Offshore private
banking has become a dirty word in the public arena, with
traditional centres and modes of operation being turned on their
heads. Maryrose Fison finds that client appetite remains strong,
but if managers are to compete, they may have to consolidate
offices and learn to specialise.
The future of offshore
private banking was seriously in question six years ago.
Go deeper with GlobalData
Widespread publicity
surrounding the estimated scale of tax evasion in so-called tax
havens angered the politicians and public alike as reports alleged
that billions of euros was being secreted beyond the bounds of
international law.
The turning point came in
2009 when Switzerland, Belgium, Luxemburg and Austria agreed to the
Organisation for Economic Development and Cooperation’s model tax
convention on income and on capital, paving the way for the
bilateral exchange of tax information.
The same year, the Swiss
government agreed to provide information on individual clients and
their holdings to foreign tax authorities in cases of tax evasion
as well as tax fraud.
That year, analysts
forecast the change in Switzerland’s historic policy of banking
secrecy would shatter the competitive edge of its offshore private
banks, pushing high net worth individuals into the arms of onshore
wealth managers.
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By GlobalData
Offshore locations now manage $8trn
Today, these concerns
have not quite materialised. According to the Boston Consulting
Group (BCG), assets under management in offshore locations grew
from $7.5trn in 2009 to $7.8trn in 2010.
Switzerland is presently
seeing stable to positive growth in assets belonging to
international clients, according to the Swiss Private Bankers
Association (SPBA).
But while the market
appears to have navigated the eye of the storm, slow economic
growth in Europe, changes in behavioural patterns among clients and
regulation mean that the offshore private banking market will have
more hurdles to clear in the years ahead.
The most up-to-date
figures on the global distribution of offshore wealth were
published by BCG in May 2011.
According to the
analysis, Switzerland had the largest market share of offshore
wealth with 27% of offshore assets positioned there, representing
$2.1trn. According to the SPBA, 52% of assets under management in
the country are owned by foreign clients and 48% by domestic
clients.
The UK, Channel Islands
and Dublin were second place in BCG’s report with $1.9trn between
them; the Caribbean and Panama held $700m together; Hong Kong and
Singapore held $700m and Luxemburg $600m.
An analysis of the
origins of wealth reveals the prominent role that proximity plays,
with regions closest to the financial centres tending to contribute
the most wealth.
In Switzerland, more than
half of the wealth of foreign clients originated from Europe. In
Hong Kong and Singapore, more than three quarters came from
Asia-Pacific, and within the US, over half originated from Latin
America.
Growth drivers
Retaining a competitive
edge has more dimensions than the sum total of the technical skills
involved in making the right investment plays.
Paul Patterson, head of
business in the UK, Channel Islands and the Caribbean at RBC Wealth
Management, says geography and the changing make-up of clients’
families are also key.
“There has been an
internationalisation of wealth. More people are living in countries
other than their home country or have business interests in
multiple countries or have more international focus on how they
invest their assets,” he says.
“It is less about
regulatory arbitrage and more about proximity and national
connection. If we look at Singapore, its proximity to Asian
markets, its perception as an independent country and its
dedication to rule of law, safety and stability make it a strong
centre.”
As families become more
geographically dispersed and multi-jurisdictional, language is also
playing an increasing role.
Mark Bright, head of
offshore business at private bank Kleinwort Benson, told
PBI that the ability of staff at offshore private banks to
speak to clients in their native language could have a fundamental
impact on trust.
“If we look at the new
growth areas for offshore private banking, India and China, I don’t
see that English-speaking or only English-speaking relationship or
business development staff are going to be anywhere near as
successful as those that are fluent in Cantonese or Mandarin, for
example,” he says.
Multi-jurisdiction
expense
But for many private
banks, the ability to open offices in multiple jurisdictions is
constrained by the additional cost burden of increasing regulation
aimed at improving disclosure and preventing conditions that could
allow tax evasion to occur.
In the years ahead,
industry observers predict competitive edge will come to be defined
by a more multifaceted approach than was applied in previous
decades.
With the onset of intense
scrutiny through regulation, Bright expects there will be a
regionalisation of offshore private banking, resulting in banks
concentrating their operations in fewer geographies and adopting a
more specialised approach towards gaining and retaining
clients.
“Offshore banks will have
to increasingly specialise and choose a few markets to do business
with, rather than in the past when they have tended to interact
with clients from all over the world,” he says.
“It is going to be
increasingly difficult to maintain the requirements for
authorisation of individuals within those countries, and the
regimes themselves have become more complex.”
Hand in hand with
regionalisation, Bright anticipates a consolidation of operations
at individual bank level with offshore private banks looking at the
number of bases and distribution of operations.
“Groups that have got a
lot of offices may well ask: ‘Do we need 25 international offices
or would we actually be better off with 10?’
Key trends:
Consolidation and specialisation
There will be
consolidation within groups to reduce their international footprint
and it may well be one way of specialising to reduce cost and
complexity.
“The shape of offices
will change such that some offices may be very much front-office
focused, client-focused and some may be the hubs where a lot of the
operational administrative functions are taken,” he says.
“And that may be
outsourcing completely or it may be outsourcing to other entities
within the financial services group,” he adds.
Within Switzerland,
Michel Dérobert, secretary general of the Swiss Private Bankers’
Association, forecasts that an increase in regulation will result
in the consolidation and reorganisation of independent portfolio
managers.
“Switzerland is probably
the only country in the world where these professionals are not
being regulated for other purposes than money laundering,” he
says.
“I think that, in the
near future, there will be more rules applying to them and there
will probably be a law on financial services which will deal with
the situation.”
“The independent
portfolio managers are not banks but they deal with clients and
they have their clients’ funds deposited with banks,” he says.
“You are talking about
10% of the market which is dealt with by these people – very many
of them are former bank employees. Their number is likely to
decrease and their size will probably increase, in order to cope
with the regulation,” he adds.
Adapt and
overcome
Regulation will continue to put a strain on the balance sheets
of offshore private banks, but experts say that efficiency and
relationship management will likely prove some of the most powerful
tools for offshore banks.
The ability to recognise
and adapt to cultural differences in emerging markets will
distinguish between those that can draw in assets at the individual
offshore bank level and those that can’t.
Bright adds, “Service quality will become even more important as
a differentiator. That will mean skills and education of the local
market – not just the ex-pat employees.”
