During the past 10 years, the banking and asset management sectors have gone through a restructuring phase, following the 2008 financial crisis which prompted major banking groups to redefine their strategies. As is well known, a huge increase in regulatory and tax compliance obligations followed the crisis, affecting banks and investment managers heavily.

In the same period, however—and not at all accidentally—the digital transformation reached a new stage of maturity, enabling new efficiencies and creating new channels to the market. Historically, tax practices and tax reporting in particular have been low-tech and paper-based, but no longer: digitalised operational tax compliance has seen to that. “Operational tax” broadly covers withholding tax (WHT), transactional taxes, and compliance obligations (due diligence and tax/investor reporting). Compliance officers today can now rely on regtech products and services, which come generally in three varieties:

  • Quantitative regtechs, which are built to handle huge data sets. They are useful, for instance, for fulfilling periodic reporting obligations regarding investors or account holders.
  • Process-centric regtechs, which improve or redefine a particular process. They can, for example, enhance client on-boarding processes, or solidify internal controls or governance frameworks.
  • Pure regulatory regtechs, which focus on identifying new regulations and monitoring changes. As regulations thicken and existing regulations quicken, such automated tracking systems are essential.

As outlined in my last article, many large banking institutions have adopted IT solutions that can handle a huge volume of transactions to meet local and international tax compliance challenges. In the future, however, all financial institutions—regardless of size and number of transactions— will need some form of IT tool. Hot on the market currently, in the field of IT-enabled compliance tools, are:

  • healthchecks or standardised reviews of compliance that use proprietary e-tools
  • reporting engines that can automatically generate XML files for tax authorities
  • e-learning modules on documentation, withholding, and reporting requirements
  • entity classification tools (based on sets of tax technical questions and industry guidelines) that can determine the most appropriate FATCA/CRS status
  • AEoI trackers to help regulatory monitoring and provide FATCA/CRS status in multiple jurisdictions with regard to deadlines, reporting formats, submission portals, etc.
  • WHT validation tools that can be used pre- or post-investment to assess whether the rates applied by custodians are correct, given the characteristics of the investor or income

In a nutshell, to remain relevant in the long run, financial organisations should gradually embrace the digital transformation and study today the tools of tomorrow.