A U.S. tax probe against Swiss bank UBS has killed traditional offshore banking and wealth managers will have to improve their offers to survive, bankers and industry experts said on Tuesday.
Offshore private banking involves managing the wealth of rich clients from a foreign location.
However, some clients have exploited the system to avoid paying taxes, especially if carried out in traditional banking secrecy strongholds like Switzerland and Liechtenstein.
The situation has been thrust into the limelight since Washington accused UBS of using Swiss bank secrecy laws to help wealthy clients avoid paying taxes and forced it last month to hand over some treasured client data.
UBS's capitulation to the U.S. tax authorities and a global crackdown on tax evasion are denting the allure for banks to shelter untaxed money, experts say.
The entire offshore banking model seems to be dead, said Teodoro Cocca, a professor for Wealth and Asset Management at the Johannes Kepler University in Austria.
Forget bank secrecy and focus on onshore or on tax compliant business, he told an audience of Swiss private bankers.
Experts say there has been almost no growth in the offshore private banking business in recent years, even though some small players are still attracting tax-sensitive money. The returns offered are just becoming too risky, Cocca said.
Top bankers say private banks in Switzerland, the world's largest offshore center with an estimated $2 trillion in managed wealth, should learn from UBS's troubles and compete more with other banks on their home turfs.
The consequences of the crisis at UBS have been dramatic, said Pierre de Weck, Head of Private Wealth Management at Deutsche Bank.
I have been for years an advocate that Switzerland should build from a position of strength and attract capital not because of confidentiality, he said. Our big offshore center has to learn the onshore skills to survive.
De Weck said private banks based in well-known financial centers such as Switzerland and London, the world's second largest offshore financial center and a gateway to such banking secrecy hubs as Jersey, Guernsey and the Isle of Man, would continue to offer services to foreign clients.
He said this was especially true for clients based in underdeveloped markets that have yet to build diversified financial services.
If you are a shipbuilder in Greece, you have your money in Switzerland or London, because Greece has not got the capability (to offer the same breadth of financial services), de Weck said.
However, private banks will have to be prepared to bear the higher costs of ensuring clients pay their taxes back home.
Offshore compliant is a business model. Offshore non-compliant is not, said Sebastian Dovey, Managing Partner at specialized wealth management consultancy Scorpio Partnership.
The onshore model is the model many more players will start to tackle. It looks like it is a better business.
In a world of increased transparency and with cash-strapped governments seeking more tax money, clients will still be attracted to specialized financial centers, but this should be because of a better offer rather than tax advantages, bankers said.
The key issue is: What are you wanting from an offshore center? said Angela Knight, chief executive of the British Bankers Association.
At the moment, what is not a workable proposition is whether there are tax advantages and confidentiality advantages. These are rushing out of the window right now.
(Editing by Karen Foster)