Private bank customers get digital as tax disclosure becomes automatic

Private bank customers get digital as tax disclosure becomes automatic

The British overseas territory’s private banking sector goes back more than 160 years and today is developing new areas of operation, writes Ray Spencer in the second part of a report on Gibraltar banking

Key has been the adoption of digital banking – albeit somewhat later than the retail banking side of business – for private clients, a concept that seems to go against the image of close, even secretive, personal encounters with High Net Worth Individuals (HNWI).

The merger of S G Hambros with Kleinwort Benson (KB) last year by parent Société Générale, to create Kleinwort Hambros (KH) marked more than a change in name.  “We are developing a digital banking strategy for private wealth management – delivering a service through on-line advice,” new chief executive Eric Barnet, declared.

He was introducing the rebranded business to journalists in Gibraltar, where it has had operations since 1981 having bought Crédit Agricole in 2003 and ABM Hambros in 2008 – “a track record of commitment to the jurisdiction, which I hope, and expect, to continue”, he said.

The KB part of his business was already ahead, but by end-2017 Barnett expects KH “to have introduced digital account handling, with a wider range of customer services to include Kleinwort investment skills at lower initial levels of entry – down from the present £75,000 general minimum threshold to around a couple of thousand pounds when people are investing – from pensions to ISAs, for example”.

The rationale is that on-line competition arises from tech start-ups that have no history of investment, whereas with KH “people will know that it is a business used to dealing with money, they will gain reassurance, and we can reach a wider range of clients and offer an additional layer of comfort”.

The Gibraltar operation is “profitable”, he told Gibraltar International, and growth in assets under management in recent years – at a rate of 5-10%pa – “has come from expanding the market with HNWIs locally and across the world, not from other players”.

A Swiss privately-owned Gibraltar bank and asset management firm, Turicum, was established in 1993 by bankers, asset managers and lawyers from Geneva and Zurich, (where it has a representative office), and since January has offered internet access to accounts, check balances, make transfers and contact individual relationship managers.

Chief executive, Andreas Businger, relates: “It has been a major project, like driving a car whilst at the same time building and exchanging the motor, and a major challenge, but one that we – unlike some of the major private banks – have been able to do.” Turicum says it does not depend on external financing and “in order to protect the Bank and our clients’ wealth we do not engage in any risky banking activities”, including corporate and investment banking services, mortgages or commercial loans.

Another Swiss-owned private bank, Lombard Odier & Cie, has operated in Gibraltar for 30 years and provides a private client investment and asset management service, plus technology and banking services. Peter Caetano, managing director of the local business since 2015, says the bank “has witnessed and undergone many changes in its time, most significantly the ability to cater for Gibraltar resident clients following the end of the tax-exempt regime in 2010.

“We went from a booking office to a fully-fledged bank, adapting to the ever changing regulatory market”, he explains. With most clients being local or from the UK, he points to the bank’s “ability to constantly re-evaluate the world around us and create fresh perspectives”, a philosophy emphasised in its latest ‘Rethink Everything’ branding campaign.

The introduction of automatic exchange of tax information from this summer with more than 50 other jurisdictions as part of Common Reporting Standard (CRS), adds “a new dimension to the on-boarding process for new clients, and has placed an additional administrative burden on banks to report on impacted clients accurately and in a timely fashion”, Caetano points out.

Serious offence

More than 100 jurisdictions have committed to the swift implementation of the CRS and in 2018-19, CRS extends to much of the rest of the world! Automatic exchange of information involves the systematic and annual transmission of “bulk” taxpayer information by the source jurisdiction to the residence jurisdiction of the taxpayer.

As James Tipping, director of Gibraltar Government’s Finance Centre, points out: “Since January 2011 tax evasion has been a serious criminal and indictable offence with possible imprisonment of up to seven years, which was then a starting-gun for financial services firms to review their client lists and, if they had any doubt about the origin of money they handle, they need to have reported it.

“Thus, it is an offence not to report any suspicion as it could relate to money laundering as well as tax evasion.” It is a particular issue for banks generally, but particularly so for private banks.

For two years, the US FATCA (Foreign Account Tax Compliance Act) has meant banks provide information on US customer accounts, to which a UK-originated version was added last year for Crown Dependencies and Overseas Territories, and automatic exchange of information under the EU Directive on Administrative Co-operation for member States comes into effect in September.

In addition, Gibraltar has circa 151 tax information exchange mechanisms with some 90 countries around the world, including 27 bi-lateral tax information exchange agreements (TIEAs) that variously came into force from 2009 to allow for specific requests by competent authorities for detailed information.  It is believed that Gibraltar has received around 200 TIEA requests regarding individuals resident overseas or entities controlled by such individuals, but none have been sought by Gibraltar of other jurisdictions.

Personal choice grows

The total funds under management for Gibraltar’s seven private banks at the final quarter of 2016 was £7.4bn, compared to £6.4bn a year earlier, but in that time there has been a significant shift away from bank-led investment decisions to non-discretionary, client-made decisions – up 22% by value to reach £6.9bn.

There are five purely private banks in Gibraltar and two others with an element of retail banking, including Danish-owned Jyske Bank, which has been in the territory since 1987 after taking over A.L. Galliano Banker’s Limited, Gibraltar’s oldest private bank in private ownership that dated back to 1855.

Jyske’s original business was 60-70% with private clients, but it became “difficult after the 2009 Lehman Bros collapse”, recalls Christian Bjørløw, chief executive of Jyske Bank (Gibraltar). Five years ago, Jyske decided to become a full service bank, so that today private clients account for around 40% of business, with assets handled expanded to over £1m.  With a minimum of £150,000, “an increasing number of Gibraltar people are able to invest”, he notes.

Last year Bank J. Safra Sarasin (Gibraltar), which opened in 2001, took over the local branch of Credit Suisse as well as one in Monaco, acquisitions it describes as “an excellent strategic fit” that will allow it “to extend its reach in these attractive private banking jurisdictions”. This year saw Bank JSS (Gibraltar) establish, essentially the Credit Suisse business it took over in November, to provide wealth management services to private and institutional clients, and it is expected to re-launch the combined businesses this autumn.

Bank J. Safra Sarasin accepts deposits both from individual clients and other banking institutions, and said in November that it was “determined to further strengthen its position, as it believes in Gibraltar as an important financial centre”.

The Rock has not always been a successful place for Swiss bankers.  In 2013 EFG Bank closed its loss-making Gibraltar business (that it gained from Spanish-owned, Banco Atlantico), along with banks in France and Sweden in a move that cost up to CHF 11.7m (around £8m).

In 1987, other Spanish banks began private banking operations in Gibraltar, Banco de Bilbao and Banco Central, followed by BBVA Privanza International, and Santander jointly with Royal Bank of Scotland, but today none remain.

Barclays announced its withdrawal from Gibraltar after more than 100 years, first in retail banking by early-2015 and closed all of its operations locally by mid-2016 when it withdrew a small office dealing with large companies and very HNWIs, transferring that business to London and Jersey.

Its origins in Gibraltar, however, went back to June 1888 when as the Anglo-Egyptian Bank Limited it became the first non-Gibraltarian bank to open a branch.

Remaining confident

Lloyds Banking Group’s office in Gibraltar with 30 staff “provides a banking service to several thousand UK expatriate or international customers that reside in Europe” and for private banking they need to meet minimum eligibility criteria of a sole annual income of £50,000 or hold £25,000 to save or invest (or currency equivalents), or hold at least £100,000 to save or invest with the bank within six months.

Britain’s intended exit from the EU in 2019 has not discouraged private bankers.  Barnett says the merger of Kleinwort and Hambros was completed before the referendum vote in June 2016 and “our French parent was prepared to make an investment in the UK and its growth in the UK economy even if there was Brexit.

“We are confident that the UK still will remain the international centre for wealth management”, he asserts and the merger “is part of a long-term plan to expand our business in the UK and Anglo Saxon international jurisdictions” – the Channel Islands and Gibraltar. The combined operation has £16bn of assets and saw £2bn added in final 6 months of 2016, “demonstrating strong confidence in the business”, Barnett declares.

The prospect of Brexit for Turicum, a self-described ‘small to mid-sized bank’ (as measured by funds under management), is not seen as a particular problem, given its correspondent banking arrangements with Swiss, UK and Gibraltar banks.  However, Businger says: “It does present an ironic twist, as after Switzerland recorded a narrow binding referendum result in the early 1990’s to stay outside of the then European Economic Union, the bank’s founders decided to set up in Gibraltar [which is at present in the EU], and which was developing as a financial services centre”.

Turicum says it does not depend on external financing and “in order to protect the Bank and our clients’ wealth we do not engage in any risky banking activities”, including corporate and investment banking services, mortgages or commercial loans.

Staff numbers grew from 25 to 33 last year as a result of “continuing steady growth from what he describes as “a relatively small base of customers with an average investment level above €2m, mostly from Germany, France, England and Gibraltar”.  Bussinger reveals: “In 2015 our asset base rose by more than 30% and in 2016 it was a further 10% higher.”

The Bank, he admits, is “a very profitable enterprise” and Bussinger emphasises: “Gibraltar is our home and we are fully committed to the jurisdiction as we are not part of a bigger banking group that might decide to leave for internal political reasons.”

Launched in May 2015 as a State-owned retail bank, Gibraltar International Bank considers expanding into the private banking sector as a possibility, and subject to Board and shareholder approval.  “It will depend on the appetite of the market – we know there has been some movement in that market locally,” observes Lawrence Podesta, chief executive.  “We will need to see where we stand in a couple of years’ time and where Gibraltar stands, given Brexit”,