The end of banking secrecy

Now that there should be equal competition between Swiss banks and those in neighbouring countries and island centres, in which direction will the private clients’ money flow?

Across the borders from Switzerland, German and French banks, hugely affected by the financial crisis, are still waiting to evaluate the situation. “There will be a levelling between the different states,” suggests Joerg Brock, head of private client portfolio management at Dresdner Bank in Frankfurt. “The experience of German clients is that their banks have lost them money and generated costs, leading to a huge loss of confidence in their banks. This will lead to a flight to quality of advice.”

However, this does not necessarily mean Swiss banks will benefit. “This is a country with a home turf. Germans still trust German banks a lot more than international banks,” he warns.

In Paris, the mood is more optimistic, with the head of private banking of a major institution claiming there have already been flows into the French capital. “We are now opening accounts for foreigners. Something has already changed,” says the senior private banker. “The end of banking secrecy is a big, structural move, which will reinforce onshore business and weaken offshore business. The ultimate client and customer will perceive higher risk and difficulties and be unconvinced of the ultimate advantage of being offshore.”

Most island centres, still under attack from European and US governments and keen to avoid being found on government lists of unwelcome trading partners, appear to be re-inventing themselves as niche players, servicing front and back office needs of wealth management groups, rather than deposit taking centres.

Carving a niche

Located off the UK’s North West coast the Isle of Man, has been carving a niche as an operations and asset management centre for hedge funds. Attracting ‘alternatives’ managers Charlemagne Capital and Bridge Asset Management has helped boost funds managed on the island from $7bn ten years ago to $43bn (E30bn) today, peaking at $53bn in 2008.

“Our costs of operating are favourable compared to the Caymans, Dublin and the City of London, and we can still bring people in when we need to,” says John Spellman, director of Isle of Man Finance, which has backed diversification into fund administration in order not to be concentrated on one specific area during market swings. Administrators on the island include BNP Paribas, HSBC and Fortis.

Many hedge fund managers feel they are badly serviced in the European timezone, and welcome the emergence of European island centres to rival Caribbean favourites Cayman and BVI. Financial services is playing an increasing role in the economy of the semi-independent island of 80,000 people, now accounting for 36 per cent of GDP.

The Isle of Man has recently announced plans for automatic exchange of tax information to steal a march on other offshore centres. Locals were aggrieved when their island was dismissed last year by UK Chancellor Alistair Darling as a “tax haven sitting in the middle of the Irish Sea.”

Along with the Isle of Man, the other British-connected offshore centres, Jersey and Guernsey, are competing to boost asset management and asset servicing businesses, to help replace any offshore banking or Trust businesses, which may be edged out by UK regulations or G20 pressure.

“We are facing huge amounts of competition and it is getting more hectic by the day,” suggests Peter Niven, chief executive of Guernsey Finance, whose department is working on two priorities: introducing businesses interested in joining Guernsey-based players, such as subsidiaries of wealth managers Credit Suisse, Kleinwort Benson and Rothschild; and combating currently fashionable anti tax haven rhetoric from US and European governments.

Guernsey has signed tax information exchange agreements with 13 jurisdictions, including the US, UK, France, Germany and the Netherlands. As requested by the OECD, the agreements all address tax evasion.

Neighbouring Jersey has in recent years specialised in attracting specialist property and private equity related fund work. Island representatives say its 13,000 employees working in the finance industry amount to considerably more than most competitors.

Malta is different in that, along with Cyprus – another Mediterranean country once labelled an ‘offshore’ centre - it has joined the European Union. “Since we joined the EU in 2004, there has been a new perception of Malta; we are more on the radar,” reveals Joe Bannister, chairman of the Malta Financial Services Authority. “And I can assure you. We are not on any list of tax havens.”