The Benchmarking Landscape

In 2002 I wrote a book on withholding tax. I updated that book in 2009 with a different publisher (Palgrave Macmillan). One chapter in that book was (and is) about benchmarking. I come from a science background co-mingled with a subsequent career in FMCG marketing (‘fast moving consumer goods’ in case you were wondering) so I start from the base of fairly sophisticated understanding of process and how to measure it in a commercial environment.

I’ve been in financial services now since 1996 and it continues to amaze me that this field has such basic performance measurements – where they exist at all.

So, I set out in those two books, to correct that and, while I was at it, try to shine a spotlight on this rather obscure niche of asset servicing. I’ve probably done more cost benefit analyses and performance analytics in the custody field than anyone else I know and I come to just three conclusions.

First, most custodians have almost no clue what tax reclamation really costs to do. Second, while its one of the few asset servicing activities that generates cash value, its most frequently treated as a grain of sand in a custodian’s shoe rather than a valuable service. Third, there is almost no benchmarking taking place.

The Process

Let me take just one question, usually from an institutional investor – ‘how long will it take to get my money back?’ Now, you might think that’s an easy question and certainly most custodians would answer with what are termed ‘market averages’. So for example, you might get money back from Switzerland in 11-18 months after filing a claim. Each market has a different average. The problem with this number is that it’s not a true reflection of the actual process. Here’s how this works. Take a deep breath so you can follow me.

First, the start point of the whole process is when the income gets over taxed – the pay date. But you can’t claim yet. The entitlement from a tax perspective has been established, but most financial institutions won’t and can’t start claim on the day after pay date. They have to deal with data integrity, errors, reversals, netting and a whole host of things. This will take a least a month and, in some cases, I’ve seen it take 6 months or more, simply because the different moving parts (departments) are not aligned in resource or time. So, now its some months later, and we have a clean data file and can generate the claim. But the claim needs to be prepared.

Most custodians do not have a power of attorney from their clients (or worse, they have a mix). The driver for that may well be liability but the consequence is more delay. The claim, with a request to the beneficial owner to go to his/her tax authority and get a certificate of residence is the next procedural stumbling block. Clients are renowned for being lousy at getting documents back, so this piece could last a couple of months easily (and take a lot of relationship management resource along the way).

Remember by the way, that the custodian is not just doing this once. They may have thousands of these going on at the same time. So, now it should be easy right? They have the data and they have the documentation. Wrong. Most custodians use a network of sub custodians and they typically file claims into the local market via their sub even though there are many markets where you don’t have to do that. So, we just inserted a sometimes unecessary step into the process which will take time and effort to manage and of course delay if the sub does not instantly take claims and handle them efficiently.

Time Limits

Its the sub that is filing the claim to the local market tax authority and this is the bit where the ‘time to get money back’ sits – just one part of a much longer process. That said, it’s common for a sub custodian and a custodian to approach claims as an administrative process rather than a service, so the norm in the market is to file the claim, then make a diary entry on or around that ‘average reclaim time’ to follow up the claim if it hasn’t been paid.

Following up in the interim to try to get the money back faster is not a normal practice. So the money has been returned and its all over right? Wrong again. Custodians don’t file one off claims, they file many claims; at the same time.

Sometimes they file a whole year’s worth at a time. Tax authorities pay in batches. Strangely enough, they sometimes get it wrong and pay the wrong amount too. So getting the money back from the tax authority doesn’t instantly turn into an account credit. The custodian first has to reconcile the payment to the claims that underly it, then credit client accounts. As with the beginning of this journey, misalignment of resources means that this can take a month or so too.

So, what you’re told is 11-18 months might actually be more like 3 or more years from the point at which you became entitled to the money. And, while it’s sitting in a tax authority, it’s not in your account available for reinvestment and returns. You can breathe again now.

So, given that this activity has so many moving parts, and each custodian will do things slightly differently if at all (and be more or less efficient) and that the result of this activity is putting money back into a client’s account that they will otherwise lose forever – it’s really surprising that there aren’t clear performance benchmarks that can also be used as differentiators. While its still seen as an administrative task, I suspect this will continue to be the case – but, if the frequency of calls I’m getting is anything to go by, I don’t think it will stay that way for long.

Benchmarking

When I developed the 22 benchmarks of tax reclamation, I looked to create process efficiency measurement tools as well as risk management tools. The fact is that if you look at any of the third party outsource firms, of which the largest and most efficient by far is GlobeTax, their contingent fee model focuses everyone’s attention on delivering that value back to the investor as fast as possible. You can see in their process model that they have shortened or removed many of the steps that custodians continue to struggle with. So its clear what can be achieved when this niche area of asset servicing is treated as a value proposition rather than an administrative burden.

Process Efficiency, Statute Risk and Relief at Source efficiency are just a few. So the next time someone asks – how long does it take to get money back from X, you’ll have a better idea of what that really means, plus a whole set of questions that will help you either judge your own competitiveness as a custodian or judge your custodian’s service if you’re an investor.

I run regular in-house training courses on this stuff, so if you’re interested, get in touch.

Image Credit: Ken Teegardin