Euromoney: The Death of Private Banking

By Helen Avery on Euromoney

[Read the full article on Euromoney, this is an excerpt]

Private banking emerged in Europe in the 1600s and 1700s as the continent’s nobility needed a safe place to hide their money amid the various revolutions that sought to level the playing field between the wealthy and the poor.

Back then, ‘private’ largely meant ‘secret’; later attempts to redefine it as ‘personal’ have been unconvincing.

Last year’s ‘Paradise Papers’ leak, which itself came on the heels of the ‘Panama Papers’, revealed that private banking still has more in common with its 400-year old roots than the industry would care to acknowledge – chiefly that private banks are advising clients how to avoid paying taxes, even if today they call it ‘tax optimization’.

Between 2009 and 2016, Swiss banks and the Swiss private banking arms of international banks were fined $5.8 billion for tax violations in the US alone, according to data from the Corporate Research Project’s violation tracker. Last year, HSBC’s Swiss private banking arm paid €300 million to settle a tax probe with local French tax authorities.

If private banks once viewed tax avoidance fines as merely a cost of doing business, they now have an entirely different problem – their clients do not want that business.

Josef Stadler, UBS’s head of global ultra-high net-worth, has said publicly his billionaire clients, for example, are concerned that growing inequality between rich and poor could lead to a “strike back”.

Those fears reverberate across the wealth spectrum.

Morris Pearl, a former managing director at BlackRock, is a founding member and chair of the group Patriotic Millionaires. Its members are wealthy individuals lobbying for higher taxes for their income bracket in the US.

“People understand that the growing gap between rich and poor is causing social unrest, and it does not work. We don’t want a world of armed guards – no one does,” says Pearl.

What many of the wealthy want today has little to do with tax optimization, private jets and concierge services.

“Clients care less about red carpet treatment and more about whether they are getting a holistic, modern service, and to know the impact of how their money is spent and invested,” says Santander Private Banking chief executive Victor Matarranz.

Falko Paetzold at the Centre for Sustainable Finance and Private Wealth at the University of Zurich says that some German and US wealthy individuals are asking their family offices to be less aggressive when it comes to taxes.

“Only the most progressive of asset owners are starting to talk about the tension between investing responsibly or running a foundation and being tax aggressive,” says Paetzold. “Nonetheless these conversations are beginning. It’s a view into the trajectory that wealth management will take over the longer term.”

Read the full article on Euromoney