What effect the end of banking secrecy?

By Stephen Evans

Ending banking secrecy in Luxembourg on January 1 2015 has had a significant effect. The business of moderately wealthy foreign clients (the fabled Belgian dentists) of simply stashing cash in Luxembourg bank accounts to avoid tax is largely a thing of the past. Jobs have been cut and the number of banks has fallen.

Banks do all kinds of things in Luxembourg, and wealth management is just one of these. The end of legally enforced secrecy about savings information has hit some harder than others.

This contributed to the drop in the number of banks from 152 in April 2014, to 141 a year later. Employment in private banking had risen from nearly 4,000 in 2008 to over 7,000 in 2012 falling to 6,783 in 2013, said a recent report from the Luxembourg Bankers Association’s Private Banking Group. 

Post-crash changes

These declines were well before secrecy ended at the start of this year, and this was despite good news such as the arrival of several Chinese banks. The expectation from the industry and unions is that this decline will continue.

But change had to come after the 2008 crash. Until then the likes of Luxembourg, Switzerland and Austria had managed to repel demands that they lift banking secrecy.

However, in recent years, the international pressure to change became too great as governments sought to end illegal tax evasion.

So, in 2013 Luxembourg agreed to sign up to an EU law that allows foreign tax authorities access to information about private bank accounts. The regulator has also taken a firm line.

The Financial Sector Surveillance Commission issued a circular in April requesting firms “show themselves to be pro-active in the struggle against tax fraud.” 

Countering criticism

Despite the losses, the feeling is that Luxembourg is benefiting overall from the change, particularly regarding international public relations. For example, when the Swissleaks story of tax evasion broke in February it detailed Switzerland and Luxembourg banks' involvment in tax avoidance.

“The industry is now focusing on attracting the business of “high net worth individuals” and even “ultra high net worth individuals”.

The country was able to counter criticism by pointing to the recent changes. The wealth management sector continues to thrive though.

The industry is now focusing on attracting the business of “high net worth individuals” and even “ultra high net worth individuals”.

This involves creating structures that find legal ways to keep tax bills to a minimum. Competition is fierce from the likes of Switzerland and London, although Luxembourg is the main eurozone private banking centre.

More assets managed

This strategy appears to have paid off so far, with banks managing more assets than previously.

The Private Banking Group report said that last year wealth managers were dealing with 318bn euros of assets, 4% more than in 2013 and 15% more than 2007.

However, due to the tougher environment, income at 1.68bn euros was 8 percent lower than 2007. Although assets are up, this is because the country is attracting more wealthy clients.

So while this might be OK for some banks, there will be a downside for employment. The Private Banking Group calculated that over half of all assets now come from clients with wealth in excess of 20m euros, up ten points since 2011.

Meanwhile, the assets of the merely “affluent” (with between 100,000-500,000 euros to invest) account for 9 percent of all assets, down from 15% four years ago.

However, the 20m euro+ clients only make up about 1 percent of the total. Fewer clients need fewer staff to service them. 

A growing market

These figures are for 2014, before the end of secrecy, so what has happened since?

National statistics office Statec estimated that assets would fall by about 5 percent this year, but industry players privately expect something like a 10 percent drop. Over time this could lead to more job losses as business lines are wound down and processes are outsourced to reduce costs. Servicing the very rich is a growing market though.

A recent study from the Boston Consulting Group predicted that private wealth is due to grow by over 4 percent per year in western Europe over the next five years.

The figure will be closer to 10 percent in the Middle East and Asia, which could be good news for the likes of the BIL and KBL (Qatari owned) and the Chinese banks.

Pierre Gramegna, the finance minister, told the Financial Times in a recent interview that “bank secrecy had become more of a handicap than an advantage” for Luxembourgish banks.

He reckons that after the decision to abandon bank secrecy, the level of bank deposits remained stable. “The clients we have been able to attract are from the Gulf and Asia,” he said.

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