With ever-increasing financial services legislation, there is a need for offshore banks to raise their game in order to meet the regulatory challenges facing the industry
Offshore banks no longer exist in a world where rules and regulations are decided by their home jurisdictions. Over the last 10 years, the international regulatory requirements of offshore banks have been tightened considerably, with greater attention being paid to the legitimacy of serving existing customers and looking for new cross-border clients.
There has been a huge increase in financial services legislation and all financial services organisations and banks (in particular), are now subject to greater scrutiny. Although regulation is still not a level-playing field in all countries it has increased in developed countries.
However, it is not simply the evolution of legislation globally that is changing the playing field for offshore banks, but also the evidence of a greater sense of urgency within the respective regulatory bodies themselves.
The reason behind this new-found enthusiasm for increased global regulation seems to be two-fold. Firstly, it is no longer appropriate to distinguish between nationals of the onshore jurisdiction and expatriates when considering consu mer protection.
Historically, the law in a given country may have made no explicit distinction between these two groups of residents, cultural and linguistic differences. This often produced what appeared to be a two-tier system, whereby the nationals of the country seemed to be able to rely upon greater practical levels of assistance from the authorities, while the temporary resident was left with 'caveat emptor'.
Spain is one jurisdiction where cries for assistance from the expatriate community at the mercy of rogue, unregulated independent financial advisers went unheeded until the noise became so deafening that the Bank of Spain and the securities regulator, the Comisión Nacional del Mercado de Valores (CNMV), became obliged to begin looking into cases of unauthorised selling.
The second factor relates more to self interest. Onshore jurisdictions have been saying for some time that they believe offshore jurisdictions have been siphoning assets away from their countries with a corresponding reduction in tax receipts. This has been of particular concern for their permanent resident population and they are looking for ways to slow this process down, if not stop it all together. Clearly, focusing on whether the offshore providers are complying with domestic legislation is a useful way of addressing this issue.
Further grist to the mill is provided by some of the negative experiences British banks have endured recently at the hands of the Financial Services Authority (FSA), the unified regulatory body that now controls the activities of most strands of the UK financial services industry.
Senior executives and their compliance teams within the banks' head offices are becoming more sensitive to the potential for similar problems elsewhere in the world where they do business and expect group best practice to be enforced wherever a business unit operates.
Offshore banks in the Channel Islands have always worked hard to satisfy the requirements of not only their host regulators but also those of the FSA.
In addition, particular care has been taken to consider the requirements of the Federal Reserve and the Securities and Exchange Commission (SEC) in the US, often as a result of the presence of group subsidiaries in the country and the all-embracing compliance requirements for the group as a whole worldwide. These developments require banks globally and their offshore subsidiaries specifically, given the widespread distribution of their customer bases, to consider other jurisdictions.
Offshore banks may have customers resident in upwards of 100 different countries, so the requirement to understand legislation and how it is implemented in so many countries is a real challenge. By doing this, banks are protecting themselves. Also, their customers can be confident they are dealing with an organisation that takes its responsibilities seriously when it engages in discussions relating to their financial affairs.
In order to begin the process of understanding what its obligations and opportunities are when dealing with existing or potential customers in a given country, offshore banks should consult the websites of the onshore country regulators, from which it can glean a general insight into the regulatory environment.
In certain cases, such as Hong Kong, there may be more specific information available, which will outline what an external bank may or may not be able to do. As a rule, however, the regulatory website will only take you so far. Specialist consultancies, often based offshore, can provide further assistance in the form of databases, which can supply a synopsis of the position in a given country.
If a more detailed view is required, specific pieces of work can be commissioned. If this approach is taken it is vital that the position is regularly reviewed so that updates to legislation or the stance of the regulator are factored into thinking.
The result of such investigations can be that restrictions are required to the current business model. This, of course, challenges the bank to either accept the resulting reduction in business from the country in question or consider whether creating some form of physical presence (either independently or in conjunction with an existing regulated organisation in the jurisdiction) may make sense. Ignoring the findings is not recommended.
Local legal firms with experience in dealing with such situations are often the first port of call, however, accounting and tax practices are also important in ensuring a holistic understanding of the position on the ground is understood.
The options open to banks working independently tend to fall into one of three categories: representative offices, branches and subsidiaries.
Most start-up operations will focus on the representative office option for reasons of relative ease to establish and lower costs. However, activities permissible through representative offices can vary from being restricted to a generalised promotion of an organisation's brand through to a fairly comprehensive ability to market and sell to individual customers. Branches and subsidiaries would most likely follow on from evidence of the successful operation of a representative office.
From the perspective of businesses based in offshore centres, such as the Channel Islands or the Isle of Man, effective promotional work by bodies - Isle of Man Finance, for example - cemented by agreements between the respective regulatory bodies of the offshore and onshore jurisdictions, has resulted in good access to markets in the Middle East, South Africa and parts of South East and East Asia.
Additionally, the US, although requiring an extensive compliance and commitment of resource, is prepared to consider applications from banks based in the British offshore islands.
The EU is a challenge and it is hard to see, at the moment, any alternative to non-EU-based organisations finding a way of establishing a foothold within the EU in order to gain appropriate market access.
Offshore banks will need to decide how they will embrace the regulatory challenges facing the industry. For those that are willing to lift their game, the opportunities afforded by an increasingly globalised world are perhaps bigger than ever.key points
Regulatory environment tightened over the past decade
Websites of onshore country regulations provide insight to regulatory environment
Big opportunities available through increasingly globalised world
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