Matthew Lynn says banks that prospered by offering exclusive ‘wealth management’ services during the boom years are about to encounter some very angry customers
Of all the phrases in the financial lexicon, ‘private banker’ is one of the most evocative. It summons up images of discreet addresses in the more remote Swiss cantons, of luxuriously furnished townhouses in Mayfair, of chequebooks printed in florid script, of pinstriped executives who never stint on the second bottle of claret. Thriller writers find them as handy a plot device as a fully loaded Beretta. Nothing else manages to wrap up tradition, snobbery and timeless financial solidity quite so completely in one institution.
Until now, that is. Over the next few months, the private banking industry looks set to be rocked by a series of scandals. In this country, Sir Keith Mills, the multi-millionaire founder of the Nectar card business, has just launched a high-profile campaign against what was once the grandest of all Britain’s private banks, Coutts & Co. More high-profile names are likely to join that crusade over the next few weeks.
Meanwhile, the Austrian government has been forced to take control of Vienna’s Bank Medici after it lost a packet on the funds of the disgraced New York financier Bernard Madoff — in which several private Swiss banking houses were also caught up. As David Craig described here last week, even the more reputable hedge funds, towards which the private banking fraternity have directed billions of their clients’ money over the last decade, have been stopping investors taking money out as asset levels collapse. Private bankers are running into some distinctly un-private bother.
For the banking industry as a whole — which frankly can’t afford much more in the way of problems — that matters. Private banking has been one of the great growth sectors of the last decade, serving the hundreds of thousands who floated to unexpected wealth during the long boom. Commercial banks were no doubt hoping to repair their battered balance sheets with profits reaped from their ‘wealth management’ units. The trouble is, if the well-heeled clients decide the investment advice on offer isn’t much better than what they might get from a Sunday newspaper, or indeed a taxi driver, they might well decide that the private bankers’ fat fees are no longer worth paying. They might even begin to suspect that some of the products and services the bankers have sold them were a lot more lucrative to the banks than they were useful or prudent for clients like themselves.
Sir Keith’s campaign neatly encapsulates how the private banks have run into difficulties. The creator first of Air Miles, and then of the Nectar card — a business he sold for £350 million, netting £160 million for himself — he asked Coutts to look for a safe place to put his spare cash. It sold him AIG Life Premier Bonds, issued by the giant American insurer AIG which had to be bailed out by the US government in the same week Lehman Brothers went bust. The money has now been frozen: investors have been told they can have some of it back now, and the rest in three years, so long as they leave it locked up until then. If they insist on taking it all out now, they risk significant losses. Sir Keith himself could be £30 million out of pocket.
‘The interest rate was a bit better than Base Rate at the time, but it was nothing to write home about,’ he says. ‘It wasn’t flashing up warning signs. In the case of many people, they had instructed Coutts to find a safe haven for their money. Up until the day that AIG closed the funds, they were still pushing these funds.’ Sir Keith has set up a website, bringing together wealthy clients of Coutts who feel they should not have been put into what turned into such a risky investment. ‘I didn’t know what to expect when I started this, but we’ve had a lot of response,’ he says. ‘People really feel they were misled, and they feel that a private bank had a duty to point them towards potential problems with AIG... There was a duty of care.’
Coutts has a lot of reputation to lose. Long described as ‘the Queen’s bankers’, it dates its origins to 1692, when one John Campbell of Lundie set up shop as a goldsmith-banker at the sign of the Three Crowns in the Strand. The Coutts family took over from the Campbells in 1761 — and eventually sold out to NatWest, which became part of Royal Bank of Scotland, which is now controlled by Gordon Brown. The bank vigorously disputes Sir Keith’s claim. ‘Whilst Coutts is very understanding of the client’s situation we are confident that the product was sold with the appropriate advice and was compliant with the FSA regulations,’ said a spokeswoman. ‘At the time of sale it was made clear that the investment was low risk, not risk-free.’ The bank is now offering loans at competitive rates to clients who have money tied up in the bonds. Executives there insist everyone will get their money back, and maybe some interest as well. And they believe they were looking after the clients properly by diversifying their assets, even if in this case the diversification didn’t work out.
The rights and wrongs of the case may well end up being settled in court. Still, as public relations catastrophes go, it’s a whopper. The one quality people tend to look for in a bank — especially a posh private one — is its ability to give them their money back when they ask for it. ‘I think the private banks have a huge problem,’ says Sir Keith. ‘Their credibility has been completely destroyed. Companies like Coutts have been badly damaged. It has taken them 200 years to build it up, and now they have blown it.’
The problems at Bank Medici in Vienna are much worse. It had $2.1 billion invested with Madoff funds, and has been ruined by the collapse of the fraudulent scheme. Its founder, Sonja Kohn, who always booked a suite at Claridges to meet clients when she stayed in London, was initially reported to have disappeared — prompting theories that the Russian billionaires who were among the bank’s clients might have had something a little more gory in mind by way of response than merely setting up an ‘action group’ website. Within a few days, however, the bank said she was back in Vienna.
Medici was particularly heavily exposed to Madoff, but it was far from alone. The Geneva-based Union Bancaire Privée — spotlighted in these pages recently by Taki — has admitted that at least half its funds had money invested with Madoff’s firm. Two other pillars of Switzerland’s formidable private banking industry, Notz Stucki and Banque Benedict Hentsch, have also admitted losses.
In many other instances, clients were steered into hedge funds, more than a fifth of which have now stopped investors from taking their money out. It adds up to a grim picture. Private bankers like to portray themselves as the wise men of the arcane world of wealth, guiding their clients through a maze of investments, always ensuring that family fortunes are protected from the worst of the hurricanes blowing through the financial markets. Whether through incompetence, carelessness, cynical manipulation or just bad luck, it is clear that many of them have failed.
For the banking industry, that will hurt. According to the consultant Scorpio Partnership, by 2008 the private banks had a total of $17.4 trillion in assets under management (about one and a half times the GDP of the United States). UBS, the global leader in the field, had $1.8 trillion in its private bank, which counts as serious cash even in Zurich. Twenty-seven private banks were sitting on more than $100 billion each. In a world in which rampant asset inflation and a fast-expanding global economy were minting fresh millionaires by the hour, private banks were racking up annual growth of 10 per cent or more. Naturally enough, banking for rich people only is an extraordinarily profitable business: it’s a bit like running a pub for alcoholics who drink only champagne. Strip out all those annoying small customers who don’t actually have much money and the banking business gets a lot simpler and more cost-effective. In fact it’s probably one of the easiest way to make money ever discovered.
Yet it depends crucially on reputation. Wealthy clients need to trust that they are getting a superior level of service than they would from a high-street branch. ‘This is the beginning, not the end,’ says Sir Keith Mills. ‘I’ll carry on with this until I can persuade Coutts to do the right thing.’ Not only Coutts but the entire money-minting private banking industry is about to learn some pretty sharp lessons.