The writing has been so prominent on the wall for such a long while that there is fear that it is beginning to feel like graffiti.
In September, a joint report by KPMG and the Swiss University of St Gallen spelt out a portentous future for the private banking industry in the country. It is the world’s centre of private banking with an estimated more than $2 trillion (Dh7.35 trillion) in assets, but it continues to face multiple pressures.
These include low performance on assets under management, relatively low net new money, persistently high costs per employee, increasing regulatory pressures and falling revenue margins and profits. In January, the Swiss government’s fat-cat ordinance — to be replaced by parliamentary legislation — introduced some of the world’s toughest limits on company directors’ and executives’ pay.
Also last month, the shock move by Swiss National Bank to abandon the cap it had imposed to stop the franc appreciating against the euro invited grim predictions from analysts: complications in merger and acquisition plans, closures and cost-cutting among smaller players, and the need for asset disposals across industry. Consolidation among private banks of all sizes is expected to gather strength as everyone scrambles to comply with enhanced regulation and capital requirements.
In this already complex and challenging environment, the much-publicised whistle-blowing case at HSBC brought several other private banking issues to the fore: tax evasion and avoidance, money laundering, concealment of assets and handling of untraceable cash. HSBC’s response implies this behaviour was common among the bank’s peers, and that if its compliance procedures were inadequate, this may have also been true across the industry — and outside the country.
The HSBC scandal is only the latest in a series of criminal and regulatory investigations associated with private banks. According to ratings agency Standard and Poor’s (S&P), misconduct and related risks in the sector are rampant. “Misconduct risks have become a much bigger issue [and] investigations have become a way of life,” Nigel Greenwood, Credit Analyst, S&P, said at a news briefing in London earlier this month.
Investigations and their results have also led to large fines, and with such a staggering number, the question is not how many private banks have been associated with financial crime, but if there are any that have not. For instance, among the 16 global banks sued by the US Federal Deposit Insurance Corporation last March for participating in the Libor fraud were Barclays, Deutsche Bank, Lloyds, Société Générale, Norinchukin, Royal Bank of Canada, Bank of Tokyo-Mitsubishi, and WestLB.
In October, the European Commission slapped a fine approximating €32.3 million (about Dh134.7 million) on JP Morgan, UBS and Credit Suisse for rigging international interest rates and influencing derivatives. In November, the US Commodity Futures Trading Commission and Britain’s Financial Conduct Authority issued a joint fine of $3.25 billion on Royal Bank of Scotland (RBS), JP Morgan Chase, Citigroup, HSBC and UBS; Swiss financial regulator Finma fined UBS $138 million; and the US Comptroller of the Currency imposed fines of $950 million on JP Morgan, Citibank and Bank of America.
Although many calls have been made for regulation that is better, and more strictly enforced to prevent these problems, private banking is a complex business with closed-door deals being the norm rather than the exception. Several of these are structured specifically to escape attention from regulators.
Euromoney’s 12th annual private banking survey reveals that the biggest industry concerns for 2015 are the interest rate environment, ability to generate returns, and regulatory uncertainty. While 21 per cent of the world’s private banks will invest in asset management this year, 19 per cent have earmarked technology as a priority investment area, and the majority of 500 institutions in 70 countries said Asia will be their focus for expansion.
Burkhard Varnholt, CIO and Head of Investment Solutions at Julius Baer, also listed out the biggest risks in the survey. “In no particular order: geopolitics, epidemics and related scares, monetary and economic policy experiments, competitive currency devaluation, hysteria and herding in financial markets, and the media exacerbating such cycles.”
In the Middle East, the Euromoney survey ranked Credit Suisse as the best private bank. Meanwhile, Emirates Investment Bank recently announced that its net profits increased by 28 per cent, total assets under management jumped 81 per cent, and customer deposits advanced 78 per cent last year. The success of its private banking services is attributed to wealthy individuals in the region who have shifted money from offshore accounts to get more personalised services from local banks that aim to match offerings by larger Swiss counterparts.
Private banking in the region will have to address a different set of issues, such as the Foreign Account Tax Compliance Act (Fatca) — a US law that is aimed at preventing tax evasion through international bank accounts.
Andrew Bates, Regional Head — Middle East, Nedbank Private Wealth, says, “Fatca is a hot topic, and a lot of clients get notifications that their bank is no longer able to provide services to US-connected parties. To avoid these complex regulations and potential issues, an increasing number of non-US financial institutions no longer offer any services to US-connected clients.”
Another issue is the increased capital requirement for banks covered by the Basel Accords, says Bates. “Banks are now required to increase their capital requirements, and this could be a factor when looking at operations in markets such as the GCC.” He believes that cost-competitiveness, inappropriate business models, strategy realignment, local competition and problems in home markets may well see change and consolidation, and this is reflected in recent developments.
RBS plans to sell or close its corporate debt and debt capital markets business in the Middle East, Banque Heritage wants to buy client assets from Standard Chartered and is looking to expand in the region, while Abu Dhabi-owned Falcon Private Bank aims to sell its Hong Kong business to concentrate on the Middle East.
Erich Pfister, Global Head of Private Banking, Falcon Private Bank, explains, “The Swiss private banking industry will undergo a further consolidation process. Many players still need to reassess their business models relative to the variety of countries and customer types they want to serve, and the spectrum of offering they want to provide in future.
“Private banks also need to develop a differentiated value proposition, taking a step beyond the Swiss-ness argument with value-adding investment opportunities.”
Cedric Lizin, Head of Middle East and North Africa at Barclays Wealth and Investment Management, believes that clients will benefit from the highly fragmented sector, as banks in the region compete over service quality and product innovation — also key growth factors. “Over the past year, we have witnessed noticeable growth in the industry. According to industry reports, wealth in the region increased by 11.6 per cent to $5.2 trillion last year, and is expected to rise further to $7.2 trillion by 2018.”
Lizin believes evolving regulations will continue to affect private banking: “The biggest impact is the increased complexity of conducting business to enhance the value proposition to various client segments while addressing regulatory changes. A greater focus on productivity and operational efficiency is required.”
Patrick Odier, Chairman, Swiss Banking Association and Global Senior Partner, Lombard Odier, told Gulf News in October that performance orientation is good news for clients and banks because it forces the latter to deliver. “There is [more] emphasis on both safety and performance. Clients in the region have been focused on risk management. Wealth preservation remains one of the top priorities of investors in this region.”