Tougher regulations, tax declarations and transparency trends are significantly reshaping the private banking industry, and the Middle East is no exception to this. To adapt to the new global environment, private banking activities in the region have started to undergo profound transformations, and the repercussions are being felt.
In the old days, banking secrecy was the cornerstone of the industry. With the implementation of know your customer (KYC) guidelines and the Common Reporting Standard (CRS), compliance is now ruling the game. However, compliance is never just a tick-box exercise; it is an essential part of the responsibility that goes with managing clients’ money. And it cuts both ways: both banks and clients have to know everything about each other.
In an era in which banking secrecy is disappearing, people’s needs and priorities have evolved. The selection of the most appropriate and safest jurisdiction in which to invest their money has become a key concern.
Another important shift linked to the disappearance of banking secrecy is that clients are much more demanding in terms of performance. They are benchmarking the performance of their investments with what they would get from competing banks, and they do not hesitate to move to another institution if they feel they can get more dynamic returns.
All these developments are coming together with another major transformational factor: the generational shift. Powerful macroeconomic and socio-demographic forces have been driving the growth of wealthy households in the Middle East. But the wealth that was created by the first generation of entrepreneurs and investors is now being passed on to the next generation. This new generation has a better understanding of finance; it is familiar with the full range of existing products and it is also tech savvy. In others words, private bankers in the region are now dealing with extremely sophisticated clients.
This new generation is looking for holistic wealth management solutions that encompass their needs across a wide range of products and services. They are also sensitive to prices and willing to negotiate, which in turn puts additional pressure on banks’ margins.
These new challenges have also brought new opportunities, and those actors that have been able to anticipate the evolving requirements are best placed to take advantage of them. Only those who meet three key conditions will be able to acquire and retain clients.
The first consists of meeting each client’s specific needs with tailor-made solutions. Second, it will be essential to offer proper pricing. Third is the quality of the relationship the bank is prepared to build with its clients and the quality of its service. A bank that fails to meet any one of these conditions is at risk of seeing its clients tempted by one of its competitors.
At a geopolitical level, current tensions will continue to impact private banking activities well into 2019. Generally speaking, geopolitical developments around the world—and in the Middle East—have been dramatic in the last ten to 15 years. The nature of these shifts has generated a growing demand for new solutions, such as trusts and family offices. Now more than ever, wealthy families are looking for secure succession planning solutions.
In this turbulent environment, the U.A.E., which has one of the world’s highest concentrations of millionaires, distinguishes itself for the stability and credibility of its financial institutions. The Dubai International Financial Centre (DIFC) is already one of the world’s leading financial centres and the leading financial hub in the Middle East, Africa and South Asia region.
The attractiveness of this market has long been recognised and major players have been established here for several years, but it continues to attract new entrants every year. The growth of wealth has encouraged more local players to enter the market, and new foreign banks have sought registration to be able to operate under local regulations.
As a result, in this already competitive market, competition is becoming stiffer, which makes it essential to stay ahead of other providers through a differentiated product and service offering. For example, as a result of the region’s historical merchant culture, investors have a strong bias in favour of hard assets. They like to hold real estate, invest in commodities or take stakes in companies with a business model that speaks to them; in a word, they need to see real value.
Given this disposition, clients in the region have demonstrated a strong appetite for direct investment solutions. The demand for this investment category is constantly increasing. Few banks are innovative enough to stand out in this niche, but those who can service their clients with attractive private-market investment opportunities happen to be very successful.
Last, a more complex market environment is emerging as another key trend for 2019. After years of uninterrupted progress, valuations have reached historic levels. Volatility has made a brutal comeback. The normalisation of monetary policies and the desynchronization of growth rates from one region to another are suggesting more modest performances. In tandem with the geopolitical risks, this new environment calls for a more cautious approach.
This caution will be required as long as uncertain developments, such as the US–China trade war, do not reveal the full extent of their consequences. For some months now, customers have started to turn to less risky assets. The mission of private banks will be to help them deploy investment strategies that will offer protection against risks, while continuing to advise them on attractive opportunities.
Mohamed Abdellatif is Head of UBP Middle East