Bankers around the world had a bumpy ride in 2011, made more difficult by roadblocks and diversions thrown up by regulators.
These officials are a well-meaning bunch, creating structures to protect the end-consumer, ensure the health and stability of the global financial system, and make sure governments receive their share of tax revenues.
But while their intentions are good, regulatory changes of the past year will continue to impact the strategies of wealth managers in key markets around the world in 2012. Here Scorpio presents its global review of some of the key developments to be mindful of.
UNITED KINGDOM: The Retail Distribution Review (RDR) will have a wide-ranging impact on the way clients receive and pay for investment advice. Although the changes have been debated since 2006, uncertainties remain over the model’s final shape. With a deadline for full implementation of January 2013, firms will be using this year to prepare; chief concerns surround maintaining profitability and retaining clients. There are also fears over a loss of advisors from the industry and a withdrawal of services to the affluent – the very consumers this legislation was designed to serve better.
Of course, there is still political pressure on banks, with proposed legislation aiming to reduce the risk of another domestic banking crisis (lest we forget, the British taxpayer already owns Northern Rock, RBS and Lloyds Banking Group). The UK government has indicated it is looking to accept “in full” the Sir John Vickers’ report, which recommends the separation of banks' retail business and investment business. Private banks, and the wealth management divisions of larger groups, appear to fall squarely in the middle of these and the ring-fencing may prevent them from offering a full array of services. Some may choose to migrate some of these services offshore, but bear in mind 2011 also brought major change to offshore centres potentially making them less able to serve these clients in as profitable a manner.
Historically, a key attraction of banking offshore was the ability to structure clients’ affairs to minimise the impact of taxation, but in this era of austerity and increased intergovernmental cooperation this is a diminishing factor in choosing your institution or jurisdiction.
SWITZERLAND: It’s clear that the era of bank secrecy is all but over. Switzerland has signed more than 30 double taxation accords since 2009, when it agreed to comply with the Organisation for Economic Co-operation and Development (OECD) standard on tax information exchange; the trend continued this year as new agreements were signed with Germany, India, the UK and Russia. With secrecy fading as a unique selling proposition, Swiss bankers are increasingly highlighting their reputation, stability and expertise. Other offshore centres are similarly promoting their transparency and compliance as an asset.
NORTH AMERICA: US regulators have introduced Foreign Account Tax Compliance Act legislation that will impact US citizens globally. Because it will require institutions to implement withholding taxes on US persons’ accounts, some firms are asking clients to find a new home for their offshore money. Credit Suisse recently closed its Zurich-based unit for US clients, and HSBC decided to stop providing offshore private banking services to this market. Other institutions, such as Royal Bank of Canada, are taking a different tack and creating compliant structures to serve the market effectively.
ASIA: Singapore launched the world’s first, industry-led Private Banking Code of Conduct in April, which set out three objectives: fostering standards, enhancing transparency and building confidence in the private banking industry. The code requires private banking advisers to pass a competency assessment before they can provide financial advice. In addition, it sets out standards of market conduct such as ensuring clients’ funds are from a legitimate source and giving adequate disclosure on the products they provide.
In Hong Kong, reforms such as the liberalisation of renminbi regulations and greater access to the mainland China market present new opportunities. There are challenges in dealing with no fewer than four separate regulatory bodies that oversee the market – the Hong Kong Monetary Authority, the Security and Futures Commission, the Office of the Commission of Insurance and the Mandatory Provident Fund Schemes Authority – although there are signs these bodies will work more closely together in the coming year.
On the mainland, the China Banking Regulatory Commission (CBRC) is planning to combine current regulations and issue standardised measures regarding private banking business. The regulations will apply both to domestic and joint-venture banks, and the authority is expected to issue more private banking licences. From this month all commercial banks will be required to assess and categorise the risk profile of wealth management clients into one of at least five levels, and then demonstrate they have sold only suitable products to those clients. The CBRC also plans to crack down on illegal practices including banks purchasing each other’s wealth management products or investing client funds in other banks’ wealth management products.
The costs of complying with changing regulations (enhanced training, improved reporting systems, fully staffed compliance departments and management time) are always balanced against the real costs of non-compliance (hefty fines, reputational damage, systemic failure).
Global and local firms will be making some tough choices about which markets to operate in, and which clients to serve. Regulators should watch to ensure that the impact of their work in the years ahead is not fewer clients served by fewer bankers offering fewer choices.