LONDON: Private banks managing the financial affairs of the world’s wealthy face spending millions of dollars every year on vetting new clients, as regulators get tough on banks that harbour tax cheats and money launderers.
While the world’s rich are getting wealthier and putting more money into private banks, a growing proportion of the cash is from geo-political troublespots in the Middle East and Asia.
That is leading the banks, mostly based in Europe and the US, to spend hundreds of hours on costly checks aimed at meeting regulators’ demands to root out bad clients, eating into their profit margins.
Paul Kearney, head of Kleinwort Benson’s private investment office, said his team incurs between 5,000 and 25,000 pounds (US$7,600 to US$37,800) of costs in vetting each new client, depending on the background intelligence required and the jurisdiction in which the research is undertaken.
“Currently the international client base is the faster growing so we would expect our costs to increase in the next 12 to 24 months,” he said, adding costs could equate to up to 10 per cent of the first year’s earnings from that account.
Some in the industry question whether all the effort will make much difference.One London-based lawyer specialising in super rich clients, whose firm rejected one customer who turned out to be selling restored Soviet military hardware in the Middle East, said sophisticated criminals would always be hard to identify.
“If someone wants to get through the process and they are an inappropriate person, they will almost certainly have the necessary documentation and a front to get themselves through,” he said, speaking on condition of anonymity.
But with regulators cracking down on banks, and plans to prosecute individuals as well as their employers currently being discussed in some countries, more money managers feel they have to invest some of their profits in trying to reduce their risks.
“It is expensive, that is true, but you cannot think of it as it once was, because you cannot go back in time,” said George King, head of portfolio strategy at Royal Bank of Canada’s private banking arm, of the tougher vetting process.
“The burden for not doing it well or incorrectly, in terms of reputational risk or fines is both enormous and growing.”
Top banks, including HSBC, have paid huge fines to US lawmakers to make amends for unwittingly laundering Mexican drug money, while Britain’s Financial Conduct Authority has fined three banks, including RBS’s Coutts, for lax money laundering controls since its crackdown gathered pace in 2012.
Increased vetting costs come on top of rising administrative and regulatory expenses that have already made the competitive business of wealth management much less lucrative for banks.
Data from the 2013 World Wealth Report compiled by RBC Wealth Management and Capgemini shows the investable wealth of the world’s so-called ‘high net worth’ individuals rose by 10 per cent to a record US$46.2 trillion in 2012, after dropping 1.7 per cent in 2011.
The flow of money into the US$18.5 trillion global wealth management sector increased 23.7 per cent in 2012, reversing a 27.9 per cent outflow in 2011. However, average pretax profit growth was 5.3 per cent in 2012, down from 12.3 per cent in 2011, with high costs blamed for the dip, consultancy Scorpio Partnership said.
The cost of complying with regulation will continue to rise, according to PwC’s annual Global Private Banking and Wealth Management Survey, published last month.
Respondents said they expected risk and regulatory compliance expenses to account for seven per cent of annual revenue in two years, up from five per cent.
Participants from the Americas are bracing for even higher costs – roughly equivalent to nine percent of revenues in the next two years.
“The ability to understand and manage the avalanche of regulatory and risk issues… will likely require private banks to continue investing heavily,” said Justin Ong, Asia Pacific leader in PwC’s global private banking arm. — Reuters