Although there is a common perception that offshore banking is a route for clients to hide “undeclared” funds, this is not how offshore banking in Singapore has been developed or will be promoted, according to Francis Koh, professor of the Finance Practice, and director, MSc in Wealth Management, at Singapore Management University.
Date: June 2012
As a result, in the years ahead, offshore banking will complement onshore banking services and lead to the further growth of the wealth management industry in Singapore.
Understanding offshore banking
By definition, offshore banking covers bank services provided by financial institutions located outside a depositor’s country of residence. The commonly-cited benefits of offshore banking include:
Depositors often combine offshore banking activities with social and/or business visits. This suggests that offshore banking locations are usually located in strategic locations which have easy travel access to and from home countries for the offshore clients and their relationship managers.
Why then do some analysts postulate the the demise of offshore banking in the near future?
It is probably because of a legacy issue involving some offshore banking centres which had grown to be conduits of “undeclared money”. These centres prospered with the help of statutory acts providing “bank secrecy”, which tolerate the acceptance of indiscriminate deposits without rigorous know-your-client processes.
Many of these centres were alleged to be involved in money laundering and black-listed by the Organization for Economic and Co-operation and Development (OECD).
There is now a broad consensus in the industry that “bank secrecy” as practised previously will not be available in the near future. International co-operation against tax evasion and other forms of illicit cross-border fund transfers have made strenuous demands on financial institutions removing bank secrecy as the raison d’être for offshore banking. Consequently, offshore financial centres, which depend on regulatory provisions of bank secrecy as the mainstay of business, will decline.
However, wealth management in Singapore did not evolve from, nor was it developed to take advantage of, “bank secrecy” or “undeclared funds”, and Singapore has not been blacklisted by OECD at any point in time. Thus, there is indeed room for both onshore and offshore banking to grow in Singapore.
The growth of wealth management in Singapore
The active promotion of Singapore as an international financial centre gained traction in the 1960s. With excellent infrastructure, a well-educated workforce and an efficient legal system, many financial institutions were attracted to establish operations in Singapore.
Many multi-national companies set up manufacturing facilities as well as their regional headquarters in the republic. The growth of commercial, trading and manufacturing activities supported the need for international finance. The increasing presence of global financial institutions sets the scene for Singapore to be a “global” financial centre. Singapore is currently ranked in the seventh position as a global private banking and wealth management centre after London, Geneva, New York, Toronto, Hong Kong and Zurich.
The driving force behind Singapore’s financial sector development has been the Monetary Authority of Singapore (MAS). MAS has assiduously introduced regulatory reforms and actively promoted the growth of the banks and encouraged financial innovations.
The many measures implemented by MAS and other government agencies include the following:
According to an industry survey by MAS, more than 80% of the total AUM was sourced from outside Singapore demonstrating Singapore’s primary role in serving regional and international investors. The Boston Consulting Group has estimated that Singapore has an 8% market share of the global cross-border wealth management.
The strategic thrust of the industry in Singapore
In developing wealth management, Singapore’s strategy focuses on becoming a “competent, trusted and clean financial centre”, as articulated by Ravi Menon, the managing director of MAS. This will support the ultimate objective to sustain Singapore’s position as a premier wealth management centre building on its existing capabilities and robust “financial eco-system”.
The strategy has been operationalised through a set of visionary actions. On the issue of competency, MAS recognised that Singapore faces a severe shortage of talent. Qualified professionals are needed in almost all areas: front, middle and back offices. Hence, MAS, has encouraged the industry to train more professionals, and quickly.
So far, about 1,500 professionals have been trained under this FICS framework. Meanwhile, the framework is being reviewed and refreshed to increase its relevance to the industry.
In line with the urgent need for more competent wealth managers and to provide a pipeline of trained talents for the industry, the Singapore Management University, in collaboration with Wealth Management Institute (WMI) and supported by Swiss Finance Institute (SFI) and Yale University, offers a Master’s degree in wealth management to aspiring and incumbent wealth managers. This unique degree offers qualified candidates opportunities for internships during their studies. So far, more than 300 participants have graduated from the programme.
On the issue of sound market conduct, MAS regularly reminds the private banking industry to build trust and strengthen client relationships. Wealth managers have been urged to move away from a transaction-driven approach of pushing products to a client-centered approach which focuses on customised advice that will meet the financial needs and life-cycle circumstances of their clients.
Banks have also been advised to review their compensation structures and to refrain from “aggressive poaching” of staff from other competitors.
MAS has repeatedly stressed the need to keep the financial centre “clean”. There are real and reputational risks if Singapore becomes a conduit for illicit funds, and Menon has pledged that Singapore is fully committed to align its AML and counter-financing of terrorism (CFT) regulations with the recommendations of the Financial Action Task force (FATF), which sets the global standards to control the flow of illicit money.
MAS strictly enforces the AML/CFT provisions through a risk-based approach by taking into account the business activities, types of customers, products and services and the internal control system of each private bank.
Recognising the importance of collective responsibility to develop best practices and ethical conduct within the industry, private banks in Singapore have banded together to establish a Private Banking Interest Group (PBIG). One of the early initiatives of this group was to launch a Code of Conduct for the industry in Singapore, setting out key competencies, training and assessment of relevant wealth management professionals and their appropriate market conduct. The Code also establishes standards regarding the continuous training and assessment of the professionals.
Under the code, relevant wealth managers have to pass a common competency assessment called the Client Advisor Competency Standards (CACS) before they can provide financial advice. The assessment examinations were successfully implemented in September 2011.
Will Singapore continue to thrive as an offshore centre?
The wealth management industry in Singapore is growing well, led by MAS and other key agencies of the Singapore government, working closely with the industry – which has collectively agreed to shoulder responsibility for raising competency, upholding professional conduct and developing a client-centric environment.
The close collaboration between industry and regulatory authorities is a key strength of and augurs well for the future of wealth management in Singapore as a competent, trusted and clean wealth management centre for both onshore and offshore banking.