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.
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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
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By GlobalDataTalk 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”.
