Published by Wealthbriefing Asia – 27th October 2016
A prominent executive search firm working in the Asia-Pacific region talks to this news service about what the Indonesian tax amnesty means for private bankers and wealth managers in Singapore and the wider region.
As the Indonesia tax amnesty moves into its second phase, having finished its first round at the start of October, Singapore-based bankers focused on the Indonesia market continue to wrestle with future strategy.
“There has been a significant decline in the transnational volume [of business] coming from Indonesian clients at the moment,” Danny Jones, founding partner at Huddleston Jones, told this publication in a recent interview at his offices in Singapore.
One issue at present is that an increasing number of Indonesia-focused bankers would prefer to remain with their existing employer rather than move jobs because of uncertainties surrounding the consolidation that is expected to take place in years to come, he said.
“Indonesian clients will likely consolidate the number of bankers they engage going forward, which may result in a natural fall out of Indonesian focused-bankers based in Singapore,” Jones said.
The amounts involved in the amnesty are large, although with all such amnesties there are uncertainties about how much money exactly ends up being disclosed. (There are around 50 amnesty programmes worldwide.) Based on the declarations compiled so far, Indonesia expects to raise $4.41 billion in taxes and penalties. Around $200 billion of Indonesian money is estimated to be in Singapore out of around $470 billion of assets under management by private banks in the city-state (source: Reuters). It can be argued, however, that while the movement of money will be larged, the negative impact on Singapore shouldn’t be overstated (to see a recent editorial comment on this issue, click here).
Under terms of the programme, individuals and companies are charged between 2 per cent and 10 per cent in penalty interest, based on how soon they take part and whether they only declare or repatriate funds to Indonesia. Returned money can go into government bonds, infrastructure projects and regulated real estate investment trusts – arguably not a particularly diversified or sophisticated menu. Those financial institutions appointed to manage the funds must submit regular reports to the tax office and ensure the money stays onshore for at least three years.
A painful wait
That three-year term creates a challenge, Jones argues, for bankers who had been managing offshore money. “Singaporean bankers will now embark in the cannibalisation fight that has commenced amongst competing banks for the assets that remain in Singapore. However, a strong pull from ‘gateway banks’ in Jakarta could attract Indonesian nationals to manage repatriated assets,” he said.
Given the relative lack of choices for how onshore money is invested, going onshore where the money is might not make sense for a banker used to offering the most sophisticated products. And those high salaries in Singapore will be hard to justify in, say, Jakarta.
Another option for private bankers is to join a private bank that has existing partnerships or joint ventures with local Indonesian gateway banks, or collaborations between banks with existing onshore businesses that can provide domestic clients a degree of sophisticated products and services, as they are currently accustomed to, Jones said. There are tough restrictions on foreign ownership of Indonesian banks and such protectionism in the past means Indonesian banks are not as diversified to meet the technical requirements of wealthy clients today.
Under terms of the amnesty, people who want to repatriate their assets must first open accounts at appointed trustee banks – gateways – before shifting their assets to investment instruments. Jones thinks there will be an increase in demand for experienced Indonesian offshore bankers by such gateway banks, which could be an equally attractive proposition for repatriating nationals who struggle with the growing pressure on bankers in Singapore.
Singapore-based bankers face a tough time. “Every individual RM is going to find it increasingly difficult to acquire new client assets and meet rising targets. Bankers that can internally access and deliver services outside of private banking, such as corporate banking and capital markets, may have higher success in sustaining and attracting larger, key relationships in Indonesia,” Jones said. He said banks such as BNP Paribas or HSBC for example are in a strong position from stressing their corporate advisory and lending work in countries such as Indonesia. Another bank that has a strong Indonesian footprint in dealing with corporates is UOB, for example.
Singapore, along with many other IFCs such as Switzerland, is adapting to an era of increasing automatic exchange of information. The new Common Reporting Standard begins to bite in 2017 for first-adopter nations and in 2018 for second-adopter nations (Singapore is in the second cohort). The Indonesia tax amnesty is only one headwind that Singapore faces; the jurisdiction has recently seen two banks, BSI and Falcon Private Bank, kicked out by the financial regulator in relation to dirty money transactions linked to Malaysia’s 1MDB, the state-run fund. That scandal has created a chill.
A great deal of money held in Singapore in recent years by Indonesian clients stems from the Asian financial crisis period in the late 1990s, when civil unrest and dramatic market shifts prompted wealthy families to get assets out of Indonesia to safer jurisdictions, Jones pointed out.
Indonesians continue to hold considerable amounts of property and business interests in Singapore, and their business and financial needs will continue to generate a measure of work. Also, if Indonesia’s government is able to push for serious reform, the growth of that country could, in the medium term, be good news for a banking hub such as Singapore, given the range and depth of its expertise.
But the next few years will be testing for Singapore as it adapts to a changed environment, and the employment market for bankers will have to take account of that. And Jones adds that transparency and demands for more data suggest the very term “private bank” might become obsolete. “It is now all about wealth management these days,” he said.
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