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February 2, 2009updated 05 Jun 2017 11:40am

Disquiet over banking state ownership

Some high net worth investors have been displaying concern at the sweeping state ownership of a number of banks after a series of global bank rescues

By John Evans

Some high net worth investors have been displaying concern at the sweeping state ownership of a number of banks after a series of global bank rescues. Some are worried that client confidentiality could be compromised by having a government as a major owner. John Evans reports.

The argument is being aired in the wealth industry that government ownership, however carefully structured and insulated from a bank’s business, is incompatible with private banking because of inherent conflicts of interest.

In Britain, lenders like the new Lloyds Banking Group, combining HBOS, and Royal Bank of Scotland, now have the government as key shareholders.

Rivals claim that, for example, they have seen clients move accounts from Coutts, the iconic British private bank owned by RBS, amid worries over confidentiality, as well as the financial stability of the Edinburgh-based bank up to the huge government bailout, which leaves the state owning 70 percent. In other cases, clients are said to have opened accounts at other banks in order to diversify their advisory relationships.

Coutts, famed for being bankers to the Queen and other RBS private banking subsidiaries such as Child & Co and Adam & Co, have between them about £50 billion ($74.8 billion) in client assets under management.

Client alienation

Talk in the London private banking market suggests that concern over client alienation at the top of Coutts has been so acute, potential remedies such as a hiving off from RBS, including a management buyout, have been informally discussed.

RBS chief executive Stephen Hester is currently undertaking a strategic review, centring on the divestment of non-core operations which could include Coutts. RBS has already agreed the sale of its stake in Bank of China, raising £1.6 billion.

Coutts has extensive business in Switzerland and Singapore, two offshore centres that adhere strictly to client confidentiality and a code of banking secrecy. But the British government, along with other Organisation for Economic Co-operation and Development nations, is launching a strong assault on offshore banking. In particular, Britain’s tax agency, the HMRC is attacking undeclared accounts held in a range of offshore centres.

At the same time, the TUC, Britain’s trade union organisation, is demanding banks that have been rescued by government should be made to disclose the full extent of their use of tax havens.

A study of company reports by the TUC showed that some of the biggest banks – Lloyds TSB, RBS, HSBC and Barclays – have between them more than 1,000 subsidiary companies incorporated in tax havens. The TUC claims that HSBC has the largest number, with more than 500, of tax haven subsidiaries. Barclays has the largest number in a single location – 143 in the Cayman Islands.

“These can only be for the purposes of financial structuring of transactions, probably to secure a tax advantage,” the TUC says.

TUC general secretary Brendan Barber says that this raises questions about whether part of “the objective is avoiding paying a fair rate of tax to the UK – a tax gap that has to be made up by the rest of us”.

While there is no suggestion that anyone has broken any tax laws, now banks have public stakes or trade with the knowledge the taxpayer stands ready to bail them out, the taxpayer has a right to know the full extent of bank activities and liabilities worldwide, Barber says.

The deputy leader of the UK’s Liberal Democrat party, Vince Cable, takes a similar line, in commenting on Barclays’ reluctance to accept government aid. He charges that the bank relies on the British taxpayer to be lender of last resort when it gets into difficulty.

Cable adds: “But it pays a man millions of pounds every year to devise ways of avoiding British tax. This explains all too clearly why there is a reluctance to have Treasury representatives on the board looking at the books.”

Ian Woodhouse, a consultant who was until recently head of the Ernst & Young wealth management practice, agrees that some rich clients seeking stability, safety and continuity are worried by continuing problems around high risk private banking business models within parent banks that are exposed to subprime and commercial lending defaults, and in some cases with government intervention as a major shareholder.

“This is largely a perception issue as clients, in the absence of visibility from rating agencies, are having to make their own judgments,” Woodhouse says. “This is reflected in some clients taking steps to draw down or withdraw assets from some private banks they perceive as having higher risk business models in favour of others who they perceive to have lower risk models.”

Woodhouse suggests there is evidence that some clients currently perceive Barclays, Coutts/RBS, UBS and Union de Banque Privee as currently being “riskier than HSBC Private Bank, Lloyds Banking Group, Credit Suisse and other mid-size private banks such as Baer”.

Repositioning initiatives

But given these are client perception issues, most of the affected banks have been undertaking repositioning initiatives to restore credibility, as well as enhancing their communications to clients, both of which are beginning to reassure clients, he stresses.

However, government ownership and worries among some private clients that their business could be subject to scrutiny “should also not be over-emphasised as it is more likely governments will want to focus on generating returns from their investments and, as such will steer clear of any actions that could damage the franchise,” Woodhouse asserts.

At Coutts, officials stress that the government has made it clear the banks would continue to be run as commercial organisations and it will have no involvement in the day-to-day running.

The issue of possible conflicts of interest from state bailouts and ownership has also arisen in the US.

Jes Staley, head of JPMorgan’s asset management and private banking division, says political interference in the management of those lenders like Citigroup and Bank of America that have gone to the US government for large-scale support was the “biggest risk” facing his bank.

If the big banks start to be “geared for public policy as opposed to economics we may end up competing against institutions that are being run for non-economic purposes”, Staley says. This is “the biggest risk we see out there”.

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