Key findings of the whitepaper ‘Tryst with Transparency: How private banks in Switzerland and Singapore are ensuring best-of-breed service in a demanding regulatory ecosystem’ – written by Private Banker International and sponsored by DTCC – highlights how both these wealth hubs are ensuring client centricity in an era of increased transparency and regulatory pressures, as well as establishing future best-practices
The private banking and wealth management industry across the globe has gone through an unprecedented transformation over the past few years. A high level of transparency is the new reality in the wealth management space due to a multitude of regulatory demands.
Switzerland and Singapore – two of the world’s most important wealth hubs – personify two distinctive financial markets. While Switzerland is the world’s largest destination for cross-border wealth management with centuries of traditional private banking experience, Singapore represents a fast-growing and consistently flourishing wealth hub, supported by the rapid rise in regional wealth, the number of wealthy individuals, and global popularity.
Despite facing their unique industry dynamics, C-level executives at private banks in both Switzerland and Singapore are grappling with the same concerns. The whitepaper ‘Tryst with Transparency: How private banks in Switzerland and Singapore are ensuring best-of-breed service in a demanding regulatory ecosystem’ – written by Private Banker International and sponsored by DTCC – highlights how both these wealth hubs are ensuring client centricity in an era of increased transparency and regulatory pressures, and establishing best-practices for the future.
The comprehensive research was aimed at obtaining qualitative industry viewpoints. The findings are based on 20 in-depth interviews with top-ranking executives across global and local private banks in Switzerland and Singapore, as well as industry consultants/analysts.
In a nutshell, the key concerns across both geographies emerged as: Urgency of getting CRS-ready (Common Reporting Standards), Rising compliance costs and complexities, Explosion of data, Cumbersome KYC/AML due diligence, and Complex cultural shifts. To address these concerns, PBI compiled its research findings into five segments. The key findings are essential for private banks to survive and thrive in this era of transparency. Highlights of the whitepaper are detailed below:
Successfully coping with a multitude of regulatory demands
Financial regulatory policies are becoming progressively demanding and globalised. To name a few, the Markets in FinancialInstruments Directive (MiFID), Foreign Account Tax Compliance Act (FATCA), European Market Infrastructure Regulation (EMIR), to the Common Reporting Standards (CRS), have all significantly impacted the operations as well as the infrastructure at private banks around the world.
According to PBI’s research, preparing for the CRS is a top priority for private banks in both geographies and will continue to be so for the next couple of years. The majority of private bankers interviewed for the research said the CRS – an Organisation for Economic Cooperation and Development (OECD) initiative to get countries to exchange a common set of data with one another about offshore account holders – is the most far-reaching regulation in the private banking space.
Several countries that signed up – including Switzerland and Singapore – have committed to begin reporting as early as 2017. CRS is already having profound impacts of an organisational, operational, IT, legal, and strategic nature within private banks, and is significantly raising costs.
Currently, private banks in both geographies are hiring more members on their compliance teams to handle various regulatory reporting requirements and to understand fully what is expected of them once CRS is implemented.
The complexity of the detailed reports required due to CRS, combined with the demands of FATCA, is directly related to the number of booking centres a private bank has. As a result, private banks are starting the rationalisation of booking centres. For several banks, the rising cost and pressures to remain compliant to local and global reporting standards have become too high to bear.
According to PBI’s research, there’s a need for private banks to review and rationalise booking centres and client segments that make business sense to the organisation, to remain profitable and cope with regulatory demands across multiple jurisdictions.
Another key concern for private banks in both geographies is cyber security threats. As the automatic exchange of information is due to become standard practice, most private banks are keen on spending more money on cyber security, the PBI research reveals.
Not all private banks are on the same level of preparedness when it comes to opening up their ecosystem to other ecosystems in order to share client data with regulators from different countries, or third party organisations, and they are increasingly worried about data breaches. Private banks need to consider the dynamics of cyber risks from the start while developing a new business strategy or model, and invest in the right third-party systems to mitigate cyber threats for the long-term.
Ensuring client centricity while meeting reporting obligations
Private banks in both Switzerland and Singapore are rethinking aspects of their business and operating models and also leveraging on improved IT capabilities across the organisation to deal with the increased regulatory complexity. The main challenge is to balance maintaining personalised services and receptiveness to clients’ needs, while increasing standardisation and improving operational effectiveness.
For private banks to get this transition phase right, a key objective is to prepare the staff as well as the clients involved in fully understanding the implications of a heightened transparency environment. Thus, creating a new paradigm in client service – readying not only the staff but also the clients – is the need of the hour for private banks. Educating wealthy customers around what will happen with their personal information once the CRS is implemented is going to be a necessary best-practice in client service, as the new regulation will impact the way they view their banking relationships. However, currently, this dynamic is beginning to develop in Switzerland in particular.
Additionally, private banks are increasingly scaling up their asset management capabilities in-house, and investing in advisory tools. Private banks are focusing on bringing on-board expert advisers and offering a sophisticated and diverse asset range to wealthy clients.
Developing sophisticated front-end offerings to provide a range of granular and intuitive advisory tools through digital interfaces is also a priority. To do this, though, robust middle and back-office systems are a necessity in private banking.
Outsourcing select middle and back office functions is, currently, a rising force in wealth management, the research finds. Small to mid-tier private banks are more inclined to outsource certain functions, but the hybrid-outsourcing model is gaining appeal among tier 1 banks as well.
According to PBI’s research, in Switzerland approximately 25% of the private banking industry has opted for hybrid-outsourcing models. In comparison, for private banks in Singapore, outsourcing is in its nascent stages. The main reason behind this is the historical tendency to increase headcount rather than opting for automation. However, this model is not flexible or durable. Private banks need agile, specialist third-party firms to support them.
Importance of efficient data management in an era of transparency
The data management piece of the efficiency jigsaw puzzle is currently the most crucial one for private banks in both geographies. To ensure best-of-breed service in a demanding regulatory ecosystem, private banks need to get their data management game-plan right.
The private banking industry has in general suffered from under investment in IT when it comes to data management capabilities. The challenge within many organisations is that the data is stored in vertical silos and is fragmented across many databases and spreadsheets. The private banking industry is also less mature in its data management capabilities in comparison to the investment banks.
Currently, there is a shift underway in the wealth management industry from legacy to good practice in data management, keeping the volume, velocity and variety of data in perspective. According to PBI’s research, private banks are investing more IT budgets than ever before in improving capabilities to source, aggregate, store, secure and analyse data.
The best practice game-plan for data management should have two aspects – the optimisation of internal processes and gaining external assistance through third-party firms. With regard to successfully handling client-sensitive data, private banks need to strengthen internal processes, while partnerships with third-party firms can go a long way in benefitting private banks in handling transactional reporting information.
The whitepaper reveals that as private banks are grappling with increasing regulatory demands, the majority of players are keen on finding ways to optimise time and effort when it comes to the management of transactional data, and mitigate operational bottlenecks.
Regulations such as EMIR and MiFID have made it crucial for private banks to access and provide accurate, timely and complete transactional data. Challenges for private banks, nowadays, are extremely similar to those faced by investment banks. However, currently, private banking operations are only approximately 30% automated, compared to a 60%-70% automation at the investment banking arms.
It is increasingly a challenge for private banks to take the legacy and manual processes within the organisation and streamline, standardise, and automate them. This is where partnerships with specialist third-party organisations can help. The big shift for private banks on the operational side is coming via straight through processing (STP).
Riding the KYC and AML wave in stormy regulatory times
Lengthy KYC due diligence processes have become a well acknowledged, industry-wide issue nowadays. While all private banks are admittedly grappling with the volume of KYC and AML systems and strategies they have to implement, scale is proving to be of crucial advantage. It is clear that larger players are navigating the current climate more easily than Tier 2 and 3 private banks. Private banks of all sizes across Switzerland and Singapore, currently, have distinctive KYC strategies. Over the last 36 months in particular, the majority of these banks have reviewed their due diligence frameworks.
Tier 1 private banks have leveraged their ability to invest large amounts of money in developing their IT platforms to handle the extensive KYC and AML requirements. Most large, global banks are implementing one-bank strategies across the countries they operate in to benchmark best-practices for KYC/AML.
For smaller banks relying on smart solutions and partnerships to ensure effective KYC and AML processes is key, as they don’t have the budgets or the scale to be as efficient as needed. They need to need improve their cost bases by moving out certain processes that can be aggregated on a single platform.
According to the whitepaper, almost all private banks interviewed agree that digitisation in client on-boarding has become a priority while manual processes still dominate. The key issue is that a lot of the client onboarding work is still carried out manually. The sheer volume of paper work that clients have to run through is frustrating and the process is driven by compliance rather than business sense.
PBI’s research also found that there is a growing appetite among private banks for outsourcing commodity type information around KYC. The future for particularly small or mid-tier players – given the scale requirements in the current regulatory climate – is to harness a ‘sensible outsourcing’ approach within the organisation.
The value of promoting a culture of innovation
The majority of traditional private banks have not been inventive with their business models or technology initiatives. Using sophisticated digital tools has been welcome, but true innovation has hardly found takers.
In the current regulatory environment, though, wealth managers feel that innovation and original thinking is becoming imperative to success. Regulators want private banks to be less risky and more open but this should not make players less innovative but should encourage novel business solutions instead.
Private banks in Singapore are ahead of the game when it comes to ingraining innovation into their wealth management strategies, processes and systems. UBS APAC, for example, has set up an innovation hub and is closely working with the different regulators and fintech start-ups to consult on future trends and "promote a culture of innovation".
All in all, a cultural change is needed at private banks during this transition phase where players are more open to new ideas and opportunities in order to define best-practice for compliance and client service. Strong leadership is essential to carry this out.