ABBL

 Luc Rodesch, Head of the ABBL's Private Banking Group, on changing client profiles, "Rubik", and future challenges and opportunities for the Luxembourg private banking industry.

Private banking client profiles have changed considerably over the years. What are today’s client profiles and what are the corresponding opportunities and challenges?

Luc Rodesch: Whereas our clients used to live mainly in our neighbouring countries, today they are coming from all over Europe and beyond, and they tend to have more international activities.

A typical client would be a company owner operating in different countries, deciding at some point of time to change his country of residence, with children living in other countries, who’s looking for advice in order to organize his inheritance planning. Or it could be a high-level employee of a multinational company who’s moving every second year for professional reasons to a new country and who’s asking for advice on how to structure her financial assets in a tax-compliant and optimized way. Most of these clients have their trusted advisors in their home country but the latter are often lacking know-how and experience in cross-border activities. And that’s exactly the point where a private banker in Luxembourg comes in.

Over many years, we have developed cross-border expertise, we have international lawyers, specialized tax advisors and we have the right tools in terms of legal structures, including investment funds that we are able to set up on behalf of private investors. So the more international the background of a client is, the more likely it becomes that their private banker in Luxemburg together with different specialists comes up with the appropriate solution, which very often is not available as such in their home country.

So the needs of our clients tend to become more complex, but at the same time the clients themselves are becoming more demanding or even critical with respect to quality of service or investment performance. The client expects, on the one hand, good advice in terms of financial investments, legal structuring, maybe property financing or even more specialized services like philanthropy, but on the other hand - as he or she is lacking time - does not want to spend time with different bankers who are all specialized in a specific field of competence. So what he or she expects is a highly skilled senior client advisor who has the know-how to guide him or her through the different solutions and who’s a kind of interface between the client and the in-house or third party specialists. 

So our challenge in the private banking industry is twofold: to train the existing population of 1,500 relationship managers working in Luxembourg in cooperation with the IFBL, but also to attract new talent to our country.

Adapting to changing client profiles, and developing the corresponding know-how of existing and future client advisers in line with changing client needs, are key challenges for our industry today.

For a while now, Luxembourg private banking has been moving from offshore to onshore. Can you comment on this trend?

Luc Rodesch: The move from offshore to onshore is the main driver of change for private banking in Luxembourg.

This trend was not only triggered by political pressure from some European countries trying to boost their tax income. The main reason is once again a change of attitude of our clients. Where the former generation was putting money aside for difficult times, the younger generation perceives savings on an account in Luxembourg as a financial resource, to be invested in a safe and profitable way, and to be accessible at anytime to invest into a company, a real estate project or simply for consumption. This is, of course, not compatible with a numbered account in Luxembourg or in Switzerland.

For all those reasons, we have to accept that the future of private banking in Luxembourg is 100% tax-compliant. But that’s not good enough. We need a tax system that guarantees that each European citizen is paying his taxes on his capital income according to the laws of his country of residence. But at the same time, we need to protect the financial privacy of our clients. To provide the best possible advice to their clients, private bankers have to be aware of the financial situation of their clients, their family situation, sometimes even their medical situation; in the case of inheritance planning, for instance. Private bankers may also be informed of sensitive business projects. Clients will only accept to disclose this kind of information if they have developed a long-term relationship of trust within a framework of strict confidentiality laws.

In relation to client privacy, what is your position on the European Savings Directive and the so-called Swiss Rubik model, and why is this subject important to Luxembourg private banking?

Luc Rodesch: We had so far two different systems in Europe to tax the capital income of non-residents.

Firstly, the European withholding tax system, as defined in the Savings Directive, which is applied in Luxembourg and Austria. We had extensive discussions in the board meeting of the PBGL and the ABBL and we unanimously believe that the current system is not sustainable for two reasons: at 35%, the tax rate is too high compared to domestic taxation within most countries and the European withholding tax is not final. In other words, European citizens have not fulfilled their tax obligations by paying this withholding tax.

The second system in the EU is the automatic exchange of information applied by the other 25 countries. This system is even worse, as it applies to cross-border capital income only, whereas most countries tax the capital income received by their citizen within their own country by applying a final withholding tax. This means that clients are better off in terms of financial privacy if they keep their assets in their own country, since international capital income would be automatically declared to their tax administration.

This is, of course, a serious issue for private banking in Luxembourg as over 240 billion Euros, around 80% of our total client base, are held on behalf of non-residents. Of course, one could argue that the automatic exchange of information doesn’t work anyway, since the different tax administrations cannot digest the available flow of information. Or that the automatic exchange of information only covers tax related information, which could be acceptable to tax-compliant clients. But the efficiency or the scope of the system doesn’t really matter. If our clients – and this applies especially to high net worth clients – believe that their privacy is better protected in their home country or in another financial centre like Switzerland, they will leave.

An alternative system has appeared recently in an agreement between Switzerland on the one hand, and Germany and the UK, on the other hand. The so-called Rubik model you mentioned in your question. The idea is basically to apply the local tax system according to the country of residence of the client, to guarantee anonymity and to settle the past.

This new system is definitely not perfect and has to be analysed very carefully. At a level of 20%-25% on assets, the flat tax to settle the past is quite expensive, and the scope of the withholding tax is wide, including, for instance, capital gains. But this system reconciles our two main objectives, which are tax compliance and financial privacy. Unlike the European withholding tax, this tax will be final and –very importantly – the system is not mandatory. In other words, the German client of a Swiss bank can still opt for a “Selbstanzeige”, or voluntary disclosure, for the past or for a system of automatic exchange – on an individual basis - for the future. If this system would eventually pass the political process in Germany and also be implemented in other countries, while Luxembourg would have to apply the automatic exchange of information, our high net worth tax compliant clients will move their assets to Switzerland or back to their country of residence. And that’s the reason why we believe that a ‘level playing field’ within Europe, including Switzerland, is essential for the future of our industry.

In your opinion, how can the Luxembourg private banking industry meet these challenges?

Luc Rodesch: First of all, we need to retain most of our existing clients in a tax compliant environment, which means that our service offer has to be competitive with the offer of the local banks of our clients.

As we continue to lose smaller traditional clients, another challenge is client acquisition. We have to attract new clients to Luxembourg who are tax-compliant, high net worth, more sophisticated, more demanding and less profitable. As this might sound like wishful thinking, let me give you one statistic on the allocation of our client base according to the size of the underlying portfolio. Today clients above 5 million Euros represent 57% of our asset base compared to only 42% 3 years ago. So far we have managed to compensate the structural outflow of smaller traditional clients by attracting high net worth clients to Luxembourg. Those clients are coming increasingly from new markets outside Europe and a better diversification of our client base should indeed be a strategic priority for all of us.

I personally believe that if we manage to preserve our stable environment in Luxembourg, if we manage to improve our know-how in line with new expectations of our clients and if we keep a framework that protects the financial privacy of our clients, the future of our private banking industry in Luxembourg looks bright.