What will the compliance landscape look like for fund firms in 2020? The accountancy firm of PricewaterhouseCoopers believes that it has the answer.

As more and more governmental work is foisted on private institutions almost daily, PwC presents a bleak picture of asset management firms' compliance obligations in the future, especially in the sphere of client surveillance. In a weighty 32-page report released this week it predicts that tax authorities will have direct access to asset managers’ IT platforms and that the way in which every firm offsets 'tax risk' will be a crucial factor in its competitiveness.

PwC states: "Tax will be a key operational and business activity, requiring specialist resources, a new approach, and integration into front and middle office activities – including data reporting, product development, distribution and brand strategy. Tax and reputation will be inseparable concepts. Tax will now (i.e. in future) be viewed as an operational risk, joining the ranks of other key risks which senior management takes a keen interest in [sic]. It will become a competitive advantage or disadvantage."

Total transparency of investor residency and identity will be the norm, according to PwC, which adds that regulators will expect nothing less. PwC and other 'Big 4' accountancy firms like to embed or 'second' staff at regulatory organisations, the better to know what they are thinking and planning.

Offshore disadvantages

Through political pressure, demand from investors and regulatory change, PwC expects many offshore financial centre to move onshore into a range of new registered products as jurisdictions and regional blocks continue to compete to offer attractive investment vehicles for cross-border and domestic investment. Many of these onshore vehicles, it believes, will themselves be exempt from tax. They also might obtain double-tax-treaty access and suffer no withholding tax on distributions or redemptions. This is because PwC expects countries to continue to compete to attract vital inward investment. New specialist platform investment products such as securitisation regimes and real estate investment trust (REIT) funds will, it thinks, be created as part of this competitive landscape, making product design and fund structuring more complex.

The report goes on: "As new cross-border distribution hubs have developed, such as the Asian passport regime, managers will increasingly be required by local regulators to have real substance and a local presence in each of their overseas territories. In order to be able to distribute widely, ‘boots on the ground’ will be required, including local distribution teams, local fund managers and local tax and regulatory experts. In addition, local regulators will often require regulatory capital to be held locally, leading to cross-border funding and interest deductibility issues for global asset managers.

"The most tangible change will be where fund managers domicile their products and their employees. Investment firms will have revisited how they operate and have established new guidelines for their staff. Many previously unregulated products will have opted for the tax certainty of regulated status."

Tax just another op risk

Here the report theorises: "By 2020 and beyond, tax will be just another operational business risk in the same way that valuation and regulatory reporting came to be viewed as operational business risks years before. Control reports over outsourced services by custodians, administrators and transfer agents will routinely include tax risk management and governance as a core control objective."

By 2020, the beancounters predict, non-bank finance will no longer be in the shadows. They believe that 'pressure' from regulators and from demands on regulatory capital will inspire banks and insurers to retreat to their 'core businesses.' They expect asset managers, by that stage, to be providing a far broader set of products than they do today, dominating a range of products and activities that include:
•  pension and lifetime savings products;
•  corporate financing, such as direct lending, trade receivables and invoice factoring;
•  distressed assets and commodities;
•  peer-to-peer lending and crowd-funding;
•  infrastructure funding; and
•  money-market strategies.
As a result, by 2020 and beyond, economies of scale will become paramount and a new breed of mega-manager will have emerged and will be involved in all parts of the globe and all distribution channels.

Us watching you watching us watching you

Surveillance of high-net-worth individuals is bound to increase, according to the report: "Access to records is not an issue: tax authorities will have direct access to asset managers’ IT platforms. This started with VAT (SAF-T)3 and quickly became a global standard. As yet, only some global businesses are subject to perpetual tax audits across the globe by their home tax authority, with co-ordinated assistance from local tax authorities."

In the future, all investment activity will be reported in some way by a counter-party, financial intermediary, fintech provider or broker. Tax authorities will access such data from regulators and market operators as a matter of routine and will be able to test these new non-bank financial investment areas for compliance with transaction taxes, withholding taxes and self-assessment capital gains taxes practically at will.

PwC expects people at asset management firms to respond to far greater scrutiny one more than one level. First, the huge increase in the volume of tax reporting will cost asset management tax teams plenty of money. By 2020 many firms will be focusing on their tax-related costs and will be keen to extract more from existing resources. This places an emphasis on the use of technology to increase efficiency, tighten up compliance procedures and avoid regulatory penalties (the report predicts that these are destined to mushroom).

Regulators in most jurisdictions will have the technology, but not always the necessary authority, to make demands for information such as the submission of travel data for key investment firm executives. Some asset managers will probably decide to suck up to those regulators by providing information of this sort before they are asked. The exchange of information between tax authorities will be no longer limited to the groupings of jurisdictions that we know today (e.g. the European Union, the 'Group of 20' industrialised nations, the United States); instead, countries will be forming their own clusters to exchange a variety of tax-related information with one another.

Although in the last few years asset managers have tried to aggregate investors into fewer fund products in order to manage costs, in the next five years PwC expects that more funds and specific products will be required to serve the regulatory and tax-related needs of different investor groups (institutional, private, banks, insurance companies and retail). This is particularly likely in Europe where the removal of distribution-linked fees under the European Union's second Market in Financial Instruments Directive (MiFID II) is bound, in their eyes, to lead to an explosion of differently priced share classes. Although costs will rise, so the accountants think, so too will after-tax yields on funds, pleasing clients and helping funds keep ahold of those clients.

The tax function in 2020 and beyond: when book-keepers wax lyrical

Let us leave the final word about coming regulatory and tax-related developments to the beancounters at PwC as they paint their picture of the world in 2020. In this "shopping list from the future" they describe that world as they expect it to be from the point of view of the tax function at a fund firm reporting to its board.

Legislative/Regulatory

•  Global tax information reporting requirements such as BEPS and similar transparency initiatives have grown exponentially and now have a material impact on the operations. This has meant wholescale budget reallocation within the tax function.
•  The tax function is now exposed directly to regulators, which demands transparency regarding global taxation and to public stakeholders. This requires us in the tax function to communicate clearly and thoughtfully about our corporate contribution to the communities in which we invest and do business.
•  Information sharing is commonplace among taxing jurisdictions, and taxing authorities have the capability to mine data and conduct global audits, resulting in increased disputes. This means we deal with many more enquiries from authorities. The focus on reviewing data and ensuring data quality before it is made available to the authorities has become considerably more intense compared with 2015.

Risk and governance

•  Many jurisdictions legislatively require the adoption of a tax control framework which follows guidelines similar to Sarbanes-Oxley and COSO (Committee of Sponsoring Organizations of the Treadway Commission). The onus on our tax function has been to implement these frameworks and ensure they respect local rules and guidelines.

Process

•  Most global tax preparatory compliance and reporting activities, including data collection and reconciliations, are now performed within our shared service centre.

Other companies achieve this through cosourcing with a third party, which is equally viable.
•  Our company views tax as an operational risk and we carry out regular risk management analysis.
•  As you know, we provide regular reporting of key tax risks to the CFO, the COO and you, the members of the board.
•  We use real-time collaboration tools to automate workflow, document management, calendaring and internal controls.

People

•  Our tax professionals as a group are highly proficient in data analysis, statistics and technology, as well as process improvement and change management.