Lifting the veil

That the veil of Swiss banking secrecy has been lifted, following concerted international pressure after a decade-long debate, there is no doubt. Swiss banks are unlikely to hold a pre-eminent position, based purely on unfair legislative advantage, ever again.

Following this dramatic reversal, there are now three key questions which the wealth management industry is keen to know the answers to: How will Swiss banks re-invent themselves to maintain a market leading position? Will key competitors in other countries benefit from the Swiss turmoil? Which other international financial centres are likely to reap rewards from the uncertainty?

“It is clear from the pronouncements at the G20 that the era of banking secrecy is finally over,” says Xavier Isaac, managing director of Investec Trust in Geneva.

There was a sense of shock across the Swiss banking and financial planning houses of Geneva and Zurich earlier in

the year, after the G20 let it be known in April that Switzerland, along with Singapore, was a prominent name on its ‘grey’ list, somewhere between the ‘black’ list of worst offenders against a transparent and honest global financial system, and the ‘white’ list of supposedly squeaky clean jurisdictions.

Going behind the scenes

But a careful look behind the headline impact of the G20 statement has some very good news for Switzerland, reports Mr Isaac, who believes the traditionally neutral mountainous country is being targeted by those jealous of its success in scooping up more than a third of the world’s so called ‘offshore’ wealth.

“There is a distinction between tax havens and other financial centres within the grey list,” says Mr Isaac. “Switzerland is categorised as a financial centre, not a tax haven. This is a very important element, and runs contrary to what surrounding countries have said about us.”

Both competing centres of Singapore and Luxembourg, an EU member, are included on the same list, so the playing field between Switzerland and these two has finally been levelled.

Moreover, Switzerland is also looking to demonstrate a global sense of responsibility by signing new agreements on exchange of certain information and taxation details to reach the 12-treaty threshold required to be a ‘model’ nation under OECD standards.

Banks in the nation will start to build “a slightly different Switzerland,” no longer relying on banking secrecy as the cornerstone of wealth management, but through consolidating their position as centre of expertise for handling the assets of wealthy families.

More business may even seek a Swiss home as private clients begin to question the fiscal stability of countries such as the UK.

“The initial reaction of a number of more typical Swiss banks was that the level of international pressure against them was unfair and that we were a scapegoat. Their first instinct was to fight for Swiss banking secrecy, but they very rapidly realised that it is a lost battle,” says Mr Isaac.

Larger Swiss banks have suffered some staff defections to other international institutions, in the belief they were not ready for the big change and far too complacent about their market leading positions. Yet the main players claim they saw the change coming and had adjusted their business models accordingly.

“Like many others in the industry, we have been fully aware, for many years of the globalisation of private banking. We adhere to all relevant rules and regulations in terms of servicing clients in the most appropriate manner,” says Paul Sarosy, head of product and sales management at Credit Suisse Private Banking.

Onshore focus

What Mr Sarosy sees, and banks like Credit Suisse and its competitors are incredibly keen to explore, is the new desire from clients to have their assets serviced ‘onshore’ in their own domestic markets. This domestic model of basing client relationship managers in regional offices is clearly the growing one, particularly with the traditional advantages of banking in Switzerland being virtually exhausted, although the old “offshore” model is far from dead, believes Mr Sarosy.

“What you will find is that the need for products that are being offered to a certain type of client living in a given geographic region must be transparent and regulated in that given market,” says Mr Sarosy.

“Have we been seeing a trend to handling servicing and delivery solutions to these clients onshore? Yes we have. Are we ignoring those clients on our Swiss plaform? No we are not,” he adds.

Rather than relying on tax-led products or services sold on confidentiality, Credit Suisse has been developing specialisations in discretionary and advisory private banking, through asset allocation led investment models, often incorporating investment banking products.

Thematic focus

Many Swiss banks, including Pictet, Lombard Odier and Julius Baer, have been moving towards a thematic led approach to differentiate themselves, offering funds investing in water, energy and socially-responsible investments.

“We have had a thematic focus at Credit Suisse now for some time and have been able to offer solutions based on our research,” claims Mr Sarosy.

It would be a mistake to link all of Switzerland’s problems with those of the world’s largest wealth manager, Credit Suisse’s key rival, Zurich-headquartered UBS, which agreed to pay $780m (E560m) in fines and hand over some customer names to the US government back in February, after admitting helping clients evade taxes.

Prior to this, UBS wound down its Swiss-based offshore banking unit for US clients following US regulatory pressure after an ex-UBS private banker turned whistleblower. The bank’s wealth management arm, already hit by problems overflowing from its neighbouring investment banking unit, suffered record outflows, although UBS said these were not purely connected to the US government’s actions.

Speaking to PWM, the bank’s head of wealth management, Juerg Zeltner, said poor asset allocation and incorrect selling of structured products also contributed to the problems of UBS and other banks in the industry.

Outflows

“Outflows in an institution are primarily due to the strength of an institution and the potential problems they are having are certainly to do with the changing personnel they are going through, more so than regulatory issues,” believes Mr Sarosy.

Switzerland’s central bank has now threatened to force the shrinking of both UBS and Credit Suisse through “direct and indirect measures” in order to limit risks to the country posed by their size. In 2008, the collective assets of the two banks were equivalent to six times Switzerland’s gross domestic product (GDP).

Government officials understand it is difficult to separate the success or failure of UBS, whose officials declined to co-operate with this feature, from the fortunes of Switzerland.

As the country’s largest bank, it is the nation’s flag-bearer and Swiss dominance of the sector has always been linked to huge deposits and managed assets supervised from a chain of offices in Zurich’s picturesque centre.

Because UBS was the Swiss industry’s undoubted leader, its difficulties have automatically affected the rest of the sector, believes Patrick Odier, senior partner at Lombard Odier in Geneva and one of the best-known figures in Swiss private banking.

Yet he is convinced clients will not look too far away for an alternative, rather than defecting to other financial centres, with only “one or two” banks from 330 having suffered any significant financial difficulties. The big beneficiaries have been the Kantonal banks, representing distinct Swiss regions, which are guaranteed by the state, and the private partnerships, which have managed to re-invent themselves as thematic-led investment boutiques.

Remaining desirable

There is little doubt that the image of the financial sector has suffered both abroad and at home in Switzerland, where it accounts for 15 per cent of GDP, employs 250,000 people, making 20 per cent of the country’s social contributions, and boasts productivity at least twice as high as any global rivals.

In order to remain attractive to wealthy clients, Switzerland can no longer be based on fiscal activities and typical facilities – including secrecy, company law and low withholding tax – previously offered there. “No financial market can live only from that type of characteristic,” believes Mr Odier.

Previously, the Swiss had protected the concept of banking secrecy, but objected to tax fraud, confirms Ray Soudah, founder of Millennium Associates, one of the country’s best-known banking consultants. “The automatic nature of bank information exchange is what the Swiss objected to, that by pushing a button, you could send an internet message to the tax authorities of the respective home country.”

Information was only exchanged if money laundering or tax fraud had been judicially proved. Otherwise, tax was deducted from interest, with lump sums of several hundred million Euro paid out annually to other European nations under the EU Savings Directive, negotiated until 2013. “The Swiss thought they had compromised,” admits Mr Soudah. “Their attitude to the EU was: ‘You can’t complain that you are not getting the tax.’ But their PR has been poor. They have not been able to explain to the world that they have been collecting withholding tax. There was a concession, but they have not benefited from it.”

Permanent change

The financial crisis changed the situation for good, believes Mr Soudah, with the added impetus of newly elected US President Barack Obama becoming fed up with offshore centres luring US citizens into excessively tax friendly arrangements, depriving the US state of much needed revenue.

“The momentum has now built up from the Germans and the G20. They are all saying: ‘We have millions of unemployed, but you guys are encouraging our citizens to hide their money.’ It is a social phenomenon more powerful than most offshore centres can resist,” says Mr Soudah.

The new practicality is that Switzerland will comply with requests from other countries’ authorities requesting information about foreign assets held in Switzerland or income generated there. “This is no longer about money laundering and terror. It is about normal citizens, whose states want income tax,” he adds.

“Irrespective of UBS, this was always going to happen. People say UBS was caught helping people to hide money, but that’s what Swiss banking has been doing for the last 200 years.”

The current state of flux has already led to operational problems among Swiss banks. “Many bankers in Switzerland are suffering severe travel restrictions. They can’t travel to any areas outside where they are based,” says a senior manager at a US institution with significant Swiss operations.

“Under the current climate, if a Swiss banker wants to see a client in the UK, he has to sit a test set by the UK Home Office to show he understands UK marketing constraints.”

Yet despite these problems, the top-down regulatory change imposed by the international community is the best thing that could have happened to Swiss banking, believes Mr Soudah.

“This is good news for the country’s banking system. We may have to kick some clients out, but one way or another, our banks will be regulated, so the business will change and they can concentrate on adding real value.”

A positive future

Expertise in asset management, combined with lack of sovereign risk, lack of scandal, neutrality and quality of life will finally put paid to any potential competition from the Channel Islands, Caribbean centres and Singapore, believes Mr Soudah, with the outlook for UBS in particular, boasting a newly installed management board, looking hugely positive, now that these changes have been accepted.

This will be especially true if the troubled investment banking division is separated from the organisation’s private banking core, reckons Mr Soudah, citing the move currently being made by UBS’s smaller Zurich-based competitor Julius Baer (see box). “We see a continuous need to segregate asset management and investment banking from everything else.”

A prominent London private banker, Mike Bussey, who has previously run Swiss wealth management divisions for Rothschild and Schroders, and is now CEO of Arbuthnot Latham, agrees on the positioning of Switzerland as a financial services centre.

“Switzerland, if it sells itself right, must take the emphasis off the banking secrecy and confidentiality issue and sell itself for private banking expertise, for the international family to manage its global wealth there. Singapore has not quite got the track record of social and political stability, but it is setting itself up as a credible alternative.”

Keeping things private

Respect for privacy still remains the natural state of affairs in Switzerland, according to the Swiss Bankers Association (SBA), which is representing most institutions on this thorny, highly political issue.

While Switzerland has indeed agreed to extend international administrative assistance to include cases of tax evasion, so-called “fishing expeditions” in the form of indiscriminate and unwarranted trawling through bank accounts remain ruled out, so the privacy of clients innocent of any wrongdoing remains protected.

Secondly, while bank-client confidentiality is undoubtedly a competitive advantage for Switzerland as an international financial centre, no Swiss bank relies on this as a unique selling point, claims the SBA. “International clients come to Switzerland in search of stability and security for their assets, for competent advice with regard to managing these assets and for the general high-quality service they find in the classic Swiss private banking relationship,” reads a statement prepared for PWM.

With regard to changing business models, the SBA believes Swiss banks are constantly seeking out new business opportunities in the form of niche markets as well as responding to demand from clients, as witnessed by the booming interest in areas such as sustainable investment, family offices and Islamic finance. “We see no evidence of international clients moving their funds from Switzerland to competing financial centres,” says the SBA.