The reams of new regulations faced by private banks in Asia is eating into their margins as tough new rules force them to spend big on compliance while they close their doors to wealthy US clients.
Wealth managers in Asia are facing the headwinds of new requirements on product selling and customer suitability brought in by Singapore and Hong Kong as well as new US efforts to stop its citizens hiding money offshore.
That’s on top of the tough new capital and liquidity rules faced by the banking industry as a whole.
“We are seeing a big step-up in the regulatory requirements across the industry and rightly so to a large extent because the industry did not cover itself in glory at the beginning of the crisis,” Shayne Nelson, chief executive of Standard Chartered’s (STAN.L) private bank told the Reuters Global Wealth Management Summit in Singapore.
“As an industry we are seeing a lot more focus on (product) suitability compliance and operational risk, so the cost base of that actually increases the cost of business quite substantially,” he said.
While Asia weathered the 2008 financial crisis relatively well, many individual investors lost millions of dollars in complex structured products such as the minbonds in Hong Kong that were linked to Lehman Brothers.
That pushed the Hong Kong authorities to bring in new rules on the mis-selling of financial products. In Singapore, private banks are signing up to a new code of conduct.
“These regulations are driving up the costs – they’re focusing on lifting the standards of private banking,” said Mark Jansen, a partner in PricewaterhouseCoopers financial services advisory practice.
“They put under pressure those who don’t already have them embedded into their operating procedures,” he added.
In practice, these new rules mean private banks are hiring more compliance officers and better risk-control systems as well as investing more in training their front office staff to improve the way they sell their products.
But it’s not just the regulators forcing the banks to up their game, it’s coming as well from customers who want stronger guarantees that their money is safe.
“Customers are being more demanding than the regulators,” said Sameer Chishty, a partner at Bain & Co.
“They are telling the banks to ‘explain better what you are selling to me, what are the hidden risks, what are the hidden costs?.’”
NO NEW TAX HAVENS
Despite these rising costs, Asia’s private bankers say there is no temptation to capitalise on Switzerland’s recent tax deals by luring over new customers who are trying to escape the tax man.
Asia’s financial centres have been touted as a possible destination for tax evaders looking to move funds over from Europe, a risk bankers say they are vigilant about.
“I think my peers and I have to put on a much stronger judgmental hat when it comes to assessing inflows,” said Su Shan Tan, head of wealth management at DBS (DBSM.SI).
“We don’t want to create a situation where we start getting accused of being a hotbed, that’s the last thing we want, so if you don’t want that in the long-term then you’ve got to take the short-term pain of saying no thank you,” she added.
Few private banks in Asia now accept money from US taxpayers following the American authorities’ dogged international campaign to crack down on tax dodgers.
DBS will only offer Americans in Asia a regular checking account while Credit Suisse said they serve Americans outside of the United States via their SEC-registered unit in Switzerland.
“Because of the restrictions in servicing them, because of the onerous reporting requirements, that is not a target market for us to go after,” said Marcel Kreis, Credit Suisse’s (CSGN.VX) Asia-Pacific head of Private Banking.
Yet, regardless of whether or not these banks take US taxpayers’ money, they are all still facing the costly prospect of the new Foreign Account Tax Compliance Act.
This requires non-US banks to show the American authorities they have verified whether any of their customers should be paying US tax. If not, they will face a withholding tax their US-derived income.
“You need to have the systems and monitoring processes in place whether or not you have or haven’t got US clients,” said StanChart’s Nelson.
“We are committed to deliver on time, but it’s not without its problems – it’s a lot of work for the industry to go back and review a lot of historical files,” he added.
But while it adds to the regulatory headache, the law will make life tougher for some tax evaders, a move that experts say will benefit Asia’s financial centres.
“As a financial centre, you don’t want to be the place that is murky or has a wild west mentality. As a financial centre you want to be as clean as clean can be,” said Bain’s Chishty. -By Rachel Armstrong and Cerelia Lim