How regulatory scrutiny is shaping the global wealth industry

Riots, hurricanes, debt downgrades and currency wobbles dominated headlines this summer.  What was less noted – but with potentially more impact on the global wealth management industry – was continuing scrutiny of offshore accounts by regulators around the world.

Credit Suisse found itself in the crosshairs in July when seven bankers, including the former head of its North American private banking business, were indicted in the US on charges of helping US clients evade tax.

It is reported that Credit Suisse may settle rather than fight the case, admit wrongdoing and pay a fine of up to $1 billion. UBS took a similar approach in 2009 and ended up paying $780 million. 

But CS and UBS will likely not be the last as US regulators announced that a further six Swiss banks and a Liechtenstein institution are currently under scrutiny.

The shifting regulatory environment continually impacts how, and where, banks serve their clients, and which services they make available.

Banks are paying attention, and this summer has seen several wealth managers making decisions based on regulatory change to enter or disengage with certain markets and particular groups of clients based on where they feel there is opportunity or exposure.

One example is the Foreign Account Tax Compliance Act, legislation that comes into force in 2013 but is already having an impact on US expatriate clients. Because the regulation will require institutions to implement withholding on US persons accounts, some institutions are asking clients to find a new home for their offshore money. 

HSBC has decided to stop providing offshore private banking services to this market. Others, such as RBC, have decided to take an opportunistic tack by offering a compliant service to these individuals to build up market share in expat centres such as London.

These changes are being driven by a shift from focusing on individual compliance with regulation, to institutional compliance.

In the past, wealth managers were prepared to take clients at their word that they were complying with relevant regulatory and tax constraints, but as regulators have increasingly penalised banks for client lapses, they have had to rethink their approach.

The decision today is whether to invest in meeting the compliance needs of entire segments of clients, or to forgo them because they are too difficult to serve.

What is clear is that the trend toward harmonisation is continuing. Just this month, Switzerland announced two new bilateral tax agreements with the UK and Germany. In both cases offshore clients will be able to maintain their anonymity under Swiss banking secrecy, but at a hefty price. 

In the case of UK clients, they will be subject to a one-off charge of 19-34% of the assets held, depending on the length of time the account has been open, and then an ongoing regime which is similar to the existing UK tax rates from 2013 onwards. 

For the UK and German governments, these treaties provide much-needed additional revenue to their treasuries. For the Swiss government and banking community it potentially provides an avenue to avoid further fines such as those imposed by the US.

Clients with offshore accounts will have the choice to continue to keep assets in Switzerland under the new regime, move them to other jurisdictions before declaring their existence (such as Lichtenstein to take advantage of the more favourable disclosure facility already in place), or potentially move them to other offshore centres.

These changes have impacts outside the North American and European wealth management markets, with some offshore clients looking further east.

But this window where offshore clients may decide to move from traditional western offshore centres (Switzerland, the UK, the Channel Islands, Lichtenstein) may be only a temporary effect. 

Emerging wealth management centres in Asia are actively putting frameworks in place to demonstrate financial stability and regulatory rigour, and even though today there is still less pressure for them to share information across borders, that will not always be the case.

Individuals creating new wealth in these regions will have more choice in where they book their assets – with those in the Middle East, India and China potentially choosing to keep their assets closer to home rather than send them across the world.

If history is a guide, offshore clients will only move when the pain becomes extreme, with many deciding it’s time to regularise their affairs. For billionaires there may be real reasons to stay offshore and shift their asset and residence base, but for the more ordinarily wealthy the convenience and trust of familiar advisers may outweigh the potential cost savings of changing domicile.

As the trend toward a more level playing field continues, tax treatment will become less of a determining factor and more basic criteria such as long-term performance and service quality will return to the fore. Banks will support this transition by beefing up their onshore platforms to serve local wealth well.