The CRS, which was developed by the Organisation for Economic Co-operation and Development and involves over 100 regulators worldwide, will make it more difficult for high net worth individuals to keep undisclosed money offshore. It requires financial institutions to exchange information annually to help prevent tax evasion.
The information exchange will not be standardised among territories, but depends on agreements signed by between two nations individually. Financial institutions have about one year to prepare the reports.
“CRS is quite complicated. For the US-version Foreign Account Tax Compliance Act (FATCA), you only need to fill one form to the US. But now if you have clients from Germany or Spain, you have to fill separate forms to the corresponding country,” he said, thus pushing up the compliance costs.
The implementation of FATCA, which started in July 2014, requires all foreign financial institutions to report the finances of their American clients to US tax authorities, which again aims to prevent tax evasion.
Some of the biggest banks have begun to shun this client segment due to higher cost of compliance to the FATCA rules, opening opportunities for some robo advisors and other small players in Asia such as Maseco Wealth, Old Mutual International and Crossbridge Capital.
“The higher costs would have two implications. First is lower margins. Second, for Swiss private banks where traditionally has secrecy as a selling point, will need to change the way they market their value proposition.”
Clients might consider US or UK-based peers instead of Swiss private banks, as the former charge less, he added.
It could also induce changes of private banks’ business model: some private banks in Hong Kong have already pushed the minimum threshold higher to some $2-5m from $1m, Liem said.
“The whole mindset of private banks will have to be changed. For example, bankers that service non-domestic clients will have to be more considerate with tax implications before making a recommendation.”
The rules also concern many Chinese clients, a key driver for the private banking business growth in the region, he noted. Although these still have little understanding as well as some misconceptions of the CRS issue.
In Hong Kong, the already intense competition from all sorts of private banks has driven up the human resources and rental costs, making a profitable business even harder, he noted.
“There will be more M&As or withdrawal in the region.”
Recent examples include Edmond de Rothschild, ABN Amro, ANZ and DZ Privatbank.
