A growing number of banks in the Middle East, Asia and elsewhere have recognised that they are missing out on servicing the needs of their customers based in other jurisdictions and have established a presence in major financial centres such as London in order to address this situation.

A growing number of banks in the Middle East, Asia and elsewhere have recognised that they are missing out on servicing the needs of their customers based in other jurisdictions and have established a presence in major financial centres such as London in order to address this situation.

Many of their prospective customers will be foreign nationals from a UK perspective, and in the UK may have a tax status which enables them, with careful planning, to benefit from maintaining their assets offshore.

Handing over customer relationships to other financial institutions exposes the bank to the risk that over time they may lose a degree of control over customer relationships to the extent that a good proportion of the revenue generated from that relationship is lost.

So what are the options for a bank if it wishes to develop an offshore capability?

The simplest is to establish a relationship with an existing provider who will provide their services to the end user customer. Undertakings can be obtained around service levels and there may be some revenue sharing arrangement reflecting that the business has been introduced.

However, with this arrangement branding opportunities are lost, some of the customer contact may also be lost, and despite service level agreements a third party provider may not provide the level or style of service the introducer would like their customer to experience.

Another option is to establish a stand-alone business, perhaps a bank or trust company. In the case of a bank, larger financial institutions from well-regulated jurisdictions should be able to establish a subsidiary or branch. The business plan for the institution will need to demonstrate a worthwhile economic benefit to the jurisdiction.

A stand-alone business requires a significant commitment in terms of capital (in the case of a bank subsidiary), premises, staff and systems. It may be that the business plan does not give the confidence for this investment or there may not be the appetite for managing an entity in another jurisdiction. In the case of a trust company, the requirements are similar but less onerous.

An alternative is to establish an administered bank, trust company or investment company. A licensed entity is established and is administered by an existing service provider under the terms of the administered entity’s licence.

The service provider can guide the client through the local legislation and regulatory framework, assist in the preparation of licence applications and put in place the required infrastructure to support overall business objectives.

The service provider can also source computer systems or work with the client’s in-house systems as preferred. Because services such as financial reporting, compliance and systems support are shared services, the solution should be cost effective compared with a stand-alone operation. Most importantly, the end user customer receives the client bank’s branded products and services.

Key to any relationship is the understanding of the client bank’s culture and style and build an approach to customer service which combines best practice across all the institutions they administer giving each client bank an individual flavour.

Establishing an administered entity provides almost all the advantages of a stand-alone operation, but with greater speed of set-up and flexibility. One of the key advantages of an administered operation option is the lower cost and a considerably lower management time requirement which together make it an attractive proposition for new entrants who wish to offer offshore products and services to their international customers.