Backlash against rich challenges private banking industry

By:
Helen Avery
Published on:

Political climate increases pressure on wealthy to adopt mainstream tax structures.

As the US sequester nears of March 1st where billions of dollars of cuts will go into immediate effect, President Obama in his State of the Union address on Tuesday attempted to rally once against tax loopholes that benefit the wealthy. “To hit the rest of our deficit reduction target, we should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and well-connected,” he said.

The president's address highlights the rising political sensitivies about the income gap between the wealthy and the rest of American society, mirroring the backlash against the rich in Paris and London. With centre-left politicians in Europe and the US citing a patrioritc push for greater taxation of higher-income workers, private bankers are waking up to this new climate, aware of the reputational risks of tax avoidance schemes. In this context, Barclays's decision this week to shut down its much-maligned division that structures transactions purely to derive tax benefits was an easier one.

Paul Knox, head of wealth advisory EMEA at JPMorgan Private Bank, says: "In the last couple of years in particular there has become far more social and public pressure to pay taxes," . "Because of the global nature of clients, taxes are far more complex, but tax planning is more restrictive," says Knox. "We have never been tax advisers, but we notice clients are far more likely to ask us if a tax structure is mainstream."

Jessie Spector, Resource
Generation
The next generation, the children and grandchildren of the wealthy baby boomers, are taking it one step further: seeking advice on how their taxes can be structured to pay more than government policy demands. Resource Generation was set up 15 years ago by a handful of young adults who had inherited money from wealthy family members. Disheartened by the increasing wealth disparity in the US, the non-profit group organizes communities to work together to learn about and take action to change economic injustice and unfair tax structures.

There are today some 1,500 wealthy next-generation members of Resource Generation. "Wealthy people have lower tax rates in the US than most working people. Money that is made from investments is taxed at only 15% (capital gains) whereas the working population is taxed at more like 30%," says Jessie Spector, programme director at Resource Generation. In 2010 the nonprofit launched an activist campaign around tax justice working with other groups of wealthy individuals to call for higher taxes on those earning over $250,000, a higher capital gains tax and other policies that would increase taxes on the top 5%. The slogan was: "We are the 1%: we stand with the 99%".

Spector says it's the duty of the wealthy to recognize the inquities of capitalism and drive social change. That means a change for private banks that have largely been associated with secrecy and tax planning. "Financial institutions, in particular the banks, will have to shift how they engage with this generation." She believes that banks will need to rethink how they do business if they want to attract or retain the younger generations.

"Banks have made their primary goal to be about how to make themselves and their clients the most money. Our members see that as unjust – money should be invested to support a more equitable society, not accumulate more wealth into the hands of the few. Banks need to put their energy into how to adapt to those different priorities or else they will lose out to credit unions and community banks, which are seen as being more in tune with the fairer society the younger generations advocate."

We have seen this movie before. But as long as the scrutiny on the rich intensifies, amid the weak global recovery, private bankers would do well to take note.