On the way back from summer holidays we reflect on which lane to enter as we come through customs. Clients with offshore money are facing a similar choice of whether and how to declare assets – do you take the red lane and declare everything, the green lane if coming from approved countries, or the blue lane and hope you don’t get singled out for a further search?
The shifting regulatory environment continually impacts how, and where, banks serve their clients. This summer has seen several wealth managers making decisions based on regulatory change to enter or disengage with certain markets and particular groups of clients based on where they feel there is opportunity or exposure.
One example is the Foreign Account Tax Compliance Act legislation that comes into force in 2013 but is already having an impact on US expatriate clients. 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. HSBC has decided to stop providing offshore private banking services to this market. Others, such as RBC, have decided to take an opportunistic tack by offering a compliant service to these individuals to build up market share in expatriate centres such as London.
These changes mark a shift from focusing on individual compliance with regulation, to institutional compliance. In the past, wealth managers were prepared to take clients at their word that they were complying with any relevant regulatory and tax constraints, but as regulators have increasingly penalised the banks for client lapses, they have had to rethink their approach. The decision today is whether to invest in meeting the compliance needs of entire segments of clients, or to forgo them because they are too difficult to serve.
What is clear is that the trend toward harmonisation is continuing. Just this month Switzerland announced two new bilateral tax agreements with the UK and Germany. In both cases, offshore clients will be able to maintain their anonymity under Swiss banking secrecy, but at a hefty price. In the case of UK clients, they will be subject to a one-off charge of between 19-34 per cent of the assets held depending on the length of time the account has been open, and then an ongoing regime which is similar to the existing UK tax rates from 2013 onwards.
For the UK and German governments, these treaties provide additional much-needed revenue to their treasuries. For the Swiss government and banking community, it provides an avenue to potentially avoid further fines such as those imposed by the US.
Clients with offshore accounts will have the choice to continue to keep assets in Switzerland under the new regime, move them to other jurisdictions before declaring their existence, or potentially move them to other offshore centres. This window where offshore clients decide to move from traditional Western offshore centres to the East, may be only a temporary effect. Emerging wealth management centres in Asia are actively putting frameworks in place to demonstrate financial stability and regulatory rigour, and even though today there is less pressure for them to share information across borders, that will not always be the case.
If history is a guide, clients will only move when the pain becomes extreme, with many deciding it is time to regularise their affairs. For billionaires there may be real reasons to stay offshore and shift their asset and residence base, but for the more ordinarily wealthy the convenience and trust of familiar advisors may outweigh the potential cost savings of changing domicile.
As harmonisation continues to gather pace, tax treatment will become less of a determining factor for clients, and more basic criteria such as long-term performance and service quality will return to the fore. Banks will support this trend by continuing to build up onshore platforms to serve local wealth well.
Bill Yelverton is executive director at wealth management think-tank Scorpio Partnership
