By gavin neilson and Richard grint, PA financial services experts
The recent release of the so-called ‘Panama Papers’ – a substantial collection of leaked data about the clients of Panamanian law firm Mossack Fonseca – has sent shockwaves throughout the private banking industry. The size of the leak, the number of prominent individuals implicated and the names of the major global financial services institutions using Mossack Fonseca’s offshore banking services has led to extensive media coverage and prompted action from both regulators and tax agencies across the globe. Whilst these leaks are often helpful in assisting tax authorities in fighting financial crime and tax evasion, they also increase reputational pressure on the organisations involved – even if their activities are legitimate.
For private banks, particularly those identified in the leak, this represents a further blow to their offshore banking offerings which have historically been very attractive sources of revenue due to their commission-based income, high cross-selling potential and low capital requirements. This is just the latest in a series of challenges that have put the Ultra High New Worth (UHNW) individual market under significant pressure. The financial crisis reduced total assets under management and regulatory changes such as MiFID and AIFM have restricted product development. In addition, global tax evasion legislation such as FATCA and CRS has forced institutions to fundamentally rethink how they can profitably serve their wealthiest customers.
It is clear that the strategic change from offshore to onshore wealth management will now accelerate in the face of further political and regulatory scrutiny, and forthcoming changes will only increase the pressure for change. In particular, extra jurisdictions joining CRS, further tax amnesties accelerating the repatriation of client assets and the ongoing dilution of banking secrecy will continue to make onshore banking look like the only realistic long-term option for wealth managers and private banks.
However, this switch to onshore banking does bring some benefits to customers. While they lose a degree of anonymity, legal system flexibility and tax benefits, they stand to gain from accessible relationship managers and funds, as well as reduced exposure to currency fluctuations. So, if it is handled correctly, the move from offshore to onshore private should allow institutions to retain their most valued customers.
All this means that there are a number of immediate actions institutions currently engaged in offshore private banking (and particularly those implicated in the ‘Panama Papers’) need to take. They are:
- Prepare to respond to regulators in multiple jurisdictions; firms should immediately audit impacted business units to understand their level of potential exposure.
- Bolster KYC activities for all HNW banking customers, accounting for forthcoming MLD4 legislation in Europe where applicable; more politically exposed customers may need to be exited.
- Reshape the business model to place a greater emphasis on onshore banking, including simplifying businesses to remain competitive; and where legal offshore banking remains, ensure that full oversight of those business units is in place.
- Rejuvenate the onshore private banking product suite to best attract customers in the new world. This may include more service-led products such as art banking or philanthropic services. It is essential that these products are truly differentiated, so that they can compete with the potentially more capital-efficient mass affluent offerings from the high street banks and new competitors.
PA have extensive experience in helping many of the world’s biggest banks and wealth managers respond to regulatory change, prepare for regulator attestation and future-proof their business models: for more information, contact us now.