For those not quite up to speed, EUSD stands for the European Union Savings Directive and it impacts just about all financial services firms who act as collecting or paying agents in capital markets within the European Union. These paying agents – including banks, building societies, corporations issuing bonds that pay interest on certain instruments – will be required to deliver information on the interest payments made for each customer to the authorities of the EU member states where the investor resides (such as the Inland Revenue in the U.K.).
The aim of the directive is to create an efficient web of information on investor’s offshore holdings, which is then reported to the Inland Revenue to prevent tax avoidance. The avoidance of taxes for offshore investments has been practised by many financial services firms for years, but has almost been impossible for the authorities to detect and collect under existing market directives and rules. From the 1st July 2005 deadline this will change forever.
In order to deliver the right information to the authorities, institutions have to recode data and ensure they have the ability to extract and deliver it for both reporting and use within internal systems. Unfortunately the indications are that many financial services firms and other agencies are still not technically able to capture the relevant data today or to collect it retrospectively when the directive becomes enforceable in the U.K. by the Inland Revenue.
The UK market is the largest international capital market and has long been a beneficiary of tax avoidance by international investors and in the past foreign investors and traders have flocked to London to deal in foreign securities. Not surprisingly the rest of the European markets have been envious and are now are looking to level the playing field. The EUSD is a vital and significant change to the long term future of the European capital markets and is a lynchpin part of the move towards a harmonised single European capital market.
The market position
As we know, the pace of new regulations and directives shows no signs of slowing down. Let no one be under any illusion that strong market lobbying will slow or stop EUSD! The UK, along with Sweden, are ahead of the game regarding the consultation and legislation, if not user preparation.
The reports about an investor’s offshore holdings to the Inland Revenue by the paying and collecting agents are due in April 2006. That should really worry all brokers offering a custody service, the custodians themselves, and any other form of collecting agency for offshore holdings. Other members of the European Union have a further six months grace before they are required to report, due to the year ending December 2006.
Penalties will be in the form of fines of up to £3,000 per client holding for either misreported or not reported data. It is likely that an example will be made of the firms that fail. A severe penalty based on a small nominee could effectively drive the broker out of business – a high a risk to take.
There are a number of solutions already available in the market place and it is a clear opportunity for the software and data vendors to gain new clients and sales. Software houses such as Rhyme Systems and AIM Software, as well as vendors like FT Interactive Data, Telekurs Financial and Reuters have been working to adapt their services to help clients achieve compliance with the directive.
What to do?
If you’re not already collecting data on offshore client holdings already, you may be struggling to catch up by April. It is obviously possible to collect data retrospectively, but the longer it is left the harder it will become and the more errors are likely. Quite frankly, the thought of retrospective collection of data fills me with dread as the cost and potential penalties could be high. The recommendation is to begin collecting data immediately.
A number of the market leading consultants, plus a number of software vendors estimate that a standard project to comply with EUSD, from beginning to end, is about six months. My maths tells me that if firms have not already started they will be in grave danger of incurring fines from the Inland Revenue next year.
One further point that is worth considering is that EUSD database changes are similar to those that are going to be affected by the looming MiFID (Markets in Financial Instruments Directive) directives in May 2007. It may be too early to create a merged project to do both, but it is possible that with MiFID in mind some benefit could be gained with a more holistic approach?
Remember that EUSD is already here and is not going away and the Inland Revenue will not be taking prisoners. You are strongly urged to talk to your systems and data suppliers immediately.