Banking on bringing in wealthy investors
The financial regulator has launched a public consultation on plans to create alternative models for banking.
Proposals being considered by the Financial Services Authority aim to address the decline in traditional offshore banking.
Two additional banking licences are mooted – one for banks serving high net-worth individuals and corporate clients only, and the other for representative offices of foreign banks.
Chris Corlett, chief executive of the Department of Economic Development, said that unlike traditional lending and savings banks where the government acts as a lender of last resort, the risks associated with these alternative banks would be borne by the investor and not the taxpayer.
He said: ‘We are not talking about banks lending or taking savings for the likes of you and me. Corporate clients and high net worth individuals are looking for different things. For people worth many millions the £75,000 covered under the Depositors’ Compensation Scheme is an irrelevance.
‘The crucial difference is that with traditional banks, the government ultimately acts as the lender of last resort with a significant liability for the taxpayer. This is different, Here we talking about sophisticated and informed investors making informed choices.
‘All commercial activity has risk attached. It’s about understanding the specific risks and mitigating them.’
Could there, however, be a risk of reputational damage if one of these alternative banks went under?
Mr Corlett said it would be wrong to overplay that risk, pointing out that every jurisdiction has businesses that go bust from time to time.
‘We are competing with other jurisdictions to offer highly niche, tailored services,’ he added.
Under current regulations, all banks operating in the Isle of Man must be licensed to carry on deposit taking.
The proposed changes would see the existing Class 1 licence split into three separate subclasses.
The first category will be the traditional retail deposit takers – those that may provide services to the full spectrum of customers.
The second will comprise a new banking sector made up of non-retail deposit takers – those that may only provide services to a very limited class of individuals and corporates. These may also be termed wholesale, private or merchant banks.
Individual depositors would certify that they have a minimum of £500,000 net worth, excluding their principal place of residence or insurance or pension arrangements, and that they understand that their deposits with the bank do not benefit from a compensation scheme’.
The third category will be representative offices of foreign banks – an office branch of a foreign bank that wishes to have a presence in the Isle of Man for marketing and business development purposes, but which must not undertake any transactions.
In May last year, the DED conducted a limited consultation on introducing alternative banking models to the island.
It received 10 responses, of which eight supported the introduction of a non-retail banking licence and five supported the introduction of a representative office regime.
