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.
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
In 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.