Due to so called “2nd order effects” the impact of FATCA on the distribution of financial products is expected to be more significant than initially considered.

I believe that the critical elements of a so called “product assessment” are not yet appropriately understood by all participants of the financial market and an in-depth review of the income streams related to the withholding agent function is executed instead. In our view this will be a critically affected area on top of customer on-boarding process and back-book remediation work to be carried out by the financial institutions; this could even become a business case (e.g. if you manage private labeled funds).

Aside the obvious impact on products, if a Foreign Financial Institution is not participating under the FATCA regime, FATCA has a significant impact on your own issued, structured and distributed products due to a 2nd order effect that was initially not appropriately identified in several FATCA projects we have the pleasure to support. The objective of the „real” product assessment is to determine risks (2nd order effect) along the distribution and composition of products where potentially a 30% withholding might apply going forward. E.g. if you issue a fund and use a custodian that is not a participating FFI, your fund will loose 30% on each sale in U.S. assets executed by this custodian as the counterparty (a participating FFI) sees the custodian as its own counterparty and will accordingly withhold the tax.

For more information about FATCA, check out our FATCA Competence Center