The offshore and onshore wealth management business models are having to be reshaped as Europe regulates more heavily and wealth creation increases in emerging markets. Silvia Pavoni reports.
Ancient Greek philosopher Plato wrote: “To be at once exceedingly wealthy and good is impossible.” Lawyers would probably argue that the word ‘good’ should be defined before accusing any of their wealthy clients of not being so.
If ancient wisdom might not stand up in a court of law, its message still seems modern. Doubts about good faith or even the legality of individuals’ and companies’ means of obtaining and preserving their extraordinary wealth have always insinuated themselves into public opinion. Obscure financial centres that escape from tax regimes or other legal impositions do not help such an image.
Money laundering and, more recently, terrorist financing are topics that too often have been associated with offshore financial centres, which are now desperate to improve their image. International legislation and a specific task force, the Financial Action Task Force (FATF), aim to prevent and combat such illegal activities. Since its creation, the FATF has achieved positive results. It blacklisted 15 countries in 2000, including many offshore centres, and added a further eight countries the following year. As of its last update in October 2006, the list is empty: countries are co-operating. Things have changed.
Offshore reformation
Offshore financial centres and larger wealth management firms have been engaging in reforms and communications activities to become more transparent and visible – although smaller private banks and consultants still feel uncomfortable in the public eye (when approached in relation to this article, one private bank firmly discouraged The Banker from publishing anything about it or the individual contacted).
Tighter regulation and the co-operative approach of offshore centres have made the secrecy surrounding the identity of account holders – the main historical reason for holding an offshore account – a thing of the past, reducing the appeal of offshore centres. And a number of factors have been attracting affluent and very wealthy individuals to onshore centres.
“While both offshore and onshore banking serve a valid purpose, we have seen a move towards greater onshore banking over the past few years,” says David Poole, head of business development for Europe at Citigroup Private Bank. “[There has been] a bigger effort from local regulatory bodies to make sure that money is held legitimately and that tax is paid legitimately. Therefore some of the historic reasons for going offshore, which included the possibility that money could be held outside certain tax nets, have become a non-event. It’s now not possible, at least when you are banking legitimately, to do that.
“Offshore banking remains important for clients, particularly for those individuals who are more internationally inclined and seek to hold monies in tax-efficient ways. Onshore banking is more convenient and cheaper in terms of charges that are usually incurred.”
Furthermore, the growth of the onshore business is being encouraged by recent European regulation, which introduced taxation rules to reconcile individuals to the tax regime they should be subjected to. The EU Savings Directive came into force in July 2005, aiming to reduce tax avoidance by leaving EU residents with the alternative of either having information on their savings’ interests exchanged between countries or being subjected to a withholding tax: 15% up to the end of 2007, 20% for the next three years and 35% thereafter. EU countries, 10 of their dependent or associated territories and another five European countries have signed up to the directive, including Switzerland.
Tax amnesties
Governments have also implemented strategies to repatriate offshore funds through tax amnesties. The most successful example in Europe is provided by Italy and its Scudo Fiscale, an initiative that in 2002 created a window to bring funds back to the country by subjecting them to a light fiscal imposition: 2.5%. The Scudo has not only resulted in the return of substantial capital to the Italian economy, it also solved the issues of the repatriation of money and its transfer to subsequent generations that may have been worrying some of Italy’s wealthiest people.
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“It is difficult to repatriate money without raising some questions,” says Boris Collardi, COO of private banking at Julius Baer. “The regulatory framework in banking evolves even faster than in other sectors. Obviously, you can use your Swiss account to finance your lifestyle, but if the bulk of your assets are outside of your country of residence, it makes it a bit inconvenient to use that financial resource.” |
Loopholes closing
Regulation has closed several loopholes in Europe, while the increased sophistication of financial markets is allowing some clients to take advantage of the physical proximity of their relationship manager and, usually, of a branch network, while engaging in advanced financial operations. Such factors have increasingly been driving the expansion of onshore wealth management and contributing to a reshaping of the offshore business.
The same is not true, however, for all markets and for all clients.
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“If you are a very high net worth individual, chances are that you are reasonably financially sophisticated,” says Catherine Tillotson, head of research at consultancy Scorpio Partnership. “A local mutual fund might not provide the sort of investment you are looking for and you might want to take your money overseas and access the instruments and capabilities available, say, in Switzerland.” |
The increased wealth generated in developing countries, where political, economic and currency risks are still untamed, contributes to the diversification of an offshore centres’ client base. The most encouraging developments come from Brazil, Russia, India and China (the BRIC countries), as research by the Economist Intelligence Unit and Barclays Wealth Management shows.
“In the emerging world there are still [offshore] opportunities,” says Cameron Fowler, managing director of Barclays Wealth’s private banking operations. “In many cases, these opportunities are increasing where significant wealth is being created but economic, political or currency instability still exists. Russia is a good example of a country where investors want offshore centres. The Russian economy – eastern Europe in general but Russia in particular – creates quite a lot of wealth for quite a lot of individuals. There are estimates in the market that suggest that anywhere between half and two-thirds of those assets of high net worth individuals would be held offshore from Russia.”
The reduction of opportunities in Europe and the increase in wealth creation in other parts of the world is remodelling offshore centres, primarily in Switzerland.
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“The shape of offshore business is changing,” says Robert Taylor, CEO of Kleinwort Benson. “The shape of the Swiss bank is shifting. Historically, the Swiss bank has been orientated towards Europe and this has now shifted towards markets further afield.” |
BRIC wealth
The wealth creation growth in the BRIC countries is not only giving Swiss relationship managers a more multicultural work life, but is also contributing to the growth of other offshore centres in time zones closer to clients’ homes, with Singapore and Hong Kong leading the way in Asia. Such centres might also become interesting to EU residents who wish to escape the EU Savings Directive, as neither Singapore or Hong Kong have signed up to the European document and have therefore not agreed to provide information on interests earned on local savings accounts or exercise a withholding tax.
Reaching a universal consensus on whether onshore banking is preferable to offshore banking for wealthy individuals is impossible given the different needs of very different clients – an affluent European retiree will need different products and will be served by a different group of wealth managers than an ultra net worth Middle Eastern heir, for example. What is clear, however, is that the legal and financial development of established economies and new wealth created in emerging countries are reshaping both the onshore and the offshore business models. All wealth managers will be affected.
