Regulators throw up roadblocks

Bankers had a bumpy ride in 2011, one made more difficult by the roadblocks and diversions thrown up by the world’s regulators.

These officials are a well-meaning bunch with worthy aims – creating structures to protect the end consumer, ensure the health and stability of the global financial system and make sure governments receive their fair share of tax revenue. While their intentions are good, the regulatory changes seen in 2011 will continue to occupy the minds of wealth managers and impact their strategies in key markets around the world in 2012.

In the UK, the Retail Distribution Review (RDR) will have a wide-ranging impact on the way clients receive investment advice. Although the RDR changes have been debated since 2006, there are still considerable uncertainties regarding the final shape of the model. With the deadline of full implementation in January 2013, firms will be using 2012 to prepare on a ‘best efforts’ basis to comply with a shifting environment. The main worries relate to maintaining profitability and retaining clients.

Meanwhile, there is still political pressure on the banks, with proposed legislation aiming to reduce the risk of another domestic banking crisis. The UK government indicated it is looking to accept “in full” Sir John Vickers’ report which recommends separating banks’ retail business from their investment business.

Private banks, and the private banking divisions of the larger groups, seem to fall squarely in the middle of these two and ring-fencing may prevent them from offering a full array of services to their clients. Some banks may choose to migrate some of these services offshore, but 2011 also brought significant change to offshore centres, which might make them less able to serve these clients in as profitable or straightforward a manner.

Historically, a key attraction of banking offshore was the ability to effectively structure clients’ affairs to minimise the impact of taxation, but in this era of austerity and increased communication between governments this is a diminishing factor in choosing your institution or jurisdiction.

In Switzerland, the era of bank secrecy is almost over. Switzerland has signed more than 30 double taxation agreements since 2009 when it agreed to comply with the Organisation for Economic Co-operation and Development standard on tax information exchange, and this trend continued this year with new agreements 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 exploring similar options, and are promoting their transparency and compliance as an asset.

The desire for transparency is being driven by regulatory changes across the Atlantic as well. US regulators have introduced The Foreign Account Tax Compliance Act legislation that will impact on US persons globally. Because the regulation will require institutions to implement withholding taxes on US persons’ accounts, some institutions 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 has decided to stop providing offshore private banking service 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.

As Western regulations seem to be tightening, those thinking that growth markets in Asia might have a less developed (read more permissive) regulatory infrastructure will be surprised.

Singapore’s private banking community 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. Meanwhile, in Hong Kong reforms such as liberalisation of renminbi regulations and greater access to the mainland Chinese market present new opportunities.

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). Firms will be making some tough choices about which markets to operate in, and which clients to serve.

These well-intentioned regulators should watch carefully to see if the impact of their work is fewer clients being served by fewer bankers offering fewer choices in the years ahead.

Bill Yelverton is executive director at wealth management think-tank Scorpio Partnership