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Introduction

Shelby R du Pasquier

Lenz & Staehelin

Thursday 05 September 2019


Private banking and wealth management have been and remain crucial pillars of the banking industry. Historically, a number of jurisdictions, such as the Channel Islands, Luxembourg, Switzerland and the United Kingdom, have developed a particular expertise in that field. That said, all financial centres today have a wealth management industry that typically target their own residents. Private banking and wealth management have further evolved in parallel with international economic growth and the ensuing creation of wealth. Over the past decade, Asia, in particular, has been a booming centre for private banking, with the emergence of major financial centres such as Hong Kong and Singapore. In 2017, Switzerland, as the world’s leading wealth management centre, had a 21 per cent market share of the wealth management business, which represents a decrease of 4 per cent from the previous year. In contrast, Hong Kong and Singapore have grown considerably in importance in recent years. Hong Kong increased its market share by 127.1 per cent between 2010 and 2017 (9 per cent in 2017) and Singapore by 7.2 per cent (5 per cent in 2017).

Wealth management is also one area that has been in a state of flux during the past couple of years, as a result of a maelstrom of legislative, regulatory and tax reporting changes. Those changes reflect both the aftermath of the 2008 global financial crisis and international trends in a number of areas, including ‘know your customer’ (KYC), anti-money laundering and tax transparency. As a result, private banking has been under increasing regulatory and compliance pressure. In the past, wealth management, depending upon the way it was conducted, could be performed in a number of jurisdictions with little or no supervision. The situation has now drastically changed, with the expansion of a dense regulatory grid covering the entire banking sector, including wealth management. As a result, private bankers are now generally subject to a framework of rules covering all aspects of their organisation and management, including minimum capitalisation and equity requirements, codes of conduct and ‘fit and proper’ tests applicable to both management and shareholders. Certain countries, such as Switzerland, where wealth management is still only regulated from an anti-money laundering perspective, are now introducing supervision of asset managers.

In parallel, the change of tack as regards taxation is particularly striking: after turning a blind eye for decades to the tax residence and status of their clients – when they were not instrumental in the structuring and administration of their undeclared financial assets – private bankers have been forced, particularly as a result of the implementation of the Financial Action Task Force recommendations with regard to the fight against money laundering, to become de facto the ‘long arm’ of their compliance officers and even regulators and tax authorities. As a matter of course, they now report suspicions of offences of a tax or other criminal nature that are potentially committed by their clients.

Information requests targeting financial advisers and their clients have become a routine occurrence for international financial centres. Under the unprecedented push from the Organisation for Economic Co-operation and Development, international tax treaties have been amended to facilitate the transmission of information to foreign tax authorities. This has resulted in a marked increase in the number of such requests and the speed of such transmission. Switzerland, which remains one of the world’s largest wealth management jurisdictions, has thus seen a huge increase in the number of such requests. Whereas there were just a few hundred 10 years ago, more than 4,700 information requests were sent to that country in 2018, coming mainly from European countries.

In addition, since the introduction in 2014 of the Foreign Account Tax Compliance Act, which focused on US taxpayers, we have seen for the past couple of years the implementation in more than 100 countries of a multilateral automatic exchange of information for tax purposes. As a result, an overwhelming flow of personal and financial information related to the clients of private bankers and asset managers has been going to the tax authorities of their clients’ respective places of residence.

As a result of these changes, the legal and regulatory environment within which private bankers operate has drastically changed over the past couple of years. Traditionally, banking secrecy and confidentiality were the key words that underpinned private banking and wealth management. Confidentiality remains an important consideration, except as regards tax matters, where it no longer exists. On the other hand, KYC and compliance have become increasingly critical aspects of wealth management, both at the inception of the relationship and on an ongoing basis. Compliance and tax transparency have thus become the key words of the international financial industry. Similarly, transparent client information and suitability assessments have become a key part of private bankers’ jobs following the 2008 global financial crisis and the resulting regulatory initiatives (eg, the Markets in Financial Instruments Directive (Directive 2004/39/EC)).

In parallel, there has been a gradual blurring of the boundaries between ‘offshore’ and ‘onshore’ private banking. Historically, a distinction was made, theoretically based upon the country of residence of the client base, whereby offshore banking targeted non-resident clients while the onshore industry was focused on residents. In practice, the development of offshore wealth management was closely linked to confidentiality and taxation issues. With the erosion of these attributes, the historical distinction between onshore and offshore banking is disappearing. This, in turn, has had an impact on the industry itself and has fostered an international concentration trend in recent years. This is leading to the emergence of large international financial groups, such as UBS, Credit Suisse, Santander and Julius Baer, that are developing an extensive network of affiliated entities or branches onshore, whereas other groups have exited private banking altogether or in certain jurisdictions. In contrast, smaller institutions having more limited resources focus on one or several target markets. The aggressive geographical development of onshore banking in Asia is another sign of the tendency to operate in the markets where investors reside. This ‘onshorisation’ process is further accentuated by the increasingly aggressive enforcement by local regulators of cross-border rules, respectively new barriers to entry and cross-border offering of certain products and services.

Last, but not least, these changes have had an important impact at the client level. Some clients have found themselves lost in the international regulatory and tax overhaul. The often long-standing relationship between bankers and their clients has been further eroded by the structural changes in the industry and its concentration, which has led to a large turnover of staff. Less obviously, it is interesting to note the evolution in the client’s relationship with his or her banker, in particular as a result of the expanded role and responsibility of the banker towards local regulators and the reporting duties deriving from the ever-increasing anti-money laundering obligations. The ‘confidante’ role historically played by private bankers with their clients is phasing out, a greater focus being put on the core tenets of wealth management, namely performance, quality of service and pricing, all of which are being put under pressure from the emergence of technology-driven products and services, spanning all aspects of the wealth management services, from robo-advisers to quantitative model trading strategies, aggregation and reporting across jurisdictions, institutions, currencies and asset classes.

The private banking and wealth management industry is certainly going through interesting times and is facing unprecedented challenges and paradigm shifts, all of which cross borders and span multiple jurisdictions.


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