRA proposes to amend DP 9.4 to allow the FSCS additional time to effect a pay-out in respect of safeguarded funds in the event that there is a delay, beyond the current payout timelines as provided for in DP 9.3, in the FSCS being able to determine the amounts to be paid to eligible customers.
Subrogation
In the event of a direct payment to the end customer, the PRA proposes to amend the subrogation rules in DP Chapter 28 to suspend an eligible end customer’s rights against the EMI/PI, in order to prevent double-recovery, i.e., both receiving FSCS compensation and exercising their contractual rights of repayment vis a vis the EMI/PI. The proposed rules would then extinguish the rights of customers against the EMI/PI when, and to the extent, the FSCS has made recoveries from the failed bank. These amendments are designed to preserve the effect of the anti-set off provisions in the EMRs/PSRs for the benefit of the FSCS during the failed credit institution’s insolvency process.
Additional changes
The proposed rules also amend DP 2.2 to make explicit the existing interpretation for looking-through credit institutions and investment firms to beneficiaries when depositors/account holders are not absolutely entitled to deposits. This amendment is for the avoidance of doubt to clarify existing treatment of beneficiaries given the changes to 2.2 needed to enable the look-through proposals regarding safeguarded funds.
Consistent with the policy outcome of protecting certain safeguarded funds, the PRA proposes to amend DP 43 to clarify that the Class A tariff base includes accounts holding safeguarded funds. The PRA considers this is also consistent with the treatment of funds that the account holder is not absolutely entitled to (eg, bare trusts).
Other types of segregated accounts
The PRA considers that similar types of segregated accounts may also need to be reviewed to determine whether end customers should also benefit from FSCS protection. The PRA welcomes responses as to whether there are similar accounts that are not already covered by PRA rules. However, the PRA acknowledges that a full review of the FSCS protection for other segregated accounts may take some time, and considers that such a review should not delay fixing this known gap in protection.
Action Required
If the FIs are handling safeguard deposits, then they must check the usual FSCS compensation eligibility of the customer and report the customer accounts in SCV / Exclusion file as normal. No specific action is required by FIs.
Background
Where a firm with Part 4A permission to accept deposits has that permission restricted by the PRA and subsequently defaults, Depositor Protection 3.2 in the PRA Rulebook (DP 3.2) provides that eligible deposits accepted while the firm held its Part 4A permission continue to benefit from FSCS protection.
DP 3.2 was drafted when the UK was still a member of the EU and was intended to apply only where the PRA significantly restricts a firm’s Part 4A permission to accept deposits but remains PRA-authorised. The PRA considers that, following the UK’s withdrawal from the EU, there is a small risk that the rule could be interpreted as applying in another circumstance: where an overseas firm with a deposit-taking permission in the UK surrenders their permission and PRA-authorisation (or their permission and PRA-authorisation lapses as a result of the expiry of the TPR or SRO), but the firm continues to hold deposits that it accepted in the UK. The PRA considers this uncertainty to be undesirable and that a potential unintended consequence of this ‘expansion of scope’ could be an increase in FSCS levy costs to the industry.
Proposals
The PRA considers that deposits held by a UK branch of an overseas deposit-taking firm that has had its Part 4A deposit-taking permission and authorisation from the PRA removed should cease to benefit from FSCS protection. For example, DP 3.2 would not apply where the overseas deposit-taking firm transfers eligible deposits to an overseas branch before surrendering its Part 4A permission and PRA-authorised status. Following EU withdrawal, eligible deposits transferred from the UK to the EU by overseas firms should generally be covered by the firm’s home state deposit guarantee scheme under the Deposit Guarantee Schemes Directive (2014/49/EU) Opens in a new window.
The PRA proposes to amend DP 3.2 to reflect the original policy intent and remove any potential for ambiguity. The PRA proposes to make clear that a firm must be authorised by the PRA at the moment they default for their depositors to be eligible for compensation. The PRA considers that this would reduce both uncertainty and the risk of the rule being interpreted in a way that expands the scope of FSCS coverage and creates a potential increase in FSCS levy costs to the industry.
The PRA proposes to add a new notification obligation on overseas firms, in similar terms to the notification obligation on them at the time of EU withdrawal, to ensure UK branch depositors are aware of the loss of FSCS coverage and is provided with information on whether and to what extent their deposits will be protected by another deposit guarantee scheme when the firm has its PRA authorisation cancelled.
Action Required
No action is required from the FSCS reporting perspective, but from an operational, finance or customer service point of view, the FIs can use their usual channel of resolution.
Also, it has been mentioned that a firm must be authorised by the PRA at the moment they default for their depositors to be eligible for compensation.
If the UK branch of an overseas deposit-taking firm that has had its Part 4A permission and authorisation from the PRA removed, should cease to benefit from FSCS protection.
Background
Depositor Protection 19.1 and 19.2 in the PRA Rulebook (‘DP 19’) require firms to notify depositors of a merger, conversion of subsidiaries into branches, transfer, or similar operation and provides such depositors with a three-month withdrawal right. In this event, the withdrawal right allows the depositor to withdraw the amount of their deposit that exceeds the FSCS coverage limit at the time of the operation and, if desired, transfer it to another firm, without incurring any penalty. The policy intent behind this rule was to ensure that depositors could retain the same level of FSCS protection in the event their total protection would be less after the restructuring than before.
Proposals
The notification and withdrawal right is currently wider than it needs to be and applies regardless of whether the depositor would suffer a reduction in the total protection under the FSCS. If a depositor’s overall FSCS protection is not affected by the transaction, the PRA considers the withdrawal right is not achieving the purpose for which it was intended and is creating an unnecessary operational burden on, and cost to, firms.
The PRA proposes to amend DP 19.2 to set out that the withdrawal right would only apply if the level of a depositor’s overall FSCS protection is reduced by a restructuring operation. The PRA considers that depositors would still have a right to be informed that the entity that holds their deposit is undergoing some form of restructuring operation, and is not proposing to change the notification requirement. However, these proposals would reduce the operational burden on firms as they will no longer need to implement systems to comply with the obligations associated with the rule DP 19.2 unless there is a reduction in FSCS protection.
For example, if a merger of two unrelated entities reduces a consumer’s combined protection from £170,000 across the two entities to only £85,000 in the newly merged entity, the withdrawal right would continue to allow withdrawal of up to £85,000 without penalty. But if there is no overall impact on the level of FSCS protection before and after the merger (for example, where entities in the same banking group merge, or if deposit accounts are transferred from one UK-based entity to another UK-based entity within the same banking group), there would be no withdrawal right.
Action Required
No action is required from the FSCS reporting perspective, but from an operational, finance or customer service point of view, the FIs can use their usual channel of resolution.
PRA has provided detailed information about the withdrawal of the deposits.
Background
The Depositor Protection Part of the PRA Rulebook (‘DP’) contains various rules that require firms to notify depositors about the scope of FSCS protection arrangements. In particular, with respect to deposits that are not eligible for FSCS protection, DP 17 requires firms to provide annual information sheets and exclusions lists.
The PRA has become aware that this notification requirement is unduly burdensome to firms with depositors who are not entitled to FSCS protection by their legal personality.
Proposal
The current rules in DP 17 transposed the EU Deposit Guarantee Schemes Directive (DGSD).footnote [21] Now that the UK has left the EU, the PRA considers that they should be amended to reduce both the operational burden on, and cost to, firms.
The PRA is proposing to remove the Chapter 17 annual notification requirement for depositors who are ineligible for FSCS protection by virtue of DP 2.2(4) (ineligible depositors). To ensure that such depositors are aware that they would not benefit from FSCS protection, the PRA proposes that firms would still be required to provide an information sheet and an exclusions list to each intending depositor, whether eligible or not, before entering into a deposit-taking contract, in addition to complying with the other requirements as required under Chapter 16. This would ensure that depositors clearly understand whether or not they will benefit from FSCS protection.
Action Required
No action is required from the FSCS reporting perspective, but from an operational, finance or customer service point of view, the FIs can use their usual channel of resolution.
Since PRA is proposing to remove the Chapter 17 annual notification requirement for depositors who are ineligible for FSCS protection, the firm doesn’t require to send the information sheet and exclusion list annually.
However, firms would still be required to provide an information sheet and an exclusions list to each intending depositor, whether eligible or not, before entering into a deposit-taking contract. So, the firm should ensure that the above proposal is accomplished while onboarding the depositor.
Background
In this section, the PRA sets out its proposals to amend its Statement of Policy ‘Calculating risk-based levies for the Financial Services Compensation Scheme deposits class’ (‘SoP – RBL’) to account for changes made to reporting requirements and the leverage ratio.
Proposal
Amendments to the non-performing loans ratio calculation
The SoP – RBL sets out the methodology used to calculate Capital Requirement Regulation (CRR) firms’ and Credit Unions’ risk-based contributions to the FSCS. The calculation takes into account several metrics, including firms’ non-performing loans (NPL) ratios. Each NPL ratio is calculated using data from the FSA015 template, or where this is not available, the FINREP F18 template.
Under the PRA’s Policy Statement (PS) 18/17 ‘IFRS 9 Changes to reporting requirements’ Opens in a new window (‘PS 18/17’), the requirements for several firms to report either the FINREP F18 or FSA015 templates were removed. As a result, the PRA has been unable to calculate the NPL ratio for this group of firms. As a temporary solution, these firms have since then been assigned the lowest possible risk score for this metric by the PRA – regardless of their riskiness. Since the overall amount levied across all firms is fixed, this means that these firms pay relatively less than before, and all others firms relatively more.
The PRA proposes to introduce a permanent solution to this issue and re-introduce the original policy intent by amending SoP – RBL to allow a proxy for the NPL ratio to be used for this group of firms. This proxy would use data from the FINREP F7 and FINREP F1 templates rather than the FSA015 or FINREP F18 templates. These firms would be ranked and rated separately from others to calculate the NPL ratio, to maintain consistent treatment across the groups for which differing data is used. Please see Appendix 6 for full details of the proposed calculation.
Amendments to the leverage ratio calculation
Another metric used in the calculation of firms’ risk-based contributions to the FSCS is the leverage ratio. Currently SoP – RBL assigns firms an individual risk score (‘IRS’) of 0 if their leverage ratio, as defined in the CRR, is greater than 3%, and an IRS of 100 if it is equal to or below 3%. This threshold is now out of line with the PRA’s Supervisory Statement ‘The UK leverage ratio framework’ updated in October 2021 (‘SS45/15’).
To achieve consistency between the SoP – RBL and the leverage ratio framework set out in SS45/15, the PRA proposes to change the threshold in the SoP to 3.25% and to specify that the leverage ratio would be defined as in the PRA Rulebook. Full details of the proposed amendments are set out in Appendix 6.
Action Required
No action is required from the FSCS reporting perspective, but from an operational, finance or customer service point of view, the FIs can use their usual channel of resolution.
PRA has proposed amendments in the reporting requirements and ratio calculation for SoP-RBL. The FI has to check the amendments and update its reporting process accordingly
Background
In this section, the PRA sets out its proposals to update SS18/15, SoP – DGS and SoP – RBL to ensure that they reflect the current PRA rules in force as well as the proposals in this CP and remove spent provisions from the PRA Rulebook.
Proposal
The PRA proposes to update SS18/15, SoP – DGS and SoP – RBL to:
- reflect the proposals consulted on in this CP, this will include changing the name of SS18/15 from ‘Depositor and dormant account protection’ to ‘Depositor protection;
- reflect the UK’s withdrawal from the EU; and
- improve the clarity of drafting, for example by removing material that is no longer relevant, due to the expiry of the relevant transition period or the deletion of certain PRA rules.
The PRA also proposes to delete rules 17.3 and 20.3 in the Depositor Protection Part of the PRA Rulebook (the ‘Rules’) as, given the period since IP Completion Day, the Rules are now spent.
Action Required
No action is required from the FSCS reporting perspective, but from an operational, finance or customer service point of view, the FIs can use their usual channel of resolution.
PRA has provided the information about this CP update on the respective policy statements.
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FATCA / CRS Reporting 2023 – Deadlines, Updates & Challenges
The shift in financial and economic conditions all over the world requires stringent regulatory scrutiny. Regulators demand financial institutions to improve transparency in their reportable accounts and tax revenues.
As you are aware, after decades of discussion and dialogue finally in 2014, the Organization for Economic Co-operation and Development (OECD) introduced CRS as a global legal framework for Automatic Exchange Of Information(AEOI) between multiple jurisdictions to promote tax transparency and prevent offshore tax evasion. OECD directs the participating jurisdictions to obtain information from the Financial Institutions on the financial accounts held by the non-residents. This information will then be exchanged annually among the relevant jurisdictions. So far 115 jurisdictions around the globe have adopted CRS to maintain the integrity of the tax systems by combating offshore bank secrecy.
Every financial institution is scrambling to get over the line of HMRC CRS deadline every year around April and May. Nevertheless, on the regulatory reporting front, authorities are more stubborn on respective deadlines & Reporting accuracies, hence enterprises are shifting to digital automation at a faster pace never to be “battlefield ready” with a good flood-defence system. It’s more strategical rather than a routine regular exercise.
CRS reporting landscape constantly demands increased dynamics of changes including the following
- Reporting jurisdiction addition/drop from AEOI regime.
- Sustained demand from HMRC on correct account classification & reporting.
- Continuous impact on onboarding platforms to capture extended and precise tax declaration and ongoing maintenance and review.
- Periodical review & ongoing centralised record maintenance on Self Certification.
- Platform to support HMRC queries and submit a revised variation.
- Platform to support Remediation, Cleansing & Data Enrichment using single customer view data.
Lets start discussing the above said changes and the challenges around the CRS reporting and what banks and other financial institutions should do to be proactive with an effective plan to manage the CRS FATCA regulatory obligations seamlessly.
What are the challenges faced by the financial institutions in CRS reporting?
Data quality is one of the main challenges in any regulatory reporting as the legacy technologies or the manual operational approach results in data inaccuracies, data gaps, inconsistent taxonomies & consolidation of entities that affects the accuracy of the CRS reporting and increase the operational risk.
Further, as the new compliance processes require more granularity around the reportable data, FIs with their legacy operational approach find it hard to produce data that is fully compliant with HMRC FATCA & CRS reporting guidelines.
Achieving the regulatory compliance mandate is time-dependent and involves operational risk due to manual data scrubbing. Manual validation causes are results in error-prone and require additional investigation from the Regulator prompting questions and enquiries over the operational efficiency of the business and the data which lead to reputational risk.
What do the financial institutions need to do?
As you are aware that the deadline for HMRC CRS/FATCA reporting for 2023 is 31st of May, it is the right time for financial institutions to initiate the gap study and analysis on your CRS data and reports at the earliest so that you will be fully geared up along with effective data governance framework for this year CRS reporting on time.
Financial Institutions need to foster collaboration between various teams such as Operations, IT, Legal, and Taxation that ensures comprehensive and hassle-free compliance to robust regulations. Financial institutions should revisit their existing KYC/AML and client onboarding procedures with an exhaustive due diligence procedure to segregate and categorise the CRS reportable accounts. It requires a robust framework, domain expertise, a unified solution, etc to handle the ever-evolving CRS requirements, address the challenges and be prepared for the reporting obligation now as well as future.
Macro Global offers ”Fully-Automated, Future-Proof, Cloud/On-Prem/Hybrid” platform CRS Stride – AEOI / HMRC CRS & FATCA Reporting Solution that is unique and flexible comprising both Audit & Automation processes as a single integrated platform crafted with all our experience & expertise learnt over years.
With our futureproof “CRS Reporting Solution”, financial institutions would be better placed to furnish the precise CRS data in line with the HMRC CRS specifications.
We take care of your CRS reporting obligations in its entirety and assist you not during the deadline but prepare you before and after the submission. You have one less thing to worry about and fully confident that your compliance adherence completely addressed throughout with an assurance validation by our tax and subject matter experts. You could save substantial cost and effort by your compliance team to prepare and submit CRS report without worrying endless technical challenges around the submission, remediation & managing variation and finally “Assurance Certification”.
One great reason to choose us is the product maturity as it’s already tried and tested with every small detail addressed leaving you to focus on your business than burning midnight oil to tackle endless queries from HMRC.
If this sounds like something you are keen, pls drop a note to our sales team at salesdesk@macroglobal.co.uk or call us at +44 0204 574 2433 to book a demo or for a free no-obligation product trial.
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Open Banking to Open Finance – Exploring the benefits, risks & opportunities
Open Banking becomes an older topic for now as Europe has been talking about it for the past two years. Open Finance is currently a hot topic in the financial industry, but what exactly is Open Finance?
“Open Finance” refers to any Open Banking activity that extends beyond the regulatory scope of PSD2’s Access to Account provisions. As a result, data sharing and payment initiation via APIs that extend further into payment accounts, payment services, and payment service providers defined by PSD2 (Payment Service Directive 2) come under the scope of Open Finance.
Regulatory interventions set up the groundwork for Open Banking. Because of this, the Open Banking market is evolving, and new products and services are being introduced as customer adoption of these new payment methods are increasing. Open Banking facilitates the sharing access of customer financial data more securely to make life easier. The Open Banking capabilities developed by firms ranging from incumbent to challenger banks and FinTech firms have proven to be effective in delivering consumer and market utility. The distributed technology has laid the groundwork for Open Finance to expand for even greater customer benefit.
Open finance extends beyond the data and services provided by the banks to encompass customers’ entire financial footprint. A trusted third party could access financial data related to pensions, taxes, and insurance with consent from the customers. This paves the way for more tailored consumer services, including payments and other financial products.
Third-party providers can use open application programming interfaces (APIs) to build applications and services that add value to consumers, by providing exclusive data-driven insights, streamlining the user experience, or simplifying payments.
How Open Finance differs from Open Banking?
Till now, the distinctions between Open Banking and Open Finance are not clear. However, we can identify some differences based on what is happening around the world, whether through regulatory actions or market-driven initiatives:
- API Providers (ASPSPs): In Open Banking, banks and other financial institutions are considered as the API providers. In Open Finance, other account holders such as insurance companies, pension funds, and wealth managers, can provide Open Finance APIs.
- API Clients (TPPs): Open Finance APIs can address a variety of ‘clients,’ including TPPs regulated by a National Competent Authority (NCA) under PSD2 and organisations that are not regulated by an NCA.
- Security: NCA-issued authorisation numbers, PSD2 eIDAS certificates, and/or scheme lists may or may not be used for Open Finance client identification.
- Contracts: Commercial contracts between the API Provider and the API Client may be needed for Open Finance APIs.
The Regulatory Framework for Open Finance
The European Commission issued some correspondence on the EU (European Union) Retail Payments Strategy in September 2020. It established several objectives for the EU’s Digital Finance Strategy. One of them was to promote data-driven innovation, specifically improved data access and data sharing within the financial sector. The Commission also acknowledges the need for an Open Finance Framework by 2024 and plans to propose one in mid-2022.
There is a contradiction in defining Open Finance as the non-regulated, value-added space because services introduced today as Open Finance will no longer be Open Finance if they are regulated later. That could be a problem at some point of time.
Open Finance access is allowed, provided that only the data owner or a third party authorised by the owner has access to the data. Furthermore, due to the risks and sensitivity of financial data, there must be certain level of control over data access, which can be carried out through customer consent, contractual agreements, qualified certificates, or other means. Open Finance is an ethical process because it is transparent and effective for all parties involved.
Account Servicing Payment Services Providers (ASPSPs or banks) and Third-Party Providers (TPPs) or regulated entities are not the only ones who can take part in Open Finance. It applies to financial institutions (e.g., banks, financing companies, insurance companies), as well as merchants, utility companies, corporates, Small and Medium-sized Enterprises (SMEs), and individuals.
Advantages of Open Finance
Regulators and industry stakeholders acknowledge the importance of Open Finance and outline some of its expected benefits:
- Improves user experience by supplying customised products and services.
- Enables wiser financial decisions and improved financial management.
- Improves efficiency and productivity for big corporates and small and medium-sized businesses.
- Increase competition among financial service providers, fostering innovation, new service development, and increased demand.
What is the future of Open Finance?
Open Finance is the logical next step in applying the Open Banking concept to a much broader range of financial products and services, including insurance, pensions and even in other domains such as healthcare and more. The opportunity to improve savers’ overall financial well-being is enormous. However, much work is still to be done to get it off the ground, beginning with regulations, standardisation of the technology, and the development of new use cases to show the benefits it can provide.
We are excited to see what the future holds for Open Finance in general, as well as the innovations it may bring to the pensions industry to improve consumers’ insights, decision-making, and financial well-being.
From Open Banking to Open Finance and then to Open Data – New gateways
Open Finance is not the end, it is the beginning of financial industry evolution. It brings us closer to Open Data and a data-driven world in which all the industrial ecosystems are interconnected.
As a result, industries must embrace and incorporate Open Finance into their culture. Open Finance is pushing the industries into new innovative water, and those who swim in it will be better positioned to succeed in the upcoming Open Data reality.
Open Data services facilitate the customers to access and share their financial data with the approved third-party providers (TPPs), fostering the innovation of ground-breaking products and services that aid customers in better engaging with their finances, making empowered decisions, and accessing tailored products and services. Open Data is being utilised in the Account verification process, Credit checks and other PFM platforms.
- Improved financial decision-making.
- Increased access to advice and guidance.
- Better borrowing decisions.
- Enhanced user experiences.
- Increased financial awareness.
What are the potential implications of Open Finance?
This would be the debating question in the market currently. Open Finance could reduce costs and increase benefits for customers. A low barrier to entry, achieved through the low-cost reuse of existing capabilities, will secure the ability to bring solutions to market for consumers more quickly.
Open Finance has the potential to reduce fraud, improve financial well-being, expand credit availability, supply more payment options, and enable reusable digital identities. Each of these outcomes stands for a significant undertaking.
The challenge for future work is to identify the priorities where success is more likely to describe collaborative action from the industry players, government, customers, and regulatory bodies. It enables open access to data to identify the possibilities and opportunities around open finance and to set a mandate on what could be done.
By focusing on customer outcomes, we are also in the best position to directly address the issues that most trouble individuals and businesses, and which Open Finance has the potential to resolve.
Conclusion
The industry is already moving forward with several initiatives aimed at achieving the results as part of the evolution of open finance. The emphasis will be on integrating and putting into practice the various initiatives, such as enhanced fraud data sharing initiatives and access to all the available data sources. In other areas, business is showing thought leadership on how Open Finance could encourage entrepreneurial behaviour, for instance, by removing obstacles to the formation and operation of SMEs.
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Open Banking: AISP, PISP & ASPSP Explained
Open Banking has been driving a spectacular impact on the financial world since January 2018, disrupting everything from payment solutions and budgeting tools to lending applications and credit analyses.
But what exactly do Open Banking providers do? Regulated providers construct and maintain the digital pipes that enable banks to securely request data and payments.
Open Banking is currently being used by individuals, lenders, and financial institutions to substitute the legacy manual and increasingly complex processes. The ability to collect and view insights derived directly from bank transaction data in real-time is extremely powerful, but it can be overwhelming for businesses that have never worked with this data before. Understanding how the technology works and what technology companies are doing with it can help you come up with new uses for it.
Open Banking relies on third-party providers (TPPs) who can provide two core Open Banking services through two separate FCA authorizations:
- Account Information Service Provider (AISP): a person who is authorised to retrieve account information from banks and financial institutions.
- Payment Initiation Service Provider (PISP): a person or entity who is authorised to initiate payments into or out of a user’s account.
Companies that want to be regulated as an AISP or PISP must go through a rigorous application process with the FCA. Some Open Banking providers can be regulated as both an AISP and a PISP, but many only have one.
AISPs and PISPs manage client consent required for Open Banking data access. This implies that each AISP and PISP explicitly state to the end-user what data will be handled, for how long, and with whom it will be shared. This digital consent journey also serves as the foundation for GDPR information processing for AISPs and PISPs.
Account Information Service Providers (AISPs) explained
An AISP is a company that has been granted permission to access an individual’s or SME’s financial institution account data. The UK’s nine largest banks are required by law to comply with the AISPs’ requests. The framework and technical specifications of Open Banking allow for the retrieval of years of transaction history in seconds.
What are AISPs capable of?Being an authorised AISP means that a company can request permission to connect to a bank account and use the information from that bank account to provide a service.
Some AISPs do not have permission to access the bank account information as they are granted “read-only” permission. They can look but not touch, which means they can’t move a customer’s money.
AISP-related services and tools include price comparison, money management tools, faster and more accurate access to financial products, and speeding up manual processes such as applying for a mortgage or a loan, among others.
Examples of AISP applications include:
- Money management tools: some AISPs collect financial data and disseminate it in a way that allows people to easily understand their financial situation, create a budget, and track spending. These new personal finance tools combine data from multiple bank accounts so that users can see their entire spending history in one place.
- Loan applications: Some AISPs, such as Credit Kudos, use this same capability to allow customers to share financial information securely and quickly with a lender or broker. Lenders also use account information-derived data and metrics to improve credit and affordability decisions. This procedure expedites traditional underwriting by eliminating the need for lenders to manually compile and verify bank statements. Better insights benefit the lenders and can provide a better customer experience to the borrower.
Payment Initiation Service Providers (PISPs) explained
PISPs are authorised to make payments on behalf of customers rather than just viewing account data. PISPs accomplish this by initiating direct transfers to or from the payer’s bank account using the bank’s tools.
What are PISPs capable of?Businesses that are authorised PISPs may request permission to connect to a bank account and initiate payments from the customer’s bank account.
There are a variety of reasons why you might want a business to initiate payments for you. For example, an app that helps you handle money in your multiple savings and current accounts to ensure you never go overdrawn and don’t have to pay potentially substantial overdraft fees. This type of capability is possible in retail, where you allow a company that you shop with frequently online to connect to your bank, so you get fast checkout and don’t have to re-enter card details for every transfer of funds.
Examples of PISP applications include:- Financial management tools: A few new money management and savings apps transfer a small proportion of someone’s balance each week to a savings account according to a predetermined process. Open Banking has also facilitated new tools that automatically transfer money between accounts on behalf of customers to avoid overdraft fees.
- Business solutions: New tools integrate with back-office systems, allowing businesses to securely manage payments and collections, make real-time bank transfers, and gain greater payment visibility.
Account Servicing Payment Service Providers (ASPSP) explained
Account Servicing Payment Service Providers provide and manage payment accounts for payment service users (PSUs). ASPSPs have typically been banks and similar financial institutions including building societies, and payment companies.
The number of banks and building societies providing open banking services is increasing. Only the UK’s nine largest banks and building societies are required to make your data available through open banking now. Smaller banks and building societies also can participate in open banking.
ASPSPs release Read/Write APIs as part of Open Banking. These allow consumers to share their account transaction data with third-party providers, who can then initiate payments on their behalf. PSD2 requires all ASPSPs in Europe to participate in open banking and provide data access.
How do open banking and screen scraping compare?
Screen scraping (also known as credential sharing) is an old technique for gaining access to a customer’s bank account to retrieve transaction data. Screen scraping works as stated below:
The customer provides their login information to a third-party provider (TPP). The TPP uses these details to log in to the customer’s bank account. The TPP then copies or “scrapes” the customer’s bank data for use outside of the customer’s banking app.
Before open banking, the only way for apps to access customers’ bank accounts was through screen scraping. Online accounting software packages made extensive use of it. Open banking, on the other hand, is a more secure method because it does not require the customer’s credentials and is thus much more secure.
eIDAS certificate
Electronic signatures can have the same legal validity as handwritten signatures under a 2016 EU regulation. However, such signatures must meet the requirements of eIDAS (electronic Identification, Authentication, and Trust Services). eIDAS certificates enable ASPSPs such as banks in European open banking to identify and authorise API connections from Third Party Providers such as PISPs and AISPs. This is critical in preventing unauthorised access to bank accounts. Since Brexit, only UK-authorized Third-Party Providers can use eIDAS certificates.
Open Banking API providers and their requirements
There is no ‘official’ API for Open Banking. Instead, banks and Technical Service Providers provide their APIs that must adhere to the Open Banking Standard specifications released by Open Banking Implementation Entity (OBIE) which is an official organisation that supervises the Open Banking implementation in the UK. The Open Data API Specification governs how banks develop access endpoints for Third Party Providers (TPPs). It defines how TPPs can use a bank’s Read/Write API. You can find the list of Open banking API specifications on the OBIE website.
Read/Write API specifications
The Read/Write API specification is the primary API specification that governs how third-party providers should connect to banks. It enables Third Party Providers (TPPs) to obtain access to bank accounts for both read and write purposes, for example, fetching account balances and transaction details to make authorised payments. Through the Dynamic Client Registration process, banks allow the Third-Party Providers to enrol automatically without the need to authenticate each one manually. API performance, uptime, and reliability are critical for open banking. Since there is no single official open banking API and each bank develops APIs on its own as per OBIE specifications, the performance of the API of each bank may differ.
Macro Global’s Tavas Open Banking Product Suite and Solutions offers a bundle of solutions to any ASPSPs to extend beyond the scope of monetisation tore-engineer the bank’s portfolio and business model.
- Identity and Access Management
- Developer Portal and Sandbox Environment
- Financial Grade Open Banking APIs
- Strong Customer Authentication
- Administration Portal
- Modified Customer Interface- Fallback Arrangement
- App2App Authentication
- Regulatory Reporting
To learn more about how Macro Global can assist you in monitoring, managing, and mitigating the aforementioned challenges, please visit Tavas – Open Banking Product Suite and Solutions.
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FATCA: Objective, Impacts & Challenges in Financial Institutions
In 2010, the Foreign Account Tax Compliance Act (FATCA) is introduced in the United States to ensure that citizens fully disclose their worldwide income to the Internal Revenue Service (IRS). Foreign Account Tax Compliance Act (FATCA) is a piece of US legislation aimed at preventing and detecting offshore tax evasion by US citizens (US citizens, US tax residents or US legal entities). FATCA became effective on July 1, 2014.
Foreign governments across the world have agreed to comply with the regulations and have signed FATCA into local law by establishing bilateral agreements known as Inter-Governmental Agreements with the US (IGA).
What is the objective of FATCA?
FATCA was enacted to impose a reporting burden on monetary payers to protect the US tax base. It enables the Internal Revenue Service (IRS) to view information about offshore accounts held directly or indirectly by US citizens in cases where tax evasion is suspected.
Foreign financial institutions (FFIs) must identify their financial account holders and then report to the IRS the details of reportable US account holders and their accounts. This is typically done indirectly through the FFI’s local tax authority such as HMRC (for the UK), and it is dependent on the IGA in place.
The IRS compares FFI data to what private individuals and legal entities report on their tax returns. Before FATCA, the IRS could not make this comparison and had to rely on taxpayers to be forthcoming.
UK-US intergovernmental agreement (IGA)
The important point is that the legislation is now part of UK law because of the UK-US intergovernmental agreement (IGA) and the regulations issued under section 222 of the Finance Act 2013. Default has financial and reputational ramifications.
All UK entities are subject to UK rules, and solicitors may be asked for their clients’ FATCA status when dealing with other institutions such as banks and stockbrokers, in addition to the standard AML and client identification procedures.
Every year, financial institutions must evaluate their accounts and report certain account holders to HM Revenue and Customs (HMRC). This includes data required to be sent to the United States under the Foreign Account Tax Compliance Act (FATCA).
Who are the reportable persons under FATCA?
The legislation requires Financial Institutions (FIs) (banks, stockbrokers, and other financial intermediaries, including most Trusts) to notify the IRS through HMRC when any amounts are paid to or for a US person, irrespective of where the payment is made. Furthermore, the IRS must be confident that the FI has adequate systems in place to identify and record US Persons. The FI will be in default if there is a failure to report or any other non-compliance with the FATCA regime.
Individuals who are US citizens, US tax residents, or US legal entities are FATCA reportable persons.
- Private individuals born in one of the states of the United States, the District of Columbia, Puerto Rico, Guam, the Northern Mariana Islands (born on or after November 4, 1986), or the Virgin Islands.
- Foreign-born children under the age of 18, residing in the United States with their birth or adoptive parents, at least one of whom is a US citizen by birth or naturalisation.
- Individuals who have been granted citizenship by the US Citizenship and Immigration Services (USCIS) (naturalised US citizens).
US residents such as Citizens of the United States of America, Green Card holders. Persons who spend a significant amount of time in the United States, regardless of citizenship, or those who choose to be treated as a US resident for a portion of the year.
US legal entities include US domestic corporations, companies, partnerships, and trusts that are organised under US law. The federal government of the United States, as well as its agencies and states.
What financial institutions should do for FATCA reporting?
Customer Identification: According to this IGA agreement, Financial Institutions are responsible for identifying and reporting Financial Accounts held by Specified US Persons. Customer Identification can be done in three ways:
- Indicia search – The Financial Institution can identify Reportable Accounts by searching for US indicia by referring to documentation or information held or collected in connection with the maintenance or opening of an account; this may include information held for the purposes of complying with UK AML/KYC rules.
- Self-certification – obtained from an account holder or Controlling Person.
- Publicly available information (for entities only) – Using publicly available information, a Financial Institution may be able to determine the FATCA status of an entity account holder.
Reporting: According to HMRC guidelines, banks must report all financial account information held explicitly or implicitly by US reportable customers to HMRC. The information will then be forwarded to the US Internal Revenue Service by HMRC.
Withholding: FATCA requires Foreign Financial Institutions (FFIs) outside the United States (US) to provide information about their US customers to the Internal Revenue Service (IRS). Anyone who fails to comply is subject to a 30% withholding tax.
Key Challenges faced by financial institutions in FATCA reporting
Need for detailed guidance on Self-certification forms
Self-certification is likely to be the preferable option for most financial services firms, which will shift as much of the compliance burden as possible to clients. Clients will seek advice from the financial institutions with which they do business. However, the lack of detailed guidance and the absence of case law means that financial institutions will be hesitant to provide advice for fear of being sued and facing non-compliance issues.
Adherence to OECD guidelines
FATCA and UK tax obligations are already difficult. The OECD’s Common Reporting Standards add to the confusion. The OECD standards are merely guidelines for the 40+ countries that have agreed to them. Each country will be free to implement these standards in the way that best suits them. This could lead to inconsistencies and place a significant burden on businesses. FATCA forms are already lengthy and complicated. Customers are requested to fill out forms for other jurisdictions. It will be tedious for the financial institutions to ensure complete compliance with multiple jurisdictional and disparate requirements.
Lengthy & Tedious Client onboarding process
Banks must educate their customers about the importance of adhering to compliance requirements while onboarding them. Financial services firms’ due diligence requirements with respect to compliance obligations also result in significantly longer onboarding times. Hence banks should implement a digital customer onboarding process. Digital Customer Onboarding improves the customer experience and makes the process smoother or even effortless.
Need for Centralised Data sourceTo have a single view of their customer across all parts of the business, financial institutions will need a centralised customer database and some data processing capability. To pull this data from disparate systems, new technology such as FSCS SCV Enterprise Solution Suite will be required.
Lack of Ongoing Compliance Process
Foreign financial institutions must identify where their customers’ income is earned and sourced. This exercise is carried out every quarter. Financial institutions also have to identify any incoming funds that may be subjected to withholding tax, in which case, systems will need to calculate the appropriate tax to be withheld. Robust processes are to be established to fulfil the above said regulatory obligations and to ensure a higher degree of compliance.
Shortage of Compliance Knowledge
Generally, there is a lack of understanding of the full scope of FATCA requirements and implications at all levels of the organisation. For the reasons stated above, front office staff of the banks should be more cautious in giving advice to their customers. Senior executives must be aware of the implications for them. Specialised training programs should be given to front office staff to de-risk non-compliance. Customers must also be made aware of the FATCA compliance requirements. It must also be refined on a regular basis to ensure it remains effective.
Need for well-structured Documentation & Data
Every stage of client onboarding and ongoing client interaction must be diligently documented to ensure a comprehensive audit trail and proof in the event of regulatory scrutiny. Additional circumstantial data and documentation will need to be collected and stored so that evidence can be framed under the circumstances at the time of audit investigation or regulatory scrutiny drills.
Documentation is one of the most significant challenges for most financial services organisations, necessitating a comprehensive change programme to ensure that everyone in the organisation understands the importance of documentation and does it consistently. Major banks are using our Aira – Enterprise Document & Workflow Management System, which enhances the productivity and efficiency of their business operations to the next level of profitable growth.
Oversight & Senior Management Assurance
The Board members will be held individually and collectively liable for any FATCA compliance violations. They will require regular assurance that everything is in order. This will necessitate new governance and oversight processes, as well as an efficient and timely process for escalation of any regulatory violation. The Board will have to rely heavily on their senior directors to ensure compliance. Many boards will be sceptical and will require formal attestations from business leaders.
Who Is Responsible for FATCA Compliance?
Even though it appears to be a simple enough task, where do FATCA and other tax reporting compliance fit into the organisation? The larger multinational financial institutions appear to be struggling to answer these questions. Does FATCA come under the scope of the KYC team, the Tax Team, or Risk and Compliance? Is it a centralised team or a hub-and-spoke structure? The requirement for a single view of the client precludes a purely federated model in which individual businesses are responsible for their own FATCA compliance. What should the governance process look like once a stakeholder is identified? Should the firm have its FATCA/Tax Reporting monitoring role? Is it required to Outsource, Build or Buy an effective FATCA reporting software to seamlessly achieve the expected CRS Compliance mandated by HMRC with critical strategic crossroads?
With decades of technical experience and subject matter expertise in the regulatory space, Macro Global provides financial institutions with the assurance that their CRS reporting activities are handled by a cutting-edge CRS & FATCA Reporting Solution. We have a sophisticated audit tool that will pinpoint all the shortcomings in the CRS data automatically based on the predefined rules rather than manually going one by one. This would save us considerable time and redundancy on either side.
Automate your HMRC CRS & FATCA reporting obligations with ease, Utmost accuracy and stress free.
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Early Adopters and Late Followers – Lessons learnt from their CRS Reporting experience
Early adopters of the Common Reporting Standard (CRS) are evidence that the implementation of CRS compliance comes with challenges. Adopting CRS compliance is time-consuming as a lot of preparatory work is to be done. Financial institutions should adhere to local regulations when classifying and reporting reportable accounts.
Challenges faced by Early Adopters of CRS/FATCA Reporting
Misinterpretation of FATCA & CRS
FATCA and CRS are still being misunderstood and interpreted as two separate pieces of legislation, according to CRS early adopters. Many institutions claim they are FATCA compliant, so they don’t need to be compliant with CRS or they have the same information. These two schemes differ significantly.
Although there are common themes between CRS and FATCA, it is vital to understand that they are not the same, and each has its own set of penalties and requirements. CRS jurisdictions may have their country-specific reporting styles and gateways, whereas FATCA is only for US citizens, whereas CRS is much broad in scope and based on residency.
Late adopters should plan ahead of time to ensure that staff who are already comfortable with FATCA can learn the new CRS requirements. Depending on the circumstances, Financial institutions and entities may be required to file both FATCA and CRS reports in each jurisdiction. In the nutshell, more tasks are to be done for CRS reporting compared to FATCA reporting.
CRS reporting is pretended to be a more complex and unsolidified reporting proposition than FATCA because of the increased volume of reportable accounts to the broader range of tax authorities involved and the limited time to implement the regulatory changes. Thus the challenge to keep up with its requirements is that much greater.
Penalties for non-compliance
Penalties for non-compliance may vary for each jurisdiction. Non-compliance can spoil a company’s reputation and cause customers to lose trust. Global exchange and access to information raise the reputational risks of companies and financial institutions failing to comply, as information become public way quicker than ever before spread globally from day one.
Banks in multiple geo-locations
Early adopters of CRS learned that there is a degree of nuance in which organisations are obligated to report. The massive magnitude of the CRS adds complexity for banking institutions that operates from multiple geo-locations whose clients are spread all over the world.
Exploring multiple tax jurisdictions, handling massively more data reporting volumes than FATCA, and adhering to a relatively high number of data validation rules are just a few of these barriers.
Siloed data are the slippery side of compliance
The legacy reporting systems that support the compliance team in regulatory reporting preparation by pulling data from multiple sources to cobble together an excel report that is prone to errors, omissions, and duplication are the bank’s business challenge. Even though the systems are designed for operational drives and objectives, the data contained within the core system in some shape or form that does not fully comply with regulatory reporting with significant data silos.
The reality is that organisations are frequently confronted with multiple systems that do not communicate with one another, as well as multiple data feeds in various formats, resulting in duplication issues. The massive volume of unstructured data presents a new challenge for compliance teams, as it is difficult to derive accurate data and perform data unification with multiple records for the same person.
With increasing pressure from regulators to achieve high-quality standards and a plethora of emerging regulations in both the prudential risk and business conduct arenas, the financial institutions aspired to streamline the existing regulatory reporting process, which was not standardised, and improve the data quality.
Absence of Solid Data Governance Framework
As organisations have customer data distributed across systems, with multiple database technologies, and different and inconsistent formats, financial institutions have been fighting the battle of poorly integrated customer data.
Various implementation approaches to ensure data consistency across platforms in the past have ranged from enforcing strict policies and the approaches have all failed in the face of increasingly distributed information, inadequate middleware infrastructure, and increased operational costs.
Key takeaways for the Late adopters from the Early adopters
Financial institutions are finding it difficult to manage the existing slew of new and impending rules and regulations, forcing them to develop a more consistent and comprehensive view of all the entities with which they do business. Banks should operate with the intense knowledge that more changes are inevitable and that the timeframe for implementing their own CRS reporting functionalities is now extremely short.
Data integrity has often been a daunting task because organisations can’t analyze until they’ve done the integration, and they can’t do the integration until they’ve done the cleansing, deduping, matching, and enriching. The accuracy of matching customer accounts must be significantly improved, and this process can be hampered if the base name and address data are of poor quality.
As a result, a thorough data cleansing and enrichment process are required in advance. The desire to maintain consistent and high-quality data was a top priority for every financial institution, and it was viewed as a competitive advantage. The use of automated validation routines is one approach to achieving the framework that they should be able to see a cohesive, accurate record of the customer’s details across systems.
The first step for entities looking to implement smooth and efficient classification and reporting is to contact a service provider and discuss applicable requirements. Each entity will have distinct requirements.
There will be difficulties, so stay informed…
Today’s critical business development issue is strategic in both the short and long term, and it must be resolved in accordance with the organization’s strategy. They are usually intertwined with an organisational structure or a business process. The current and future tightness that exists between the tactical and planned approaches should not be a source of concern for business. Both must be represented in a strategic plan while remaining realistic in addressing the business’s immediate needs.
A good strategic plan forces everyone out of their comfort zones, methodically challenges their assumptions, and employs an unbiased approach to find the best strategy that supports the organization’s mission and objectives, as well as desired outcomes and metrics for measuring the goals. In most cases and key challenges, identifying and concentrating on business development issues is the best course of action.
Observing the difficulties that SME banks face in re-engineering their operational processes and keeping up with the trends in the regulatory landscape expansion, Macro Global saw an opportunity to provide a compliance platform to assist SME banks in processing reporting requirements with greater agility.
CRS Stride addresses the challenges of efficient regulatory change compliance management through intuitive integration of impacted controls and processes mandated for CRS reporting. Our cloud-based solution is intended to meet CRS compliance obligations in the most cost-effective manner possible, thereby reducing operational impediments. CRS Stride simplifies and lowers the cost of compliance by automating the reporting process and effectively managing data issues via our optimised business rule engine. Data issues are thrown back for easy correction after being validated against the HMRC reporting criteria.
CRS Stride consolidates, validates, and enriches data in real-time, improving data integrity and reporting accuracy. Our solution enables financial institutions to easily unlock value and manage regulatory compliance, allowing them to focus on their core business rather than going around in circles.
If you require advice from our expert team, who understands your industry better than our competitors? If you’re curious about how we transformed businesses by leveraging our unrivalled industry and domain expertise, read on.
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Key Practical Aspects of OECD Common Reporting Standard (CRS)
The Common Reporting Standard (CRS), developed in response to a G20 request and approved by the Organization for Economic Cooperation and Development (OECD) Council on 15 July 2014 as a global standard for the Automatic Exchange Of Information (AEOI), requires jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.
The Standard is made up of four major components:
- A model Competent Authority Agreement (CAA) establishes the international legal framework for the automatic exchange of CRS information
- The Common Reporting Standard (CRS)
- Commentaries on the CAA and CRS
- The User Guide for the CRS XML Schema
It applies to all countries that have signed on to the CRS and incorporated it into their domestic legislation. Over a hundred countries have signed on so far, and the list is still growing. As of October 2021, over 4500 bilateral exchange relationships had been activated concerning more than 110 CRS-committed jurisdictions, The list of countries participating in the CRS is available at http://www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process.
The OECD lists forty-plus “developing” countries that have not yet signed on to CRS. With 196 sovereign countries and non-sovereign territories (such as Anguilla or the Cayman Islands), there are a few jurisdictions that aren’t on either list.
CRS requires Financial Institutions (FIs) located in a CRS-compliant country to identify non-resident clients and report them to their local tax administrations in a CRS-compliant country.
It specifies that financial institutions must report the various types of accounts and taxpayers covered, and the common due diligence procedures that financial institutions must follow. Financial institutions will be required to provide HMRC with information on anyone who owns foreign investments and appears to be a UK resident, such as by having a UK postal address. Certain clients will be required to be notified by financial institutions and certain relevant persons, including professional businesses providing tax advice.
The implementation of automatic information exchange is based on the following actions:
- Account-holders who must declare their tax residence to determine whether or not they are considered “non-residents” via self-certification in the following cases:
- for any new account or subscription of CRS-eligible products for an existing client, provided that this client does not already have a valid self-certification
- for any change in circumstances that has a tax impact.
- Financial institutions that must report annually to their local tax authority on “non-resident” clients’ account balances and financial income paid to them during the year
- The tax authorities of the participating countries should share this information with the tax authorities of the account holders who are the subject of this declaration for tax purposes.
Account holders who didn’t provide the CRS-required information will be reported “undocumented” by their regional tax authorities and will face legal consequences as per local law.
The Common Reporting Standard (CRS) and its Implications for the Financial Services Industry
Financial Institutions must report their income and expenditures to their jurisdiction’s governing body under the CRS, but there are some exceptions. Financial Institutions are defined by the CRS as:
- Custodial Institutions
- Banks
- Asset/Wealth Managers
- Investment Trades
- Investment Entities
- Depository Institutions
What are the challenges faced by the financial institutions in CRS reporting?
Achieving the regulatory compliance mandate is time-dependent and involves operational risk due to manual data scrubbing. Manual validation causes are results in error-prone and require additional investigation from the Regulator prompting questions and enquiries over the operational efficiency of the business and the data which lead to reputational risk.
Further, as the new compliance processes require more granularity around the reportable data, FIs with their legacy operational approach find it hard to produce data that is fully compliant with HMRC FATCA & CRS reporting guidelines.
Identification and Classification of the Reportable Accounts
The existing customer onboarding process involves manual interaction and the data received from the customer during this onboarding process may not be adequate to identify and classify the CRS reportable accounts. Hence the banks and financial institutions must perform exhaustive data cleaning processes to make their customer data fully compliant with HMRC CRS guidelines, which is a time-consuming and tedious process.
Impact on Data Quality due Data Silos
Data quality is one of the main challenges in any regulatory reporting as the legacy technologies or the manual operational approach results in data inaccuracies, data gaps, inconsistent taxonomies & consolidation of entities that affects the accuracy of the CRS reporting and increase the operational risk. Multiple systems are to be integrated to collate and aggregate the data that is required for CRS reporting which is a challenging and complex task considering the IT architecture and the scalability of the financial institutions. Implementing a solid FATCA/CRS solution can save your life.
Compliant to HMRC CRS Reporting Schema
Reportable banks and financial institutions must have improved systems in place to monitor and assess capital-market transactions for potential withholding and reporting. This demands the deployment of a relevant reporting schema to capture additional data, which is a difficult task that requires a comprehensive understanding of CRS & FATCA requirements and the related taxonomy.
Inadequate operational efficiency
Typically, data is distributed across variety of products and geographical data sources. It is critical to synchronise data from various departments to make the necessary decisions concerning account holders. Only a few institutions accomplish error-free reporting by adopting effective FATCA/CRS solutions that address the issue.
Short deadlines and a lack of trained resources
FATCA/CRS regulatory reporting is a comprehensive regulation. Because of the critical tasks and strict deadlines for report submission, employees of reportable institutions may not have complete knowledge of these ever-changing regulations. As a result, banks and financial institutions may seek an external solution to assist in interpreting the regulation and identifying its impact on the business process to file the report on time and without error.
New Amendments in CRS
In 2017, the OECD published a new guidance called “Mandatory Disclosure Rules” for Combating CRS Avoidance Arrangements and Offshore Procedures. It considered,
- Will the additional reporting obligations reduce cross-border tax evasion?
- Preserving the protections offered by legal professional privilege while shifting the reporting obligation to the taxpayer in cases where arrangements are covered by privilege.
Following this, the OECD issued new Model disclosure rules in March 2018, requiring intermediaries such as lawyers, accountants, financial advisors, banks, and other service providers to notify tax authorities of any schemes they put in place for their clients (as promoters or service providers) to avoid reporting under the CRS or to conceal beneficial owners of offshore entities or trusts.
CRS Regulatory Reporting Requirements
From 2017 onwards, Crown Dependencies and Overseas Territories started reporting to their tax authorities.
In the UK, HMRC oversees CRS implementation within each reporting FI located in a country that has recently signed or is planning to sign the CRS soon.
To promote tax transparency, HMRC commits to fulfilling all its CRS obligations following the principles outlined in its Tax Code of Conduct. Below is the key information which should be shared with HRMC:
- Personal identification information, such as name, address, and date of birth;
- Bank account numbers
- End-of-financial-year balances and valuations
- Interest earned
- Earnings from asset sales
The information on remittance basis users will be included in the reports, which is likely to be of particular interest to HMRC.
Individuals with assets in other countries should ensure that their affairs are compliant; if they are, they will have peace of mind. In any case, making a prompted disclosure is preferable to awaiting an HMRC challenge.
Banks are not required to notify their clients that their information may or may not be disclosed to tax authorities in other CRS member countries.
What are major shifts to look out for?
“Tax authorities now have a new and very powerful tool to track and combat tax evasion with the CRS.”
The success of the CRS is determined by how strictly the FIs implement the CRS procedures to procure the correct data which is compliant with OECD guidelines. Its impact will be felt over time once respective governments generate more revenue and tax collection. At the same time, multinational corporations are taking advantage of the CRS to improve their business models and data quality and analytics capabilities.
Internal Procedures and Procedures – Because CRS aims to achieve global tax compliance, it will have an impact on due diligence processes as well as product and entity classification. It will also have an impact on data collection, data quality assessment, and exchange readiness, as well as the implementation of specific reporting procedures. Each jurisdiction will be closely scrutinised to ensure compliance with the law.
Embracing new technologies – Financial institutions are working hard to improve their existing data capture, KYC validation, and due diligence checks while onboarding customers by leveraging innovative technologies such as Artificial Intelligence, Behavioural Biometrics, and Machine Learning.
Digital Customer Onboarding – Banks adopt to Digital customer onboarding process. By aggregating the customers’ data and making the process smoother or even effortless, Digital Customer Onboarding improves the customer experience with intuitive navigation. Digital customer onboarding platforms like Pera provides dependable online identification services that assist banks in quickly verifying customer data and thus expediting customer access to banking products and services.
Privacy – CRS requirements must be included in financial institutions’ data protection terms to explain why CRS collects client data.
Final Thoughts
When tax evasion was discovered by authorities in the past, many authorities lacked the resources to prosecute offenders. Today, however, technology is easing the resource burden by allowing governments to more easily review CRS data provided by foreign counterparts and match it to taxpayers in their own countries.
Financial Institutions are proactive and think and act holistically about tax, onboarding, data, and using technology to automate manual processes are at an advantage. More accurate data and information technologies will help governments pinpoint and reduce tax evasion more effectively.
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References:
https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/
https://www.societegenerale.com/en/societe-generale-group/ethics-and-compliance/common-reporting-standard-csr
