28th April 2020

Solving Economic Substance at Scale with Technology

<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Solving Economic Substance at Scale with Technology</span>

Compliance with Economic Substance laws for the first time in 2020 will add significant pressure on operational efficiency for many providers in the finance industry, but particularly those in the Trust, Private Client, Corporate Services and Funds Administration sectors reliant on manual processing on such a large scale. With Mandatory Disclosure Rules reporting obligations also coming into effect this year, the need to act on operationally efficiency is heightened.

Here we discuss the operational challenges of Economic Substance and how technology can play a role in keeping organisations not only in front of the efficiency curve, but also better able to uncover new high-margin opportunities.

We also invite you to our webinar with PwC Channel Islands to see for yourself how we can help you solve Economic Substance at Scale with Technology.


One of the most significant challenges to have faced the industry from an operational standpoint in recent times is Economic Substance, with most noted wealth management jurisdictions enacting it in some form or another in response to EU Code of Conduct Group assessments. As you will be aware this essentially requires users of incorporated entities within scope of the laws to show sufficient ‘substance’ – applying a range of defined tests – which is commensurate with their operations.

For many individuals, families and businesses using corporate entities, understanding whether these entities are within scope of the substance laws, and taking the necessary actions will be burdensome enough. For professional (and often multi-national) Trust/Fiduciary, Corporate Services and Funds Administrators however the sheer number of incorporated entities under administration mean the operational challenge of remaining compliant is significantly scaled up.

A deeper look at the processing requirements

To fully appreciate the challenge, it is useful to understand compliance at a basic process level.

Operators need firstly to identify all entities being administered (and newly created) which may fall within the scope of the laws. Once this data is surfaced, processing needs to be done to understand whether they do or do not fall within scope, according to their Core Income Generating Activities (“CIGAs”). Once identified, the resulting data set needs to be analysed against the detailed regulatory requirements, in order to assess their compliance with the so called ‘adequacy’, ‘directed and managed’ and ‘core income generating activities’ tests.

This in itself represents a significant challenge from a data capture and management perspective. It is estimated that to comply with Jersey laws, for example, approximately 110 new data points need to be captured, which may involve asking data from clients which has never been requested previously.

As examples, service providers will need to know directors qualifications, the number of Board meetings held in the jurisdiction of tax residency, whether a quorum was achieved in each meeting, how many attendees there were at each meeting and what the meeting resolutions were for a given meeting.

The laws give rise to several key questions: Does the required data exist in the system? Do we have the fields, tables and registers required in the system to accept and record it? Can we manage and maintain that data effectively with our current systems?

In addition, the data of course must be complete and accurate in order for any analytical process to uncover in-scope entities. Poorly configured, loosely integrated, immature and under-supported legacy systems or the lack of a system altogether only multiply the risks at this critical stage. Failure in this regard will of course mean entities within scope are not identified to be processed for compliance, and if found to be non-compliant, there are applicable and substantial fines. The process itself needs to be robust in order to minimise the risks of introducing human error.

Providing entities are identified, the second stage requirement is then to apply the relevant substance rules for a given jurisdiction against the data set. Assuming data accuracy, applying the rules is typically a significantly labour-intensive process performed manually by internal teams to uncover potential compliance issues such as a deficient number of Board meetings held during the tax year.

Challenges may worsen with scale

For many organisations, but particularly the large-scale professional trustee, private client, corporate services and funds administrators, the number of entities potentially in-scope of substance laws can be vast. As a result, the costs directly attributed to substance can amount to thousands of hours of costly manually processing time which may also require an increase headcount to accommodate the demand. The opportunity costs are also significant, with valuable resources locked up on tasks which are largely repetitive and rules-based instead of on more critical business priorities. Add the challenge of jurisdictions having different sets of rules which are changing, and the challenge for these large-scale providers is further magnified.

For many providers, it is unlikely they will be able to absorb these costs and the impact on margin indefinitely, so the question naturally becomes: how can make the process more efficient?

From challenge to opportunity – Collaborating with the ecosystem to solve Economic Substance at scale with Technology

Economic Substance laws, understandably, have been very topical with our clients for quite some time. Listening to our clients’ concerns, we have worked closely with PwC Channel Islands to share some of the challenges and start to collaborate on a solution to streamline the large-scale processing required.

At the heart of the solution, our core products 5Series and NavOne have been specifically configured to capture the required data in order to identify ‘in-scope’ organisations and facilitate substance assessments, saving organisations significant in-house development and processing time. This configuration includes, for example, detailed new meetings registers which capture Board and Directors meetings, attendances, resolutions, quorate and other required data points relevant to Economic Substance.

Once collated, the data is then securely transmitted on a ‘one click’ basis via APIs to PwC Channel Island. It is then run through a proprietary substance rules engine, comparing it against the substance assessment criteria, to provide a near instantaneous scope assessment and identifying areas for remediation. The solution extends even further, having the capability to submit the assessments along with returns and financial statements to the relevant authorities electronically (such as via XML or portals), for and even more streamlined process.

All in all, this first to market solution delivers organisations a streamlined ‘off the shelf’ compliance capability which significantly reduces processing times and cost, improves accuracy and, importantly, enables providers to create new high-margin revenue streams.

This year is set to be a challenging year on many fronts as firms navigate the economic uncertainties whilst maintain their focus on compliance, particularly with respect to the new challenges around substance. Efficiency, particularly around critical, labour-intensive compliance processes, will deliver a critical buffer against these challenges.

Our Economic Substance solution is available for NavOne clients now and will be available to 5Series users in the UK summer in line with 2020 reporting deadlines.

Should you be interested in a discussion about how our solution could benefit your organisation, please contact your Account Manager or submit an enquiry online.

Like to know more about our Economic Substance Assurance Service? Register for one of our upcoming webinars.

We invite you to join Touchstone and Microgen Touchstone in collaboration with PwC Channel Islands for our upcoming webinar ‘Solving Economic Substance at Scale with Technology’.

In a 50 minute presentation we will provide an update on Economic Substance and showcase our solution to streamline the economic substance workload in particular for Jersey, Guernsey, Isle of Man and BVI structures.

To register for this free webinar, select your preferred time below.

Thursday 30 April 

09:00 GMT +1

15:00 GMT +1

Wednesday 6 May 

09:00 GMT +1

15:00 GMT +1