A number of private banks in Asia Pacific have made it public that they are turning prospective US clients away, deterred by the compliance burden of the soon to be effective FATCA. Conversely, some global funds that hold small positions in US securities for hedging purposes are weighing up the cost-efficiency of US exposure if they are subject to a 30% withholding tax.
According to Bloomberg, HSBC, Deutsche Bank, DBS, and the private banking subsidiary of OCBC, Bank of Singapore, have already turned a number of US clients away, citing the increased burden of tax compliance and the cost it entails. In February 2012, the US Treasury and the Inland Revenue Service (IRS) issued the proposed framework for how the Foreign Account Tax Compliance Act (FATCA) would be regulated after consulting the industry on the proposals issued in the "Notices" in 2010 and 2011. In attempting to clarify which entities are subject to the FATCA, the proposed regulations have increased the burden for foreign financial institutions (FFIs) by increasing the complexity of what is and what is not deemed compliant.
By turning clients away to avoid costly compliance programs, US investors will have fewer options to invest overseas, and cross-border investment may be restricted. Some respite was perhaps seen in the "joint statements" that were announced by the US, France, Italy, Germany, Spain, and the UK, which looked to develop domestic reporting and automatic exchange of information in response to local privacy law conflicts. However, uncertainty still remains as to how such a system can be implemented without further increasing compliance for global firms operating in multiple jurisdictions with different privacy laws.
Investment into the US is also under threat. Concern is growing in the asset management industry that holding a small position in US securities in a global fund that will subsequently be subject to the FATCA is not cost-effective. The FATCA aims to impose a withholding tax on any US sourced fixed, determinable, annual, or periodical income or gross proceeds from the sale of securities. The result could be an increased shift away from US investment to negate costly FATCA compliancy, as in order to avoid the withholding tax FFIs must meet the reporting and disclosure requirements of the initiative. A rule has been proposed in letters to the IRS whereby a de minimis level is set for investment exposure to the US under which FATCA compliance is not necessary. However, in the February 2012 update, such a rule was not addressed.
The group of private banks and wealth managers beginning to turn away US clients are creating a precedent that will further exacerbate the international banking demands of wealthy US individuals. Swiss banks are already just as reluctant to onboard new US clients, and if Asian banks present in Singapore and Hong Kong (where ex-Swiss assets have commonly been transferred to) also begin to deny US clients, the FATCA may well achieve its aim of reducing offshore tax avoidance. However, it will also cut off the supply of investment money from the largest economy in the world.
According to Datamonitor's Americas Wealth Markets Database (January 2012, CM00144-002), there are 655,000 individuals in the US with over $3m in onshore liquid assets, representing a total of $5,846.8bn. Some global wealth managers may not ultimately be able to resist the large customer and asset pool from the US, but for those with few US customers, divesting their funds and investment portfolios of US exposure may still be an option.
For further details please contact Edward Felmingham at efelmingham@datamonitor.com.