Booking centres are being put under the microscope by private
banks seeking to reduce costs and risks to their tax status and
reputation.
Top tier wealth management firms like UBS and Credit Suisse are
starting to question what they gain from operating in a wide range
of booking centres, according to industry sources.
HSBC Private Bank has started consolidating some of its offshore
business in Luxembourg, while Lloyds TSB Private Bank is also
looking at rationalising its locations in offshore centres, PBI
understands. Some smaller private banks are considering whether to
maintain offshore operations at all or move entirely onshore.
Go deeper with GlobalData
This shift in the industry has been prompted in part by the
startling speed with which US President Barack Obama has sought to
tackle transparency, tax and banking secrecy in tax havens.
While there has been an element of tub thumping in some of the
announcements from the US administration, there has been a clear
message that pursuing international reform on offshore tax
arrangements is at the centre of its agenda.
The realisation among private banks that this campaign is not going
away has prompted a serious strategy rethink.
Focus on tax avoidance
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By GlobalDataIn particular, a letter sent from British Prime Minister Gordon
Brown to UK offshore centres, saying there would be an increased
focus on tax avoidance, in addition to the usual scrutiny on
evasion, has led many to re-evaluate their positions.
One UK private bank, which did not want to be named, is carrying
out a review of all of its offshore banking operations as a result
of recent political posturing.
The bank, a significant player in the UK market, is looking closely
at the types of avoidance structures that have been used in the
past, and is close to pulling away from anything which looks like
avoidance from UK tax laws.
“Evasion is out of the window; it is now about concentrating on
avoidance and what is acceptable on the scale of avoidance,” said
one industry source. “I think that is where the next debate will
lie.”
In an industry where reputation is sacrosanct, private bankers are
asking whether they should continue to operate in jurisdictions
viewed sceptically by the international community. Financial
centres able to show they are well positioned for the new
regulatory environment will undoubtedly attract new business.
Reviewing the status of booking centres and offshore operations
also chimes with an increased emphasis on cost control.
“Private banks are actively reassessing their booking-centre
footprints – and, in some cases, are starting to fundamentally
rethink their approach to offshore,” David Maude, an independent
consultant, told PBI.
“There will always be demand for offshore private banking but the
banks will need to be smarter about where and how they
operate.”
Maude continued: “For many ‘multi-shore’ banks, some centres are
really tiny and low growth – and unlikely ever to be profitable in
their own right. Some of the big banks are already saying ‘we don’t
need 10-20 booking centres any more’.
“So, banks will consolidate and optimise their booking centres, and
try to run them more efficiently. Looking ahead, offering multiple
booking centre options will be less appealing to banks and to most
clients themselves.”
There had already been evidence banks were looking to rationalise
operations in offshore centres prior to the shifting international
political tides.
UK banks, with histories of operating in its various offshore
centres, some time ago started whittling down the number of
locations they were in an attempt to consolidate back office
operations.
“You will not see banks looking at having just one primary booking
centre of choice, they will be aiming for a number closer to three
or four, from a number which has been historically closer to
15-20,” said Seb Dovey, managing partner at Scorpio Partnership, a
wealth research and consultancy business.
Another cost consideration is risk related to exposure to multiple
deposit insurance schemes. Every location a bank has a banking
licence makes it more exposed to potential bailouts if a financial
institution were to fail, something which became a particular area
of concern at the height of the financial crisis, according to
Geoff Cooke, head of Jersey Finance, the organisation which
represents the jurisdiction’s financial community.
As part of compensation schemes, banks are usually asked to stump
up a percentage of a failed institution’s liabilities in order to
repay customers.
Increasing wariness of offshore banking has led wealth managers to
focus more on onshore businesses, typically a lower margin
operation. Onshore strategies were first considered in the early
1990s, particularly by the Swiss players, who decided it made sense
to diversify from the purely offshore model.
“I do not view the last year as the sole reason behind why there
has been an amplification of the onshore discussion,” said
Dovey.
“Our view is, last year offers a more contemporary rationale for
doing it [onshore] more quickly, as the debate had slightly faded
from centre stage in the early part of the decade. It is worth
noting that, in the late 1990s, when going onshore was first
considered internationally, both UBS and Credit Suisse developed it
as a core strategy.
“Wealth generation was happening so quickly in both areas which
meant that banks turned their attentions to other things. Now it is
back at the top of their agenda.”
New jurisdictions line up
There is also evidence new jurisdictions are looking to establish
themselves to take advantage of the changing political climate.
Trinidad is currently preparing for the launch of an International
Financial Centre and proposes to act as “a gateway to South
America”, while Tunisia is promoting Tunis Financial Harbour as a
financial centre enabling access to Africa.
Trinidad will be competing with its Caribbean counterparts, and in
particular the Cayman Islands, currently on the OECD’s list of
non-compliant financial centres. It also has a large industry in
natural gas, meaning commodities will be a natural
specialisation.
“Any international financial centre before launch would want to
conduct an analysis of what institutions would be interested, what
business lines would be most attractive given their position, and
their desire to attract international institutions,” said Laura
Cox, a partner with PwC Legal.
“You are looking for an initial hook, which Trinidad has on the
commodities side,” she added.
The Tunisian government is currently working with advisers,
including PricewaterhouseCoopers, on establishing a new legal, tax
and regulatory framework for Tunis Financial Harbour.
One of the key issues in building these centres is deciding whether
the domestic tax, legislative and regulatory arrangements will
apply, or whether the project would develop more effectively with a
more lightly-regulated approach.
“The key thing for banks is they want to be sure the regional tax,
regulatory and legal frameworks are sufficiently robust to give
them the assurance that if they set up, other institutions would
also have to adhere to the same level of compliance standards,”
said Alex Shapland, PwC’s regulatory partner.
“That is what institutions look for – transparent and robust
regimes.”
PBI also understands South Korea is exploring setting up a
financial centre on Jeju, an island south of the country, while
Indonesia is also looking at establishing a separate financial
hub.
Research by Scorpio Partnership shows Switzerland remains the
top-ranked jurisdiction for residency among the mobile wealthy,
despite recent pressure on its banking secrecy laws. In an index
generated by interviews with advisers to wealth clients,
Switzerland was ranked ahead of London, Singapore, New York and
Hong Kong.
The survey said Switzerland’s “rounded offer” made it the location
of choice for the majority of high net worth individuals, while
London had been penalised because of its aggressive tax moves. It
added there was a clear distinction between large, all-in centres
and smaller jurisdictions like Jersey, Cayman Islands, Isle of Man
and Monaco.
“Most anecdotal evidence suggests Switzerland has been and will
continue to be the biggest beneficiary of any moves away from
London, particularly in the mid-to-high HNW segments and above,”
said Stephen Wall, a director at Scorpio.
