In a post-secrecy private banking
industry, bankers are looking at new ways of preserving client
confidentiality and privacy. This suggests an increasing role for
insurance structures and, for some US clients, even the
renunciation of their citizenship. Will Cain looks at some of the
options.
US clients are renouncing their citizenship
and are being encouraged to move into insurance-based products as
banking secrecy in Switzerland evaporates.
Go deeper with GlobalData
While banking secrecy has been declared
effectively dead by industry commentators, the privacy offered
through insurance structures has become an increasingly attractive
option for private banks and clients.
Swiss private banks have become wary of taking
on even fully declared US clients because they are considered too
much of a regulatory and reputational risk.
Some banks have asked US clients to close
their accounts because the cost of complying with new regulations
introduced since Barack Obama was elected president is considered
too high.
They are concerned following demands on UBS to
hand over the details of clients suspected of avoiding tax and
tougher disclosure rules for banks acting on behalf of investors
investing in US securities (Qualified Intermediaries).
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By GlobalDataThe US government forced UBS to hand over the
details of 4,450 clients as part of a tax evasion probe in
September.
“There’s no real difference between banking
secrecy and insurance secrecy, other than insurance secrecy is not
under attack,” said Christian Kalin, a partner at law firm Henley
& Partners.
Wegelin & Co’s managing partner Konrad
Hummler complained new regulations were so complex it was difficult
in some cases to establish whether client assets, particularly
those of wealthy families, were liable to US tax.
The Swiss private bank, founded in 1741, has
advised all of its clients to sell US securities because of
compliance concerns, and its view that exposure can easily be
gained without investing directly in the country.
Focusing on insurance
Insurance products, particularly
wrappers structured in Liechtenstein, are seen as useful for US
clients trying to gain international investment exposure. It is
also attractive for private banks faced with tough new reporting
restrictions on US clients, because the insurance company, rather
than the individual client, appears as the client name on its
books.
“The benefits clients enjoy from these
products are the privacy they get from the wrapper and tax planning
relating to the payout to beneficiaries, usually a spouse or their
children,” said Marco Gantenbein, a partner at Swiss insurance
brokerage Volcan.
The structures make it easy for US clients to
invest internationally in multiple currencies while maintaining
some control over the investment strategy taken, according to
Malcolm Dermit, an executive director for private placement at
insurer Swiss Life.
The wrappers allow asset protection without
the need for formal trusts to be drawn up because it is provided
for in Liechtenstein’s legislation, he added.
Asset protection means that in the event of a
client bankruptcy, assets within the structure are protected from
creditors and passed on to the stated beneficiaries. The products
are a popular strategy for clients involved in professions which
could make them vulnerable to legal action, for example
doctors.
Dermit said it was important to ensure clients
placed into the structures were fully disclosed and tax compliant.
LII also understands that in the past some businesses had
allowed clients to buy and sell securities within insurance
wrappers, which is now an illegal practise.
US clients had to be outside of their domestic
country to sign up for the products, Dermit added.
A variety of offerings
Swiss Life has three insurance
products available: a Deferred Variable Annuity, which is
effectively a pension plan; a Variable Universal Life policy; and a
Frozen Cash Value policy, which is exclusive to the insurer.
Dermit joined Swiss Life after looking after
US clients at a Geneva-based bank he did not want to name.
“I took the job at Swiss life because we were
having to ask so many clients to leave the bank in Geneva,” he
said.
“The clients were asking what to do with their
assets, and I found these types of structures were among the best
available.”
He said the Frozen Cash Value product made
sense for clients with $5 million or more to put into the
structure. Clients choose an investment strategy with the private
bank that manages the account, and it is wrapped within an
insurance structure by Swiss Life.
Growth in the account represents the death
benefit, meaning that on the death of the insured party, the
beneficiaries receive a tax-free payout. The policy holder can also
withdraw the entire value of the initial investment at any point
tax free.
Going strong in
Liechtenstein
Liechtenstein has been established
in the industry for only around 11 years. It is considered to have
more flexible regulation than Switzerland while copying key
elements of the country’s legislation, particularly in the area of
asset protection.
A recently released book by Gantenbein,
Swiss Annuities and Life Insurance, sums up the main
benefits of Liechtenstein as a location for insurance products.
“One of the most convincing arguments for
signing such a life insurance contract is asset protection in
bankruptcy and enforcement proceedings, which extends not only to
the policy holder but also to the spouse and descendents if
designated as beneficiaries,” says an article by Johannes Gasser,
an attorney at law.
“Taxation benefits, flexible portfolio
management and insurance and banking secrecy complete the range of
the impressive product characteristics. Due to modern legal
provisions, life insurance contracts under Liechtenstein law
provide tailor-made solutions that take into consideration the
clients’ complete personal and financial situation.”
Gasser adds that the strong growth of
Liechtenstein life insurance market over the past few years
confirms the attractiveness of the life insurance products under
the country’s law.
There are currently around 20 insurance
companies with operations in country.
