The cynics may have written off the offshore private bank but the industry continues to grow, largely due to the personal service and expertise private banks can offer
Combine world recession, the downturn in equity markets and global uncertainty and you might have a reason to be fearful for the health of the offshore banking industry. Yes, it is true to say the global financial industry is going through a tough time at the moment. Indeed, consolidation is not restricted to manufacturing industry or mainland financial organisations, even the offshore industry is going through a period of radical change.
But fear not. Offshore private banking is, in fact, a growing industry. This is despite the fact that stock markets have had a torrid three years or so, the dotcom industry is but a fragment of its former self, and investor confidence is at a low ebb.
In general, people are being paid more now than they previously were, so disposable income and savings are a lot higher. Many people who have invested in property over the last five years, for example, have potentially made substantial profit. Private banking is a growing industry because there are more people out there still making money, but above all in uncertain times people become more focused on their financial affairs and begin to take steps to ensure they are with the best service provider, and look to fiduciary structures to protect assets in a more efficient manner.
With the increasing numbers of mass wealth-management services, the cynics began writing off offshore private banks. What the cynics failed to take into account is that a private bank is a different animal to a mass wealth-management service.
People continue to relocate around the world a lot more and this is a trend that is likely to continue ' with the obvious benefits to the offshore banking community. These expatriates are using private banks for their expertise in financial and estate planning. There are also a lot of global entrepreneurs who choose to use offshore private bank accounts for the same reasons.
It is not unusual for so-called 'expatriates' to be married to citizens of other nationalities, to move from country to country and never expect to return 'home.' For them, offshore banking is the simplest and most advantageous solution. Indeed it is the only real solution given the level of advice they will need and the pure logistics of their geographical position
Offshore bankers are specialists, so they can offer tailored advice about foreign currency, foreign exchange commission switching between currencies and where appropriate, provide fiduciary services, for example, offshore trusts. If clients need to relocate to a number of different countries they can do so without changing their bank account, which will make their lives much easier.
From a taxation point of view, it is sensible for expatriates or potential expatriates to open accounts in offshore jurisdictions where interest is paid gross. In many cases this allows a greater efficiency in tax management, especially for those who may still have a tax obligation in their home jurisdiction. Private banks have attracted and retained a loyal client base over many years due to this type of specialist and personal knowledge.
As well as the stock market downturn, the doom merchants pointed to the rise in mass wealth-management services as a potential threat to established private banking services. However, this so-called threat is no real threat at all. The amount of money that has been expended going after this market is astounding, and in reality the products they are offering already exist and are provided by offshore private banks with years of expertise.
One of the tools that the mass wealth-management industry is trying to trumpet is the use of the internet and its advantages for the global consumer. Of course the internet is tremendously useful to customers, especially those operating in different timezones, but it cannot stand alone for private banking activity. Online banking can only be viewed as an additional product, one that should be seen to complement a private banking service, not replace it. This is one of the areas where mass wealth-management has missed the point ' for the simple reason that private clients require a personal service they can rely on, not just for banking transactions but also for enquiries and advice. The internet is no substitute for this kind of service.
The problem that these new mass affluent services are facing is that there are not enough clients opting to use them so they are unable to cover costs. Even if they do gain a certain percentage of market share, that does not guarantee a profit. Research into this market has shown that the cost of servicing the average mass affluent client with investable assets of £50,000 is roughly £750 per client, per year. Banks trying to break into the market would need to generate fees of around £1,500 pa from clients to maintain their management expense ratios, according to KPMG.
Proper wealth-management advice takes time and effort and is costly to provide, and the amount of time a customer expects to receive does not vary according to wealth. The reason customers have traditionally used private banks is for expert advice and a personalised service. Mass wealth-management does not necessarily address either of these issues. Recent research conducted by Tulip Financial has confirmed this opinion. Wealthy customers were found to be abandoning high street banks for offshore private banks. High street banks, including Lloyds TSB, Barclays, HSBC and the Royal Bank of Scotland, have seen their share of current accounts for high net worth individuals fall from 80% to 71%. Lloyds TSB was particularly badly hit, with its individual market share falling from 17% 12%. Services were being withdrawn as quickly as they were being launched. The survey of 517 people with average liquid assets of £300,000, showed that people were moving as they did not get the service they wanted from the high street banks.
Looking to the future, many high net worth customers already have at least two or three banking arrangements. This is a trend that is likely to continue. Private banks need to maintain a high level of personal service to ensure they are not dropped from this list of arrangements.
An issue that arose as a result of September 11, and a valid one as far as offshore private banks are concerned, was the reputation of the centres in which banks are located. Clients will rightly be concerned that the jurisdiction holding their money offers protection to the investor. It is fair to say that offshore centres are not all cut from the same cloth.
However, with a little research, it is easy to see that quality offshore centres ' such as the Isle of Man ' are some of the safest places to hold money. This is not because there is a 'no questions asked' policy, but rather because the questions asked are so thorough. These centres have been working for years against the problem of money laundering and other international crimes, and have built systems to tackle them. So, it is unfair and inaccurate to brand all international finance centres as hotbeds of criminal activity.
All banks in the Isle of Man, for example, are licensed and supervised to strict criteria by the island's Financial Supervision Commission. Licenses are only issued to subsidiaries, or branches, of existing banks. These have to have been registered and licensed in jurisdictions that have proper supervision and licensing regimes themselves and comply with international standards on banking supervision. In terms of financial crime, there is a substantial amount of cooperation between the island's bank's and regulatory authorities to try and ensure that only quality business is accepted. Banks must exercise a 'know your customer' policy to minimise the risk of being unwittingly used in money laundering or other criminal activities.
Investor and depositor protection is also strong and comparable with the UK. Depositors are protected up to 75% of the first £20,000 per depositor up to a maximum of £15,000. The scheme is funded by contributions by banking institutions on the island in the unlikely event of a failure of a bank.
Offshore private banks have been conducting business successfully for many years now, and this is reflected in the size and loyalty of the customer base. However, this should not lead to complacency and private banks should not be tempted to alter the essentials of their service. Those institutions that have ignored the personal advice and service element of private banking have done so to their cost. Private banks' years of experience have resulted in an offering that customers really want, and that can withstand the onslaught of 'mass' competition and the global scapegoating of international finance centres. If the offshore private banking industry is growing now, in a world economy that has already slowed down, we can expect even greater expansion in the future.
Customers traditionally use private banks is for expert advice and a personalised service.
The mass wealth management service sector poses little threat to private banks.
Private banks that have ignored the personal advice and service element have done so to their cost.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected