The Center Cannot Hold:

The Center Cannot Hold: Singapore to overtake Switzerland as leading Offshore Hub by 2020 April, 2013 Offshore Centers: 2012 Private Banking Handbook

The global private banking industry has AuM of $19.3 trillion. Offshore centers account for 42% or $8.3 trillion of this total. As traditional offshore hubs come under increasing scrutiny, WealthInsight highlights the emergence of new global leaders. The global private banking industry has AuM of $19.3 trillion; offshore centers account for 42%, or $8.3 trillion, of this total. Switzerland is the largest worldwide player with AuM of $2.8 trillion - the vast majority of which is held for foreign clients. Following the global financial crisis, a diminishing sense of confidence among many HNWIs in bank secrecy laws and bank independence in traditionally reliable offshore centers, combined with the tightening of regulations, is forcing offshore funds back to local markets or towards new financial centers. This shift is being accelerated by Asia s rapid emergence as a key player in the global economy. Indeed, there is intense competition within the APAC region to become Asia s leading financial center. Singapore is the fastest growing wealth center in the world with AuM of $550 billion at the end of 2011 and WealthInsight expects it to overtake Switzerland to become the largest offshore wealth center by 2020. Hong Kong is also well placed to benefit from China s attempts to internationalize the renminbi (RMB). Report definitions: For the purposes of this report, the phrase coverage period refers to the period of 2007 2016, while the review period relates to the years 2007 2011 and the forecast period relates to the years 2011 2016. A wealth manager is defined as a specialist wealth management service provider. High net worth individuals otherwise known as millionaires or HNWIs refer to individuals with net assets of $1 million or more excluding primary residences Ultra high net worth individuals or UHNWIs or ultras are individuals with net assets of $30 million or more, excluding their primary residences Billionaires are those HNWIs with wealth of $1 billion or more, including equities, bonds, cash and deposits, fixed-income products, real estate (excluding primary residence), alternative assets and business interests. This paper uses data from WealthInsight s report, Offshore Centers: 2012 Private Banking Handbook. For more information, see: http://timetric.com/research/report/wi0069mr/. 1 P a g e

Data Snapshot: Offshore Centers The global private banking industry has AuM of $19.3 trillion. Offshore centers account for 42% or $8.3 trillion of this total. Switzerland is the largest worldwide player, with AuM of $2.8 trillion. The vast majority of funds held in Switzerland are held for foreign clients. Singapore is the fastest growing wealth hub in the world with AuM of $550 billion at the end of 2011, up from $50 billion in 2000. Offshore Centers Total AuM ($ trillion) AuM, % of Local HNWI wealth Switzerland UK & Channel Islands Singapore 2.8 1.8 0.55 212% 69% 75% Data Summary The global private banking industry has AuM of $19.3 trillion. Offshore centers account for 42% or $8.3 trillion of this total. Switzerland is the largest worldwide player with AuM of $2.8 trillion. Over 80% of funds held in Switzerland are held for foreign clients. The UK & Channel Islands is the 2nd largest player with AuM of $1,800 billion at the end of 2011. Local UK private clients AuM amounted to $780 billion. The remaining $1,020 billion is sourced from foreign clients. Most of this is held in the Channel Islands. Singapore is the fastest growing wealth center in the world. At the end of 2011 AuM stood at $550, up from $50 billion in 2000. WealthInsight research shows that HNWIs in China, India, Russia and Indonesia either prefer, or are forced, to invest offshore. WealthInsight View Offshore private banking will come under increasing pressure as stricter operational procedures are introduced by governments in Europe and North America. A diminishing sense of confidence among many HNWIs in bank secrecy laws and bank independence in traditionally reliable offshore centers will stimulate the movement of funds towards new global financial centers. Swiss offshore AuM are expected to drop to below $2.0 trillion by 2016. High growth of HNWIs in APAC countries such as China, India and Indonesia, will boost AuM in well-connected centers like Singapore and Hong Kong. WealthInsight expects Singapore to overtake Switzerland by 2020 to become the largest global offshore wealth center by AuM. Hong Kong is also well placed to benefit from growth in HNWIs from China and attempts to internationalize the renminbi (RMB). Chart 1: Offshore Centers, share of Assets under Management (2011) 40% 30% 20% 10% 0% Switzerland UK & Channel Islands Caribbean & Panama Singapore Luxemburg Hong Kong Other Offshore Source: WealthInsight 2 P a g e

Offshore Centers As of the end of 2011, Switzerland is the largest offshore center in the world with AuM of US$2.8 trillion. The UK & Channel Islands comes in second, followed by the Caribbean & Panama. Country Ranked by AuM AuM (US$ Billions) % of AuM Switzerland 2,800 34.4% UK & Channel Islands 1,800 22.1% Caribbean & Panama 800 9.8% Singapore 550 6.7% Luxembourg 350 4.3% Hong Kong 250 3.1% Other Offshore 1,600 19.6% Total 8,150 100% Switzerland has an extremely high AuM to HNWI wealth ratio, which is indicative of the relatively large offshore segment in the country. This also suggests scope for growth in emerging offshore markets. Country ranked by AuM AuM (US$ billions) Local HNWI wealth (US$ billions) AuM as a % of local HNWI wealth US & Canada 7,500 20,500 37% Switzerland 2,800 1,323 212% UK & Channel Islands 1,800 2,618 69% France 1,400 1,996 70% Germany 1,100 3,925 28% Singapore 550 730 75% Australia 350 845 41% Hong Kong 250 842 30% Brazil 150 951 16% World 19,250 66,000 29% 3 P a g e

In many growth markets, HNWIs either prefer, or are forced, to invest offshore. This is linked to a shortage of talented and reputable wealth managers at home, as well as the perceived need for risk diversification. Country Ranked by AuM AuM (US$ billions) Local HNWI Wealth (US$ billions) AuM as a % of Local HNWI Wealth Russia 65 941 7% China 62 4,320 1% India 50 1,083 5% Indonesia 17 241 7% China's private banking AuM accounts for only 1% of total Chinese HNWI wealth in 2011, well below the worldwide average of 29%. This can be explained by the close proximity of Asia s key offshore centers: Singapore and Hong Kong, with the latter the main beneficiary of close connections with the Chinese mainland. 4 P a g e

Switzerland: The Center Cannot Hold The Swiss wealth management sector accounts for 14.5%, or $2.8 trillion, of the global wealth management industry s assets under management. It is the 2nd largest country by AuM after the United States. Offshore wealth, worth some $2.1 trillion, accounts for the vast majority of this. Indeed, Switzerland is currently the largest offshore private banking center in the world, with a 34% share of the global market. Over half of these funds are sourced from Europe. HNWIs from countries like Germany (11.0%), Italy (9.5%), and France (5.2%), are among the most prominent clients for Swiss Private Banking services. 60 Swiss AuM, by region 50 40 30 20 10 0 Europe Middle East & Africa Asia-Pacific Latin America North America Looking forward, however, the Swiss wealth management model is under intense pressure. Offshore centers have suffered significant reputational damage in the past four years and advanced economies are increasing their oversight of cross-border banking and tax havens. Switzerland is facing a significant decline in assets under management as a result. HNWIs, particularly from Europe, are being increasingly compelled to retain assets in their country of residence or utilise other offshore centers. HNWIs are being compelled to retain assets in their country of residence or utilise other offshore centers. Moreover, with emerging Asian wealth well covered by locally connected centers such as Singapore and Hong Kong, Switzerland is unlikely to benefit most from the rapid rise of Asia s wealth markets. Some growth in AuM is expected to come from the Middle East, Africa and Latin America, but is unlikely to compensate for the withdrawal of European assets. As a result WealthInsight projects Swiss offshore AuM to drop to below $2.0 trillion by 2016. 5 P a g e

End of banking secrecy: a new paradigm shift Tightening tax regulations across the globe are unravelling the Swiss private banking model. The fabled Swiss banking secrecy system enshrined in law through the Swiss Banking Act of 1934 has, until now, ensured privacy for all offshore and onshore clients of Swiss banks. However, since the advent of the global financial crisis, Swiss banks have been under increasing pressure to reveal the identities of tax evaders and criminals. Following pressure from G20 and OECD countries, the Swiss government announced in 2009 that it will abolish the distinction between tax fraud and tax evasion in dealings with foreign clients. The biggest threat to the Swiss private banking model comes from the US Foreign Account Tax Compliance (FATCA) Act enacted in 2010. This law requires non-us financial institutions to report their offshore accounts and security arrangements held by US-based clients. The first victim of this law was UBS, which was fined and forced to enter into a deferred prosecution agreement with the US Department of Justice to provide identity information for certain US account holders. Another recent incident has seen Julius Baer forced pay German authorities a fine of $72 million. These incidents have raised serious concerns about the existing Swiss private banking model. To the extent that some Swiss Bankers were advised to holiday at home this summer to avoid American and European tax authorities Wealth Management in Singapore Singapore is the premier private banking destination in the APAC region with over $550 billion in AuM at the end of 2011, well ahead of Hong Kong. Singapore has built a reputation as one of the most investor- and trade-friendly countries in the world. The World Bank ranks it first out of 185 economies for ease of doing business in 2012. With its strategic location, Singapore is a natural business and trading hub for South-East Asia. Its stable regulatory structure, tax and business-friendly environment have attracted global wealth managers, private banks and HNWIs. Indeed, Singapore, has the highest density of HNWIs in the world and has become one of the world s leading offshore wealth centers: offshore assets account for 80% of the country s total managed asset base. Singapore has benefitted from a cautious regulatory regime at home and the country s embracing of global operations standards, and also from diminishing confidence among many HNWIs and UHNWIs in bank secrecy laws and bank independence in traditionally reliable centers like Switzerland and Luxembourg. By 2020 Singapore will overtake Switzerland to become the largest global offshore private banking market Indeed, the increased demand for Singapore s financial advisory and private wealth services has boosted the salaries of some leading relationship managers in the country s wealth sector to almost twice the level of those found in Switzerland. While a shortage of well-qualified professionals in the 6 P a g e

wealth management industry is often cited as a problem in the APAC region, the high wages on offer should encourage overseas-based private bankers to relocate towards the city-state. The Asia-Pacific region remains the dominant source of offshore assets managed from Singapore, amounting to almost two-thirds of the total assets managed in 2011. Rapid growth in Asian economies such as China, India, Indonesia and Malaysia will continue to see new investments in the years ahead. Hong Kong: The Chinese Connection Like Singapore, the wealth management and private banking industry in Hong Kong is well developed with established industry competitors, favorable banking regulations, and a stable political environment. The wealth management and private banking sector grew by 32% in 2010, increasing AuM to $250 billion, 15% above the pre- financial crisis level. Much of the growth in Hong Kong s wealth management and private banking sector over the past decade has been driven by the rapid growth in wealthy individuals in China. Between 2007 and 2011, the number of Chinese HNWIs increased by 41%. Yet China s private banking AuM accounts for only 1% of total Chinese HNWI wealth in 2011, well below the worldwide average of 29%. Indeed, WealthInsight research finds that over 50,000 Chinese HNWIs are looking to move abroad each year, many of them to Hong Kong. As of 2011, Hong Kong was home to more than 50% of the total offshore assets of Chinese HNWIs. The opening of mainland China s economy to the West. with the liberalization and internationalization of the Chinese currency, is also significant to the attractiveness of Hong Kong s wealth management market. Demand for access to Chinese IPOs, particularly the privatization of state-owned enterprises, boosted Hong Kong s appeal in recent years 1. And banks in Hong Kong can now provide a variety of renminbi-based services, attracting HNWIs from across the APAC region looking to diversify into RMB denominated assets. While the expansion of RMB business provides Hong Kong banks with ample business opportunities, banks will need to ensure that sufficient time and resources are invested in managing the legal and foreign exchange risks associated with the new offerings. But with this first-mover advantage, WealthInsight projects that demand for Hong Kong s offshore banking services will remain strong over the forecast period, despite the market volatility in recent months. 1 Hong Kong After lead the world by the amount raised from initial public offerings from 2009 to 2011, although the city is set to tumble down the global rankings in 2012. 7 P a g e

About WealthInsight WealthInsight provides detailed data and insightful analysis on the world's high-net-worth individuals (HNWI) and wealth sector. With decades of experience providing business information, WealthInsight helps organizations to make informed decisions and win new business. At WealthInsight's core is our proprietary HNWI Database of the world's wealthiest individuals. Around this database we have built a number of valuable research based products and services that make WealthInsight much more than just a rich contact list. Andrew Amoils Senior Analyst & Head of Reports Team, WealthInsight andrew.amoils@wealthinsight.com +44 (0)20 7406 6564 Christopher Rocks Analyst christopher.rocks@wealthinsight.com +44 (0)20 7406 6711 Disclaimer All Rights Reserved. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that WealthInsight delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such WealthInsight can accept no liability whatever for actions taken based on any information provided herein. 8 P a g e

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