Regulatory Intelligence Newsletter #4

Editorial

Dear reader,

I am pleased to provide you with our January regulatory newsletter which includes a comprehensive focus on the latest developments of FATCA regulations. The final regulations address many of the major items which required further clarification following the proposed regulations issued last year. Since February 2012, the U.S. Treasury has collaborated with several foreign governments to develop model intergovernmental agreements that facilitate implementing FATCA. Norway has just joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is presently engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion and additional signed agreements are expected in the short term. FATCA is part of what we could call the “regulatory cloud” which is continuously moving over financial industry with a global impact on organizations and activities.

Fabrice Lepeltier

Focus on...

FATCA

• Background on FATCA:

• The Foreign Account Tax Compliance Act (“FATCA”) is an American tax regulation passed into US law on Mar. 18th 2010 as part of the Hiring Incentives to Restore Employment (HIRE) act and is intended to counter tax evasion due to offshore abuses
• FATCA is intended to increase transparency for the Internal Revenue Service (IRS) on US accounts i.e. accounts held by Specified US Persons or US Owned Foreign Entity (Entity having US Substantial Owners who are owners holding 10% of the capital or more).
• A Foreign Financial Institutions (FFI) that is not FATCA exempted has to enter into a FFI agreement with the IRS in order to become a “Participating FFI” (PFFI) and will therefore have to answer FATCA requirements. An FFI that does not enter into an agreement with the IRS is referred to as a “Non-Participating FFI” (NPFFI) and will be subject to a 30% withholding
•  The scope of this new regulation is worldwide
• This new regime will coexist with that of Qualified intermediaries established in 2001

   

  • FATCA implementation process:

   

• FATCA implementation process with intergovernmental approach:

  – On Jul. 26th 2012, the U.S. Department of Treasury as well as the Treasury Departments of France, Germany, Spain, Italy and the UK ("G5 countries") released a model intergovernmental agreement ("Model IGA") for implementing the broad ranging provisions of FATCA.

  – It relies on the automatic exchange of information between countries and is intended to be a long-term solution for local law restrictions that would have prevented compliance with an FFI agreement.

  – The IGA Model provides a framework for the approach that should be followed as each country works to negotiate a bilateral intergovernmental agreement with the U.S.

  – Countries that chose to enter into such bilateral agreements would be deemed "FATCA Partners". Once these bilateral agreements have been entered into, each FATCA Partner country would need to enact legislation in order for the provisions of the agreement to govern financial institutions within their respective jurisdictions.

  

• FATCA Timeline: the final regulations adopt the timeline for the implementation of FATCA that the IRS previously set forth in Announcement 2012-42, specifically: 

  – Withholding on gross proceeds from the disposition of property that can produce U.S. source interest or dividends will be imposed only with respect to payments made on or after Jan. 1st 2017.

  – The deadline for withholding agents (including participating and registered deemed compliant FFIs) to implement verification procedures under FATCA is Jan. 1st 2014.

  – The deadline for withholding agents and FFIs to verify the identity of account holders and payees is Jun. 30th 2014 for prima facie FFIs and Dec. 31st 2015 for other account holders and payees. Accordingly, FATCA withholding will not be required to be imposed by withholding agents on such accounts prior to Jul. 1st 2014 and Jan. 1th 2016, respectively.

  – The deadline for an FFI to file FATCA information reports with the IRS with respect to 2013 and 2014 calendar years has been extended to Mar. 31st 2015.

• FATCA Updates:

    On Jan. 17th 2013, the Treasury Department ("Treasury") and the Internal Revenue Service ("IRS") have released  final regulations with respect to the Foreign Account Tax Compliance Act ("FATCA"). The final regulations largely follow the proposed regulation published in Feb. 2012. This update describe at a high level some of the notable differences between the proposed regulations and the final regulations:

• Grandfather Date Extended to Jan. 1st 2014

    The final regulations extend the grandfather date for obligations excepted from the requirements of FATCA from Jan. 1st 2013 to Jan. 1st 2014. The final regulations also provide that the grandfather date for obligations giving rise to foreign passthru payments or dividend equivalents under Section 871(m) will be the date six months following the date on which final regulations regarding those types of payments are published. In addition, the final regulations treat as grandfathered an obligation of a secured party to make a payment with respect to collateral securing a grandfathered obligation.

• Coordination with Intergovernmental Agreements

    The IRS has released two models for intergovernmental agreements ("IGAs") under FATCA. Under the Model 1 IGA, an FFI reports information to the tax authority in its own jurisdiction rather than the IRS. Under the  Model 2 IGA, an FFI must report directly to the IRS. FFIs covered by the Model 1 IGA are not required to follow the final regulations, but FFIs covered by the Model 2 IGA are required to follow the final regulations except to the extent expressly modified by the Model 2 IGA.

• New Categories for Excepted, Deemed-Compliant Entities

    The final regulations revise the requirements for certain foreign entities to be excepted from treatment as FFIs or to be treated as deemed compliant FFIs. In addition, the final regulations provide new categories of entities excepted from treatment as FFIs for entities that previously qualified as active nonfinancial foreign entities ("NFFEs") but that are changing their business and for certain passive investment entities that are not professionally managed. The final regulations also create new categories of deemed-compliant FFIs for certain credit card issuers, sponsored investment vehicles for which a sponsor agrees to fulfill the reporting requirements, and limited life debt investment entities. The new category for limited life debt investment entities is transitional through Dec. 31th 2016 and applies only to entities that were in existence as of Dec. 31th 2011. The new category for limited life debt investment entities appears to be intended to include vehicles such as CLOs and CDOs; however, the final regulations impose requirements that many CLOs and CDOs may not be able to meet.

• New Rules for Insurance Contracts and Companies

    The final regulations clarify the circumstances in which insurance companies will be treated as FFIs and when insurance contracts will be treated as financial accounts subject to reporting or withholding under FATCA. Generally, an insurance company will be treated as an FFI only if the insurance company or an affiliate issues cash value insurance contracts or annuity contracts, and such contracts will be treated as financial accounts under FATCA. 

• Registration Through Electronic Portal

    The IRS intends to publish a revenue procedure establishing an electronic web portal through which FFIs will register, enter into their FATCA agreements with the IRS and submit information to the IRS. 

Detailed Provisions on Withholding, Compliance

  The final regulations contain detailed provisions on the withholding, diligence and reporting responsibilities of withholding agents and FFIs under FATCA.

Updates

Market Abuse Directive (MAD)

• Reminder: The European Market Abuse Directive (2003/6/EC ) was published on Apr. 12th 2003 and transposed in national law in Oct. 2004. It aims at increasing investor confidence and market integrity by prohibiting those who possess inside information from trading in related financial instruments ("insider trading"), and by prohibiting the manipulation of markets through practices such as spreading false information or rumors and conducting trades that result in abnormal prices ("market manipulation"). It was amended twice with 2008/26/EC and 2010/78/EU Directives. On Jul. 25th 2012 the European Commission adopted amended proposals for a Regulation and for a Ü Directive to prohibit and criminalise manipulation of benchmarks highlighted by the LIBOR scandal.
• News: European Justice Ministers agreed on Dec. 7th 2012 Commission proposals for a directive on insider dealing and market manipulation that will criminalise such behaviour.

 

Anti-Money Laundering Directive (AML) - Counter-Terrorism Financing (CTF) - E-Money Directive

• Reminder:

  – The European 3rd Anti Money Laundering (AML) Directive (2005/60/EC) was published on Oct. 26th 2005 and transposed in national law in Jan. 2009. It provided a common EU basis for implementation the revised FATD recommendations on Money Laundering, reinforced customer due diligence provisions and recognized risk-based approach to anti-money laundering, took into account new risks and practices, introduced more obligations to have systems for AML risk management and compliance.

  – The European 2nd E-Money Directive ( 2009/110/EC) was published on Sep. 16th 2009. Its transposition in national law is under negotiation. It aims at enabling new, innovative and secure electronic money services to be designed, providing market access to new companies, fostering real and effective competition between all market participants.

News: Joint Committee of the European Supervisory Authorities (EBA, ESMA and EIOPA) published on Dec. 7th 2012 a  report on the application of AML/CTF obligations, and the AML/CTF supervision of e-money issuers, agents and distributors in Europe.

 

European Market Infrastructure Regulation (EMIR)

• Reminder: On Jul. 4th 2012, the European Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (Regulation (EU)  No 648/2012) was adopted and entered into force on Aug. 16th 2012.

• News:

  – On Dec. 19th 2012, the European Commission adopted nine regulatory and implementing  technical standards to complement the obligations defined under the European Market Infrastructure Regulation.

  – ESMA has published a  guide to EMIR for non-financial firms entering into derivative contracts.

• Timing:

  – Although EMIR came into force on Aug. 16th 2012, full implementation requires the EU Commission to adopt around 20 sets of technical standards.

  – Estimated dates of EMIR implementation timetable:

  Operational risk management of non-cleared OTC derivatives: middle 2013.

  Trade Repositories recognized, reporting obligation applied: Jul. 1st 2013 for credit and interest rate derivatives, Jan. 1st 2014 for all other classes.

  CCPs Authorized and clearing obligation applied: middle 2013 .

  Collateral posting for non-cleared trades: consultation stage likely to be during first half of 2013.

   

  Life insurance contracts commercialization – Policy holder information collection

• Reminder: According to article  L. 132-27-1 of Insurance Code, for life insurance contracts sold without an intermediary, Insurance companies must collect information about policy holder finance knowledge and experience, notably his financial situation and objectives, to be able to detail his requirements, needs and motivations justifying provided advice related to a specific contract.

   

• News: The Autorité de Contrôle Prudentiel (ACP) published on Jan. 8th 2013 its Recommendation (2013-R-01) on customer knowledge information collection as part of life insurance advice duty.

   

• Timing: Implementation scheduled on Oct. 1st 2013

   

  CRD4 - EU response to Basel III

• Reminder: Basel III is a new global standard on bank capital adequacy and liquidity. It was agreed by members of the Basel Committee on Banking Supervision in Dec. 2010. CRD4 Directive is European interpretation and transposition of Basel III requirementsconcerning all credit and investment companies.It aims at establishing:

  – Stronger bank capital requirements (new solvency ratios)

  – New regulatory requirements for:liquidity: enforced basic principles of liquidity risk management, new ratios follow-up (Liquidity Coverage Ratio (LCR)and Net Stable Funding Ratio(NSFR)),

  bank leverage: enforcement of a floor under the build-up of leverage, non-risk based leverage ratio,major risks monitoring, governance including remuneration policies,

  enhanced disclosures to authorities.

• News: On Jan. 7th 2013, the Basel Committee on Banking Supervision (BCBS) issued the full text of the Ü revisedLiquidity Coverage Ratio (LCR).

   

Key changes:

– LCR implementation is delayed from 2015 to 2019. Banks will only need to meet 60% of the requirements by 2015 (the previous start date), after which requirements will increase 10% each year until 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

– Range of High Quality Liquid Assets (HQLA) is expanded by including Level 2B assets, subject to higher haircuts and a limit.

– Changes to the assumptions as to cash outflows and inflows were adopted ‘to reflect better experience in times of stress’.

– A clarification that it is expected that supervisors will permit the use of the liquidity buffer in times of stress i.e. banks will be allowed to use the buffer, and thus fall below the minimum ratio, in a liquidity stress scenario.

 

Solvency II – European Insurance Regulation

• Reminder: The Solvency II Directive ( 2009/138/EC) aims to take into account current developments in insurance, risk management and international financial reporting and prudential standards, streamline the way that insurance groups are supervised, recognize the economic reality of how groups operate, strengthen the power of the group supervisor (ensuring that group-wide risks are not overlooked) and ensure greater cooperation between European regulators. As part of the preparation for Solvency II, national competent authorities should put in place, starting on Jan. 1st 2014, certain important aspects of the prospective and risk based supervisory approach.

   

• News:

  – European Insurance and Occupational Pensions Authority (EIOPA) published on Dec. 20th 2012 an  Opinion on interim measures regarding Solvency II.

  – EIOPA will issue Guidelines addressed to national supervisors on how to proceed in the interim phase leading up to Solvency II. These Guidelines will cover the system of governance, including risk management system and a forward looking assessment of the undertaking's own risks (based on the ORSA principles), pre-application of internal models, and reporting to supervisors.

  Contact : Adlen Bouchenafa