It has been the smaller clients with accounts in countries such as Liechtenstein, Switzerland and Luxembourg, who have faced this problem.
It started with making things a little difficult for the client, hoping they would get dissatisfied and go somewhere else. Some did, most didn’t.
Then it was followed by slapping a great big yearly fee on these smaller accounts. Foe example a semi-annual “account fee” of say 1 000 euros. That got everyone’s attention and started a slightly bigger exodus of smaller clients.
Because the money held by these clients was what the banks like to refer to as grey money. This means money that has not been declared or has not been properly taxed in the account holders own tax jurisdiction. To put it bluntly, in today’s climate, this money falls under the criteria of tax evasion.
So where are these clients going to take their money? It’s a bit tricky taking it back home. Transferring a few hundred thousand euro to your account in your home country is bound to raise all kinds of red flags and a few uncomfortable questions. So many clients just decided to grin and bear it.
Now it is the end of 2013 and the banks have stopped playing nice. They have been telling smaller clients to get out and do it now.
But why are the banks kicking out smaller clients? Surely these smaller clients are profitable? Well yes they are, their assets tend to be placed in the bank's own investment funds so the percentage earned on the assets is way in excess of what medium and larger size clients pay. It all comes down to the end of banking secrecy, which brings with it two issues:
- Administrative. You cannot now open an account with a private bank unless you sign a declaration stating that you are in compliance with tax rules in the country where you are tax liable. Many banks also require that you sign a power of attorney to the bank to automatically provide information to your relevant tax authorities. In these matters both a client with 500 000 euros and a client with 5 000 000 euros put the same administrative burden on the bank. Which client do you think the bank prefers to serve?
- Image risk. As mentioned above the money in question is “grey” therefore it carries image risk for the bank. Once automatic exchange of information begins there is the very real threat to the banks that some famous and/or public individual has a smaller account somewhere and when that is discovered the banks name will be plastered all over the media and dragged through the mud along with the client. Not a desirable scenario for any bank.
What I am writing here is not opinion, it is documented fact. Luxembourg, Liechtenstein and Switzerland are signatories to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Which is just one step in a long path towards further transparency ending in automatic exchange of information.
2015 will actually be a historic year for private banking in Europe and the EU as Luxembourg begins automatic exchange of information. For anyone who has been involved in the private banking business during the last years, they are in little doubt that Liechtenstein and Switzerland will follow very quickly.
Understand this now, because I still have trouble getting it in to the heads of some people. Banking secrecy in Europe is dead.