As we see new laws and regulations that are set to destroy financial bastions and banking privacy – and with that the tax havens of the rich and famous, Paul Robbins, Intermediary Relationship Manager, of IntaCapital Swiss, a dynamic Swiss financing house based in Geneva, gives us an insight into his opinion on the new legislation that, with a single blow, will destroy hundreds of years of banking secrecy.
In a rapidly changing world, more and more governments, authorities and lobby groups are placing enormous pressure on their international counter-parties to pass strict laws that are slowly depriving us of our privacy and our rights to financial secrecy. Citing the reasons as being the fight against terrorism, for some reason many groups believe that by taking away our privacy and financial secrecy will expose and deter terrorists.
Little by little laws are being passed that slowly chip and ebb away at our rights to remain private and our rights to keep our financial and banking affairs from being publicly dissected by governments and authorities. Seemingly initiated by the United States, slowly but surely countries around the world are being forced to sign up to international agreements to diminish its citizens and residents’ personal and privacy rights.
Governments and authorities around the world have thrown up little resistance to demands made by their counterparts to sign international treaties and agreements that wipe away their citizens and residents’ rights. Mainly because a huge by-product of the destruction of financial privacy and banking secrecy means that governments can track down and heavily tax offshore investments and wealth that has intelligently been set aside for a rainy day. The fact that thousands of people have held bank accounts in those private financial bastions for hundreds of years does in no way imply they did so to avoid tax or build cash to buy arms and afflict terror. The main and most common purpose of banking in those jurisdictions that supported banking secrecy – and I include Switzerland as one of the strongest – is the fact that those financial citadels can offer the account holder the soundest investment support, the most expert advice and experience and the highest security, far more superior than any of the other financial centres that do not(or did not)support banking privacy. That is the reason those jurisdictions attracted investors and subsequently over one-third of the worlds wealth in Switzerland alone[i].
It is often portrayed that public opinion of those who support and protect financial privacy are only the rich and super-rich. Less financially fortunate people don’t really care about their financial secrecy and rights to remain private. Well, I disagree. Banking secrecy aids sound investment foundations for both those individuals who wish to build long-term investments for their family and heirs and offers a stronghold platform for corporations laying down long-term investment strategies.
Many actions have also been taken by governments to close (or render unrecognised) those complicated trusts and financial structures that have been accused of attempting to hide wealth from tax exposure. Whilst many of us would agree that we should all pay our way and pay the taxes due, the owners of those hidden fortunes should still have their rights to their banking privacy respected and the rights to pay those taxes anonymously.
Switzerland still keeps intact that banking secrecy and has done so for hundreds of years. However, sadly it has been forced to give up the identities of its non-resident account holders to their home revenue authorities. Swiss residents still enjoy complete banking privacy and Switzerland is still one of the largest offshore wealth centres globally.
The rights to privacy in other parts of our daily life are also under attack – it’s not just the rights to financial privacy. Some years ago, George Orwell gave us a fictional account of what life would be like in 1984. I believe we all recognise the similarities of Orwell’s imagination and the world as it is today. The argument to take down and ban certain mobile communication apps that use end-to-end encryption (preventing eavesdropping), just screams at volumes that some government agencies want to spy on the content of its users. Again, citing the fight against terrorism as being the reason.
The most recent piece of legislation, the Automatic Exchange of Information Act, originally entered into force in 2015 with the first round of exchanges effected into force in 2017 and has now absorbed some 100 countries with another 8 coming into force in late 2019/2020. A total of 45 countries (labelled ‘developing nations’) have not yet set the date for their first automatic exchanges), including Montenegro.
The most recent round of countries that signed up to the Act in 2018 and that has come into effect as from January 2019 include Switzerland, Singapore, Monaco and the UAE among other infamous financial jurisdictions.
The legislation practically wipes out any banking secrecy that existed in those states. This means that if you are not resident in those states but hold bank accounts or funds therein, the competent financial / tax authority is duty bound to automatically send your information to the tax authorities in your resident state. This move is one that had been initiated some time ago, forced upon most jurisdictions and originated by the United States as a result of their ‘crack down on terror’ after the events of “September 11”, now some 18 years later conveniently morphed into a bona-fide piece of legislation under the guise to crack down on international tax-dodgers.
From our observations, those jurisdictions that have not yet offered a date for their first exchanges of information, i.e. those who are not bound by the Automatic Exchange of Information Act, are enjoying a rapid increase of investment as those who still demand complete banking privacy import their offshore wealth. One of the largest countries to benefit recently is Montenegro, where the investment climate is strong and where it offers a flat rate of tax at 10% per annum. It offers numerous benefits and incentives to new investors. So, whilst we may see the wealthiest of financial bastions lose some of its investors, smaller states such as Montenegro and the new Republic of Macedonia may bask in the financial sunshine in the foreseeable future.
‘MOVE FAST BUT DON’T BREAK THINGS’ – WHY FINTECHS WILL COME TO LOVE REGULATION
Alex Johnson, Director of Portfolio Marketing, FICO
The guiding ethos of fintech is move fast and break things. It’s the fundamental advantage that disruptors have over the incumbents they’re disrupting — the ability to move quickly and make mistakes, learn from them and deliver innovative services to customers. Generally, this ethos is presented as a virtue. Banking is ‘broken’ so any investments in improving it are both notable and noble – even if there are bumps along the way.
Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.
The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat, based on rules written for a different century, that protects banks’ ability to make money without needing to innovate and offer more or improved services to their customers.
So, it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say ‘we’re doing it anyway.’ That’s what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking and savings product that it claimed was insured without confirming that with regulators first.
The problem is that while we may mythologise the ‘move fast and break things’ ethos in the abstract, consumers don’t love it when their stuff breaks in the real world.
And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a service outage or a false claim of deposit insurance.
Stories from overseas
In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 3,500 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.
In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using personal data from borrowers’ mobile phones to make lending decisions – which although illegal, is reportedly ignored by Indian regulators.
In the Philippines (another emerging market where venture capital dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.
A prediction for the decade to come
In the 2020s, I believe fintech companies will come to love – or at least quietly appreciate – regulation for two primary reasons:
Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge. A recent survey of 2,000 Brits found 40% don’t trust challenger banks at all and 67% said they are more likely to do business with banks that have branches on the high street. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, ‘We’re going to have to grow by word-of-mouth and doing the right things for our customers.’
Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.
In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper-specific (U.S. regulators’ cautiously approving the use of alternative data, or the Bank of England considering giving non-banks access to its 500-billion-pound balance sheet). Perhaps, most promising, has been the work done by the Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for past couple of years. O
ver the next decade, through careful management of public perception and increased investment in lobbying, fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.
Reaching fintech maturity
’As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program’.
This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their plan to launch a checking and savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the Federal Deposit Insurance Corporation (FDIC).
As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘Move fast, but don’t break things’.
HOW TO MERGE YOUR FINANCES AS A COUPLE?
By Nelisiwe Ndlovu, Certified Financial Planner at Alexander Forbes
There is never a good time to discuss finances with your partner, married or unmarried, and one key issue that needs to be discussed is whether you should merge your finances.
Joining all your money matters can seem overwhelming at first, so you don’t have to combine every bank account and credit card from the get-go.
Start by having an honest discussion with regards to your individual money management and financial commitments before deciding to merge or co-manage your household finances while deciding if you want to fully merge all your finances. Detail all individual income, expenses, and all your financial commitments. The best way to achieve this would be to first take your individual budgets and combine them. This will tell you what you can and cannot afford as a couple. If one partner does not usually budget, this is a chance to start doing so as this will ensure that your household finances are under control.
Before you think about merging your finances, be open and honest about:
- How much you earn – what is the income that you will bring home? What is the frequency of your income? Are you permanently employed or a contractor?
- What are your current individual expenses and financial commitments? List your assets and your current debt.
- Your individual financial goals and money management techniques – don’t worry if you might have not figured this out at the time of merging your finances – the important thing to do is to be open and honest so that you both build a stronger money foundation
- Disclose your financial obligations, this becomes very tricky if left until too late and may cause unnecessary tension in the relationship
- What are your goals as a couple – what is the purpose for merging your finances?
Married couples can formally or informally merge their finances as detailed above where household expenses are split between the couple (the split could be 50/50 or any fair split agreed upon by the couple, which could be based percentage-wise depending on one’s income). Some couples tackle finances by adopting the ‘pick a bill’ approach, where one couple pays the water and electricity while the other covers the food.
Being married does not mean necessarily that you need to have one joint account. You may also just want to open one joint account where you each deposit money to pay just your monthly household expenses.
The top five things to remember when merging finances as a couple:
- Have the ability to manage your own finances before expecting another person to merge their finances with you.
- Be mindful of your potential spouse/life partner’s money management behaviour and skills so that there are certain things you can address together before considering merging your finances
- Always keep an open line of communication – honesty is the best policy
- Set a money limit which you can each spend without having to consult each other
- Don’t forget to change your wills and beneficiaries on pension or provident funds as required.
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