With an acceleration in the creation of global wealth, private banking services are increasing in demand. The industry is currently fragmenting between onshore and offshore private banking although most of the serious players have a foot firmly entrenched in each camp. Onshore private banking is expected to show the fastest growth, particularly within the EU, where political initiatives to increase free trade and co-ordinate fiscal regimes are gathering increasing momentum, not least with the recent introduction of the Euro. There has also been a worldwide move to restrict the use of offshore centres for individuals and companies seeking to evade taxes, or wash the illicit proceeds of crime through the banking system. This has led to increased legislation and compliance is often as rigorous in offshore centres as in the best regulated onshore territories.
This article is about the offshore private banking market which, although expected to grow more slowly than its onshore equivalent, is already well established and has estimated global assets of US$16.6tn already in situ.
There are many private banking offshore centres of excellence throughout the world, often small islands whose GNP is dominated by finance. The better known ones include the Channel Islands of Jersey and Guernsey, the Isle of Man, the Cayman Islands, Labuan and the British Virgin Islands. Some of the potential changes in international financial law will result in a change in emphasis for differing centres. For the moment they work well alongside each other. For example, a Jersey based trustee is as likely to set up a BVI company as he is a Jersey company, all depending upon a client’s personal circumstances.
Private Banking - What is it?
Private banking essentially consists of banks providing one or more services for wealthy customers. The core product which usually underpins the banking/client relationship is that of investment management. Other, often complimentary services include providing trustee services, deposit and cheque account facilities and offshore lending. This list is by no means exhaustive of the services available and in recent years there has actually been a move away from product distribution to more of a wealth management philosophy - something familiar to UK based IFAs.
Offshore investment management is at least as diverse as its onshore equivalent. Private banks offer a variety of strategies for discerning investors. This ranges from investment via collective investment schemes (either in house or third parties) typically, although not always for the entry level client, up to a full discretionary service where a fund manager is assigned to run the underlying portfolio. Entry levels for this service varies, but UK£1m or currency equivalent is a good starter. The choice of investment manager will be critical to the continued financial good health of investors and research into the areas of past performance, charges, quality of market research available and the managers ability to replicate the in-house investment models for individual clients, should be high on any advisors list of priorities before committing client’s funds.
Trusts are a major, arguably the most important, product on offer through an offshore centre. Reasons for establishing a trust are varied but amongst them are:
- protection of assets from foreign authorities,
- to avoid dissipation of family wealth,
- relinquishing ownership whilst retaining some enjoyment, and
- to create a vehicle to hold assets that will continue irrespective of death.
There are two main types of trust in regular use offshore, discretionary trusts and interest-in-possession trusts. The discertionary trust gives the trustees maximum flexibility in that they have absolute discretion and can therefore assess and adjust to the changing future. An interest-in-possession trust gives the beneficiaries an absolute right to income arising from within the trust. Trusts are established by an individual, the "settlor", who gifts the assets/property to another, the "trustee", directing him to look after the assets for the benefit of another, the "beneficiary". There are several important points to note; the legal rules which bind trustees are equitable in nature and the trustee’s obligation, primarily to the beneficiaries, may be enforced by the courts. The attraction of offshore trusts by individuals who are UK domiciled has been reduced over recent years by the progressive introduction of more aggresive anti-avoidance legislation. However, for non-UK domiciliaries significant opportunities still exist.
Pure banking services provided offshore usually mirror their onshore counterparts - that is, time deposit accounts, current accounts and lending facilities. One major difference is that interest on accounts is paid without deduction of tax and accounts are available in a wide variety of currencies.
Formation of offshore companies can be a useful part of the offshore armoury. Often used as investment vehicles there are fewer investment restrictions and the company will not be taxed on investment income arising within the company or on capital gains.
They can typically be used to either hold or form unit trusts, OEICS, mutual funds or investment trusts.
They can also be used to register direct property holdings. This is often put to good use for individuals who are non-UK domiciled, who wish to purchase residential or investment property in the UK market. A mortgage is taken out through the offshore company secured against the UK property. Rental income is used to service the loan which belays income tax problems for the individual and CGT is avoided when the property is sold, as long as the shares in the offshore company are held offshore - often in an offshore trust.
Future growth in offshore private banking will come from two sources - existing clients investing more and new clients investing new assets. The "old money" so often relied upon by private banks is fairly well tied up and unlikely to move much in the future. New money will mostly come from a new breed of client, the high income earner who may not have much in the way of investible assets at present but who will be in the process of accumulating wealth. Difficult to categorise precisely but likely to have a household income in excess of UK£100,000 per annum. In the offshore market a growing number of individuals meet these criteria and the numbers are predicted to increase rapidly. This will be as a result of demographics (an increasing population of working age) and economic growth.
In terms of marketing, this level of client is at the crossover point between the clearing and the private banks. IFAs who have a client base which includes non-UK domiciliaries and/or working expatriates, should be looking more closely at what is on offer from offshore private banks if they want to retain and expand into this potentially very lucrative market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to firstname.lastname@example.org