The On/Offshore Relationship - SunGard Blog Center

Today?s competitive wealth and private banking landscape sees offshore havens fighting one another for wallet share of the wealthy, while onshore private banks struggle to prove their worth.
The appeal of offshore private banks to high-net worth (HNW) individuals is no mystery; for a fee one can bank in a location where regulation is typically more relaxed and there are tax advantages. In Asia, the dynamics around the offshore market focus largely on competition between banks in Singapore and Hong Kong.

Leveraging a preferable tax environment to countries like mainland China is attractive to the pool of entrepreneurs that have grown in these onshore jurisdictions. Equally, more liberal investment regulation allows private banks in offshore markets to offer a broader range of products than are found onshore. Access to overseas markets and less plain-vanilla instruments means private banks can benefit from more nuanced risk/reward profiles.
This helps address the concerns of wealthy individuals who are reluctant to leave their funds in heavily regulated and controlled onshore markets. This newly affluent generation wants to diversify their risk, and needs help in moving some of their money out of their home country, legally.

For the Chinese, Hong Kong is the first obvious step. Modifications to currency regulation have aptly positioned Hong Kong to be a foreign exchange hub. Many Mainland Chinese banks operate in both jurisdictions, so Chinese investors can seek advice without entering a new banking relationship in Hong Kong. When compared to Singapore, Hong Kong is really a gateway investment centre. Many Chinese investors are more comfortable with starting their offshore investment plan in Hong Kong because of its proximity and familiarity with the Mainland. From an investment perspective, a private bank?s customers in either country can route to the U.S. or Europe with ease.

Another primary difference between Hong Kong and Singapore is that private banks also benefit from the lifestyle choice that the Singapore government actively promotes. HNWIs can apply for residency once they reach a certain investment or deposit level in-country. The government has also spent a lot of money building infrastructure, health care and education systems to make it not only an offshore centre where wealthy individuals keep investments, but will also want to live. As a result, Singapore has attracted a lot of wealthy investors not only from China, but other parts of Asia, the U.S. and Europe.

In addition to an expanded range of investment opportunities, banks based in Hong Kong or Singapore are able to move any wealth created offshore with a lot more ease than funds created onshore.

An obvious difference between offshore and onshore private banking are business demographics. Tier 2 and 3 Swiss banks do not set up onshore businesses, preferring to leverage their offshore expertise, with access to Switzerland thrown in as a value-add. And of course, there is a certain allure for HNWIs to operate in an offshore centre with a Swiss bank. However, times are changing; the famed Swiss banking secrecy rules are being systematically broken up as governments crack down on tax avoidance. Pressure from the U.S. around the Foreign Account Tax Compliance Act (FATCA) affects every market around the world. There is huge political pressure from the U.S. to make sure that the banking secrecy that existed in Switzerland for hundreds of years does not replicate itself anywhere else.

Over the years, Singapore has built a reputation as the Switzerland of Asia; it has tax friendly regulation to attract deposits, something only a few other countries, such as the Philippines allow. The Singapore Exchange has worked hard to become an investment destination, developing cross listing and depository receipts with other national markets to bring them into the country.

While banking secrecy exists in Singapore, it is ?more flexible? than the Swiss legal framework, so if another national government comes knocking the rules are a bit more cooperative. This has compromised onshore banks? positions and they will need to develop strategies to keep customers? balances in country, which rely on expertise and trust. They accept that they will lose a portion of their money to offshore centres but if the money held in-country is with a trusted adviser, who understands the clients? needs and their profile, the bank can also offer additional value-add services such as tax advice and financial planning.

Depending on the type of financial institution strategies will vary. For example, domestic retail banks upgrading their services to provide a preferred or privileged banking service can play on their established relationships and stable reputation. Larger multinational banks may find themselves with greater reach and network, but Tarnished reputations on the back of several large scale bankruptcies and interest rate rigging scandals. Nevertheless, they are able to offer a host of services that smaller firms cannot, and they have the potential to white label products and services through other banks both on and offshore as a revenue stream.

As the habit of a typical HNWI in Asia is to spread out investments across a range of banks, this gives both on- and off-shore firms an opportunity to capture a share of investable assets. The potential is there for regulation to lessen the differences between onshore and offshore firms as authorities and investors grow in their experience and fight regulatory arbitrage. On a level playing field, the banks that win will be those in whom customers trust.

Source: http://blogs.sungard.com/fs_banking/2012/08/09/the-onoffshore-relationship/

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