Family Wealth Report recently spoke to Northern Trust about the Common Reporting Standard, and its impact on the private wealth management sector.

A recent study found that many financial institutions are dragging their feet on preparing for the incoming Common Reporting Standard, due in part to confusion over certain elements of the legislation and what has been described as “FATCA fatigue.”

But while there has been much industry focus on the impact of the CRS on institutions, primarily with regards to the cost (in time and money) of compliance and implementation of necessary technology, wealthy families are equally concerned because of the legislation's wide-ranging data disclosure requirements, Dan Lindley of Northern Trust recently told Family Wealth Report.

The CRS – introduced by the Organization for Economic Co-operation and Development – calls on jurisdictions to obtain information from their financial institutions, about their clients, and automatically exchange that information with other jurisdictions annually as part of a global crackdown on tax evasion. Over 90 countries have so far announced that they will participate in the program, of which 58 are “early adopters,” meaning that they plan to go live on January 1, 2016, with the first reporting occurring in 2017.

Indeed, the CRS builds on the Foreign Account Tax Compliance Act, which came into force last year and requires foreign financial institutions to provide the US government with information on accounts held by US taxpayers. The CRS is not, however, simply an extension of FATCA, Lindley said. It has been noted by Lindley and in other reports that the treatment of trusts (and other similar structures such as foundations) under the CRS is of particular interest to private client practitioners as well as end-clients.

“A lot of people look at the CRS and think of it as the non-US counterpart to FATCA, but it is much more than that because of its broader disclosure and because the data collected through the CRS is intended to be more readily available than data collected by the IRS under FATCA,” Lindley told this publication.

Although both regimes are based on the identification and documentation of account holders, and the sharing of certain information, the classifications under the CRS are slightly different, and many of the exceptions and “de minimis” exclusions found under FATCA are not available under the CRS, Denise Hintzke, a director at Deloitte Tax, previously explained.

To say that families are concerned about the CRS is an “understatement,” said Lindley, who oversees the global fiduciary practice for family offices at Chicago, IL-headquartered Northern Trust. In response, wealthy families are increasingly moving their financial structures from offshore jurisdictions to the US – which is not a signatory – as they are more comfortable with the reporting and disclosure requirements under FATCA than those under the CRS.

Clients are rightfully concerned that their data will be more generally available, from both a reputational and personal security standpoint, Lindley continued. “These families are concerned, understandably, about the confidentiality of their financial details, and that, when it is being shared among perhaps multiple jurisdictions, there is a greater risk of inadvertent disclosure.”

The offshore law firm Mourant Ozannes touched on this point in a recent paper it published, saying: “For most private clients, the confidentiality of their affairs and of any trusts which they have settled or of which they are a beneficiary will be a key consideration,” in its paper, entitled The Common Reporting Standard – Consequences for Private Client Trusts. “The emergence of the CRS means that, on an annual basis, information in respect of trusts may be transmitted to the tax authorities of their jurisdiction of residence if they are resident in a participating jurisdiction. This information will invariably be highly sensitive, including as it will do, the value of the trust assets in totality, at least in the case where the trust constitutes a financial institution, and the identity of the settlor, the beneficiaries and the protector.”

Private clients have in recent years become “reasonably comfortable with” (or have, at least, resigned themselves to) the idea of information being shared with the IRS or HMRC - assuming that their tax affairs have historically been correctly reported, the paper added. “However, private clients who are resident in some of the 90 or so jurisdictions to which it is proposed CRS will be extended may feel less comfortable with such information being shared with their tax authority,” it said. “Their concerns will likely relate to data security both in the transmission of information to their tax authority and its retention once the information has reached it.” It noted, however, that “the OECD is mindful of these concerns which have been well voiced by private client advisors.”

Concerns over the CRS are also apparent, as mentioned above, at the institutional level. For example, well over half (61 per cent) of respondents to a recent global survey of financial executives by KPMG said they believe the CRS will impact more of their accounts than the provisions of FATCA.

"Even for financial institutions that have a good handle on their FATCA obligations, complying with the CRS model will be a monumental task because of a greater volume of data that needs to be reported,” said Michael Plowgian, a principal in the international tax practice of KPMG. Most financial institutions will need to make significant changes to their client onboarding, due diligence and reporting procedures and systems, Plowgian added.

The topic of CRS, as highlighted by Mourant Ozannes, is “enormous,” and the points raised in this article cover just a small fragment of what is an extremely complex legislation. But at time of increased awareness among clients and advisors of the importance of data protection and security in the digital age, and in the midst of a global movement towards greater transparency, these are certainly crucial considerations for the wealth management industry.