Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Deciding where to conduct a banking transaction is no different from selecting a boarding school for an unruly child. Singapore has long been seen as a solid choice. It didn't smother innovation by throwing a thick carpet of rules over everyday commerce, and it didn't believe in punishing shareholders for bankers' misdemeanors. While that second attraction still partly holds, the first is in doubt.

Banks know any management they hire will be naughty at times, and careless -- or clueless -- more often. Since the financial crisis, all three behaviors have become universally unacceptable. But while money centers like London and New York have dealt with delinquency by levying hefty fines, which end up hurting investors, Singapore's strategy has been to punish the errant wards while sparing the guardians.

A good example of this came in 2013 when the city-state penalized 19 lenders for rigging currency benchmarks in a novel way. It asked them to set aside additional reserves with the Monetary Authority of Singapore at zero compensation. After a year, the MAS returned the S$10 billion ($7.4 billion) to the likes of UBS, Royal Bank of Scotland, Bank of America and Deutsche Bank. Not having the money at hand meant management had to work that much harder to maintain profitability, but the rap on the knuckles didn't bruise shareholders.

Three years later, it's crime-and-punishment season again, and this time the offense involves that one area of banking where there's still some optimism left: serving the wealthy in Asia.

Private Banking's Future Is in Asia
An estimated $15 billion of new wealth is expected to be created in the region by 2020
Source: Boston Consulting Group/Global Wealth 2016
*via returns on existing holdings of equity, bond, cash and bank deposits. **via GDP growth and fresh savings.

Allegations that billions of dollars have been siphoned out of 1MDB, a Malaysian state fund, have triggered a global probe. Last week, Singaporean authorities seized S$240 million in assets tied to the 1MDB scandal, and the MAS said it was investigating Falcon Private Bank for "serious breaches" of anti-money-laundering regulations.

The regulator, which in May gave Swiss private bank BSI its marching orders in relation to the same case, has also put homegrown DBS, as well as the Singapore units of UBS and Standard Chartered, on notice for "instances of control failings," which it said will be "met by firm regulatory actions."

The threat of impending punishment gives financial institutions in the city a reason to groan, not because they'll be notifying their shareholders of big fines, but because the additional paperwork all bankers can now expect will make life at least as dull as it is in Hong Kong.

Bankers in Hong Kong grumble that their regulator's insistence on treating private-banking clients as though they were retail customers has pushed more sophisticated trades to Singapore because the island's pragmatic approach was tailored to fit industry needs. In the aftermath of 1MDB, that perceived arbitrage opportunity will probably end.

Bank shareholders will have mixed feelings about this. The forecast for 11 percent annual growth in wealth accumulation by ultra-high-net-worth and high-net-worth individuals in the region is juicy enough for UBS to include in its most-recent annual report. But it could turn out to be a costly mirage if in chasing that prize, bankers step on dirty money. Even momentary lapses of reason would haunt investors.

On the other hand, ensuring discipline isn't cheap either. Standard Chartered's regulatory expenditure was $1 billion last year, a 40 percent increase from 2014 and 29 percent more than what it spent on premises. The $700 million HSBC forked out in compliance-related expenses in the first quarter equaled 70 percent of its pretax earnings from Europe.

Good Behavior, at Great Cost
Standard Chartered's regulatory expenses topped $1 billion in 2015 amid cost cutting
Source: Annual report

Let financial firms moan about the extra homework in Singapore. Having already suffered the consequences of bankers behaving badly, shareholders now need to fret about how much more good behavior will cost them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net