After the past rollercoaster year with its Arab Springs, spiraling debt ceilings and eurozone dramas, trying to predict developments over the next 12 months is not easy. But firms have to plan ahead, so some grasp of unfolding developments makes sense. What sort of challenges lie ahead of wealth managers?
In this, the first of two articles, we look at the tax, regulatory and offshore issues. The second article examines the economic challenges for firms and clients.
If there is one thing one can be sure of in this world, US Founding Father Benjamin Franklin reputedly said, it is death and taxes. While the health industry does its best to the fight the dying of the light, taxes seem as unconquerable as ever.
The past year saw an intensification of pressure on so-called tax havens by Group of 20 major countries and it is fair to assume this will continue into 2012. Switzerland, which is home to more than SFr2.1 billion (around $2.26 trillion) in offshore assets, is particularly in the firing line. German and UK governments, for example, signed treaties last autumn to improve disclosure of hitherto undeclared assets (the UK treaty has been criticized by the EU as too soft). According to consultants Booz & Co, the treaties will lead to SFr47 billion of assets leaving the Alpine state, and SFr1.1 billion of revenues will go. Ouch. The Swiss have also continued to wrestle with the US over tax issues and many prominent Swiss banks no longer do offshore business for US clients. The pressure is building on a country where banking and finance accounts for about 12 per cent of GDP.
But it is not all about Switzerland. Other jurisdictions such as Liechtenstein, the Cayman Islands, Jersey, Guernsey, Isle of Man, Monaco, Mauritius and even tiny Andorra are increasing moves to throw off the tax haven tag. This may not be enough for some of the most vociferous campaigners, although nothing short of complete global tax harmonization will satisfy them. This, to put it charitably, appears unlikely. But it is absolutely clear now that the world of offshore banking will continue to require more transparency in the next 12 months.
Former lawyer Philip Marcovici, who advised the tiny state of Liechtenstein on its disclosure facility with the UK – and got a Spear’s award for it – argues that the world will get increasingly tough for illicit money. (He is a member of this publication's editorial board).
“Tax transparency developments are moving more and more quickly, and the recent announcement by Ravi Menon, managing director of the Monetary Authority of Singapore, is extremely important and dramatic. He stated that Singapore will move to including tax offences in anti money laundering rules…the fact that this has now been publicized makes it clear that the industry is in a massive transformation,” he said.
His point is important because it has sometimes been assumed that money no longer welcome in Switzerland will just head east. Maybe not, or not in the way people think. In fact, it is more probable that Singapore will want to focus clearly on onshore wealth rather – if Menon's words are borne out – than risking the wrath of G20 policymakers by taking "hot" money from Switzerland.
Another issue that the industry faces is rising attacks on the wealthy, Marcovici said. His concerns are widely shared – in early December, JP Morgan’s Jamie Dimon warned about “wealth-bashing”.
This may be ugly, foolish and self-defeating, but then human nature being what it is, it pays for the industry to realize how it and its clients are seen from the outside. As a result, there will be a need for sophisticated and compliant ways to protect assets, cope with geopolitical risk and meet the human right to privacy (not to be confused with hiding ill-gotten gains).
This all raises the question, as Marcovici argues, of why this industry appears – at least until recently – to lack a co-ordinated championship of the needs of wealth owners. In the case of STEP (Society of Trust and Estate Practitioners), there appears to be more movement in this direction. The group has set up a body to lobby on such issues to UK lawmakers and act as a specific voice for wealth managers. Other organizations, such as New City Initiative, a body of wealth managers in the UK, will hopefully do the same. There is no time to be lost.
New taxes - or maybe cuts?
Other issues to watch out for in 2012 will be the effect of the introduction, as flagged in legislative and other moves from governments, of new wealth taxes in France, Spain and Italy. Governments may already be on the wrong side of the Laffer Curve - will they fall further? (The Laffer Curve expresses the idea that there is a rate of tax above which revenues actually fall rather than rise.)
In the US, the world’s largest economy goes to the polls in November, and judging by some recent speeches from Barack Obama, the president is in no mood to dampen down rhetoric against the jet-owning super-rich, even though he may not want to annoy some of his backers on Wall Street.
The US industry will continue to see how the Dodd-Frank Wall Street and Consumer Protection Act works out; the family office industry, now it has some clarity on the rules as enforced on some businesses by the SEC, will hope for a period of peace and quiet in 2012. The Internal Revenue Service, when it is not dueling with the gnomes of Zurich, is fine-tuning the FATCA legislation (passed in 2010) on expat Americans; this onerous legislation may be tweaked furthermore to ensure it does not harm important interests abroad. But an election year may be a tough period to get legislators' full attention.
In the UK, expect the political cognoscenti to wonder if, or when, finance minister George Osborne really will axe the top 50 per cent rate in his spring annual budget. Past experience suggests he’ll move cautiously. Financial advisors, meanwhile, have 12 months left to get in shape for the rigors of the Retail Distribution Review, a UK reform which has been an almost constant feature of industry conversation over the past year. Despite politicians' calls for delay, the RDR is due to start from January 2013. Other countries will be watching.
In general terms, the regulatory and compliance burden can be expected to increase, or at most, remain the same. In countries such as Brazil, the largest economy in Latin America, the authorities have in the past been tough on foreign banks that don't play by the rules. In Singapore and Japan, for example, Asian jurisdictions have appeared unafraid to crack down on miscreants. Japan remains, meanwhile, a forbiddingly difficult market for non-domestic wealth managers to enter. Any movement on that score appears to be glacial.