Online Investing Goes Offshore

SAN FRANCISCO (09/01/2000) - The battle for the wallets of Europe's online private investors has shifted up a gear with the emergence of brokers based in countries with favorable tax regimes. Offering the privacy and discretion usually found in long-established "blue chip" private banks, these operations are targeting a lucrative niche in the online investment world.

Industry estimates say there could be as many as 14 million online investment accounts in Europe in the next three to four years, and at latest count there were about 100 online brokers. However, the majority of these brokers are catering to the mass market, where the weapons in the fight for customers are reduced fees and lower commissions.

U.S. brokerage giant TD Waterhouse says it will be first to market with an online trading platform aimed at a potentially more lucrative market. It has teamed up with Banque Générale du Luxembourg, part of the Belgian-Dutch financial conglomerate Fortis, which has a tradition of private-client banking stretching back to its founding in 1919.

The online venture, which does not yet have a name despite being scheduled to launch by the year's end, is aimed at "high net worth individuals," or people with more than 100,000 euros ($113,000) in cash and assets to invest. Using TD Waterhouse's existing technology, the service will give European investors the ability to trade shares on the major U.S. equity markets, as well as major European bourses.

It will be based in Luxembourg, which has is known to have a tax regime that favors the wealthy. Once it is registered with that country's authorities, European Union law means the site will be able to provide services to customers in all EU states. Banque Générale du Luxembourg also operates in the well-known, wealth-friendly banking centers of Switzerland and the Channel Islands.

TD Waterhouse's VP of marketing, Peter Nolan, explained that there is nothing underhanded going on.

"It is the customer's requirement to declare to their local tax authority, but thereafter the 'offshore status' is going to be attractive to a number of customers who are already investing in those [offshore] markets and therefore have an opportunity to carry out online trading in those markets, as well."

The wealthy online investor market is still waiting for the arrival of the as-yet-unnamed joint venture between retail banking group HSBC and investment bank Merrill Lynch & Co., announced almost five months ago. With as much as $1 billion in startup capital to spend during the next five years, the venture will deliver online banking and brokerage services in countries across the world except the U.S., and it is believed to be considering an offshore element to its offering.

As lucrative niches go, another online brokerage firm, IslamiQStocks.com, reckons it has a winner and again it will be making use of offshore facilities. The site, which will be fully operational within the next six months, is the first to help Muslims make investments that do not breach Islamic law.

The company has screened more than 8,000 companies quoted on the London Stock Exchange and the three main U.S. exchanges to ensure that they conform with Islamic law, called the Shari'ah. That law prohibits Muslims from investing in companies involved in prohibited activities such as alcohol production and gambling. There are also restrictions that have a bearing on the balance sheet of potential investments. For instance, Islamic law prohibits usury, so companies with excessive interest income may be out of bounds for Muslims.

IslamiQStocks' chief executive, Hasnita Hashim, estimates that with $150 billion invested in the Islamic banking system and approximately 13 million to 15 million Muslims online worldwide, there is a sizable market out there. She has applied for licenses to operate in the U.S. and the U.K., which will open the door to the rest of Europe, and has formed alliances that will open the Middle East and Asia Pacific regions.

The site is based in the U.K., but IslamiQStocks' holding company is based in the long established tax haven of the Cayman Islands. Hasnita explained that there are a number of wealthy Muslim investors with offshore funds who want the ability to invest that cash within an Islamic framework.

"The U.K. company is seeking to be licensed in the U.K., but what we can offer in the Caymans in terms of the funds cannot be offered to the U.K. and U.S. investors," she explained.

All this is a far cry from the aspirations of Swedish broker Avanza, which is poised to begin its online broker service in the U.K., Holland and Italy in the first half of 2001. Promising to charge a flat fee rather than a commission with none of the monthly, the service is carving out a niche lower down the investment community.

Avanza delayed the launch of its Germany service, now due to go online later in September, in order to complete its trading platform and will offer stocks from a host of European exchanges. Strategy and international development director Susan Sternglass reckons that now is the perfect time to start a pan-European operation, and she should be able to pick trends. She joined Avanza earlier this year from investment bank J.P. Morgan, where she was a banking analyst and carried out the first in-depth research into online brokerages.

She points to several factors which are working together: increased competition in the European telecom industry, which will lead to ever-cheaper Internet access; the emergence of true broadband platforms; and ever-increasing European share ownership.

"A company like Avanza will take a very large share of this market," Sternglass says.

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