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Banking Secrecy in a World without Secrets - Thoughts on the Impact of Offshore Leaks

by Werner Broennimann

“To keep your secret is wisdom, but to expect others to keep it is folly.”
- Samuel Johnson
The above statement may be a bit extreme, but in a world where a sole disgruntled employee can leak information by the truckload it has become increasingly difficult to safeguard secrets. Even in institutions whose entire business model depends on them. Wikileaks may not come back but for better or worse I believe we are in a world where leaking information will not go away for a while. We may see even bigger leaks in the future.
Offshore Leaks is unprecedented in its size, but even before private banks and their clients in Europe came under pressure by leaked CD-ROMs that were sold to the tax authorities in Europe and the US.
Additional to that several countries have become a lot more willing to use their power to go after undeclared money hidden in offshore finance centres. Especially the US have been using a very heavy handed approach on this.
The world is clearly in motion and one country’s everlasting banking secrecy of today may cave in tomorrow. The public naming and shaming of celebrities may or may not be the way to go, but relying on a veil of secrecy and complex offshore vehicles to evade taxes can no longer be considered a sustainable way of wealth planning.
Several banks have set up ‘white money only’ operations and create value for their clients through better service and sophisticated asset allocation. Also tax consulting that tries to minimize the tax burden through legal means seems like the much better choice now.
All of this has made the wealth management business in the affected jurisdictions harder than back in the days when banking secrecy was a key selling point. More transparency means also more scrutiny by the clients and pressure on fees. To make matter worse the effort required to comply with the regulatory environment has also increased significantly. As one would expect, profitability of wealth managers in classic Private Banking hubs like Zurich has gone down significantly.
In many ways this looks like a textbook case of an industry that is getting more mature as one of its key competitive advantages has lost a lot of effect. Differentiation by traditional means becomes more critical.
Only the future will tell whether or not the wealth management industry will be able to reinvent itself to former glory or whether a new normal of lower profitability will emerge. However as long as there is a growing number of high and ultra high net worth individuals there will be demand for wealth managers and even in lower margin industries the best in class typically are significantly more profitable than the rest.
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