Compliance and Regulation: Banking gone mad?

As an independent trustee, we have the privilege and flexibility to work with an array of different banks, custodians and wealth managers, as is appropriate to each customer’s particular circumstances and requirements. This provides us with a unique insight into the widely divergent business risk appetites of a diverse range of banks and the material extent to which their account opening and associated customer due diligence processes can differ.

This divergence in risk appetite and due diligence processes across the banking sector seems to stand in contrast with the global alignment and harmonisation of regulatory requirements applicable to the international financial services sector, including the banking sector: the Financial Action Task Force (FATF) in its capacity as an inter-governmental body has established longstanding international standards which are implemented in each co-operative jurisdiction via a framework of local statutory and regulatory measures for the combating of money laundering, terrorist financing and other threats to the integrity of the global financial system.

Any person who has recently opened a bank account will confirm that the process is becoming more onerous and challenging. This experience is not unique to any particular jurisdiction and from discussions with competitors and peers across the jurisdictions it is clear that the increasing challenges and hurdles involved in establishing new banking accounts and relationships are now common place and widespread.

The consequence is that a disproportionate amount of time and effort is being spent on the account opening process. It can take anywhere between two weeks to several months to progress to account opening stage.

This means that fiduciaries and intermediaries are incurring escalating time and expense in securing the additional information that is increasingly required by banks for opening accounts. From a commercial and customer relationship perspective such costs cannot always be recouped, whether in full or in part, particularly where fixed fees have been pre-agreed for the customer take-on process, inclusive of any costs in connection with establishment of bank accounts.

Over and above the fiduciary costs of opening an account the indirect consequence of this is the delay in investing assets. With market and currency volatility there is often a tangible opportunity cost for being out of the markets.

So what are the root causes for the escalating banking due diligence requirements and the consequent delays in opening bank accounts? There appear to be a number of reasons for the current state of affairs.

There are ongoing developments in local and global statutory and regulatory requirements which evolve in line with emerging threats to the global financial system. It follows that such new rules are responsive to evolving threats and are becoming more wide ranging and stringent.

In addition, US Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard have both given statutory impetus to the global drive for tax transparency.

That said, whilst legislation may be clear cut, in our experience different banks adopt varying interpretations of such rules and different ways of handling the client on-boarding process.

This is exacerbated by a global trend in the banking sector toward de-risking of existing books and outright refusal of new business that is not closely correlated with the banks’ recalibrated risk appetite. As a result, such customer’s deposits flow out of the Channel Islands and into other jurisdictions. This presents challenges for Channel Islands trust companies, where the banking relationships are no longer local and not in the same time zone.

Some banks have endured a tumultuous time with regulators and the press where past failures have been heavily penalised and publicised. The result is that banks’ reactive measures to prevent a repeat-failure have become the proverbial sledgehammer to crack a nut and risk management, appropriate to customer circumstances, has been relegated in favour of a more inflexible rules based approach.

In the last few months political developments have also changed the approach not just of banks but also of governments, with pressures to admonish certain countries to the extent that their citizens immediately become persona non grata. This approach may extend to people who are no longer resident in a particular country, but have historic or very historic birth or other ties. This has had a profound effect on families from that region who may now struggle to open or retain what may be a long standing banking relationship. As the risk tolerance appetites of these banks has changed, this measure has gone further to reach countries which are simply regarded as ‘emerging’.

Given the personal responsibility falling on the directors of the banks, they too naturally wish to de-risk their own position and defer to a more cautious stance: not unreasonable behaviour when faced with vicarious personal liability with potentially criminal consequences.

So what can be done to resolve this situation? Those banks who take a more proactive stance tend to do better in attracting customer relationships and assets. As an example, some send in their new business team administrators to pre-populate the forms and review the trustee’s compliance records relating to that prospective client, thereby saving some of the costs incurred by the fiduciaries.

Other banks which have local offices in the jurisdictions of the clients are able to expeditiously source their own additional ‘Know Your Client’ information. Getting a thorough grasp of local issues and source of wealth gives compliance teams the comfort that is needed knowing local knowledge and understanding has been included. This can also assist with the certification of documentation.

There also needs to be a collective responsibility on collecting information on prospective clients for the introducers and the banks. This requires a thorough and clear understanding upfront as to what is required to meet their own requirements.

Finally, there is always a need for pragmatism in banks. No two clients are or should be considered the same. Adopting a cookie cutter approach immediately discounts certain prospective clients and their assets. Once pragmatism is lost the ability of that organisation to grow will be in serious jeopardy, with consequent impacts upon the asset and deposit base retained in the jurisdiction.


Published by CONNECT, 18 September 2017

Paul Douglas
Managing Director Jersey | Board Member
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