Clients in danger of losing in private banking kickabout
Clients could end up with higher fees as private banks pull out of their unprofitable regions and implement new business models
The recent $2.6bn (€1.9bn) settlement with US authorities by Credit Suisse is a far from isolated event in the world of private banking.
It follows a deal UBS made in 2009, which saw the bank pay $780m in fines. Other Swiss banks are expected to settle as they change their mindset from tax-led to compliant business based on portfolio performance.
LGT in Liechtenstein had a similar conversion, following a data theft, settlement and sale of its German unit. It never looked back, expanding internationally, leveraging portfolio management skills to private clients.
Banks have realised they can no longer dip in and out of markets when large pools of money appear. Increased regulatory requirements are making private banking operations more expensive and risky, forcing withdrawal from certain jurisdictions and a re-focus on fewer markets.
“There has been a realisation that private banks can’t serve all countries and segments,” says Ray Soudah, a former board member for Swiss and Asian banks, now running the Millennium Associates consultancy and a leading advocate for industry reform and measures to “improve the image of Switzerland”.
Mr Soudah will be a speaker at the Global Distribution Summit to be held in Monaco on 23 June, as part of the Fund Forum event. “The banks now need a different set of tax-efficient products compliant with each jurisdiction they operate in,” he says.
He estimates “several hundred billion Swiss Francs” of clients’ funds are in flux, with assets about to change hands between banks over the next three years. Many foreign customers of banks in what were once considered “offshore jurisdictions” such as Switzerland, Liechtenstein, Luxembourg and Monaco are left “unwanted” by their banks, even though there are managers elsewhere who would probably welcome their custom.
His team has designed the CATCH system to help banks administer transfers of declared assets within and between jurisdictions, in exchange for “a small percentage of revenues” and is currently working with 100 banks.
Banks can indicate in confidence which markets, regions or segments they wish to exit or increase exposure to. Mr Soudah’s team looks for matches and puts the parties in touch with each other. “This can only be beneficial for the reputation and smooth clean-up of the banks’ situation,” he says.
This re-alignment is part of a much broader transformation of the wealth management industry, including its economics and point-of-sale mechanisms, leading to the model’s industrialisation.
Until recently, the premium pay of relationship managers was typically recovered by kick-backs which fund managers paid to banks. But this is no longer allowed in the UK and is gradually being outlawed by other markets. But wealth managers, hampered by “hopeless inefficiency” and characterised by “dreadful systems and operating models” are yet to adjust to the new reality, says David Ferguson, Fund Forum panellist and CEO of the Nucleus Financial platform.
Although some banks will try to prop up their platform revenues by taking a chunk for “fund packaging,” Mr Ferguson believes they will struggle with this model.
“This new economic model is still evolving,” says Olivier Renault, head of the Luxembourg operation at Société Générale Securities Services.
A lack of consistency in fees means some wealth managers are “squirming to find a back-door to replace revenue,” says another Fund Forum speaker, with large global players looking to levy “administrative charges” – shorthand for shelf rental – to fund providers.
With private banking operations in different countries now proposing a range of advisory, transaction and account fees, there is a risk the client will end up paying a much higher fee in the new transparent world than was levied through the previous “kick-back” model.
