Private banking centres face up to compliant future

Much of the debate around Europe’s financial centres has focused on the future role of London after the UK’s likely departure from the European Union and which other cities are likely to gain business and staff from this groundbreaking geopolitical realignment.

But in the traditional twin hubs of private banking further to the east, a parallel debate is raging. Following US attacks on Swiss tax evasion coupled with the rise of an increasingly assertive domestic Swiss regulator in a newly compliant environment, set against the backdrop of a rapid inter-generational wealth transfer, what do the once supreme cities of Geneva and Zurich have to offer private clients? Are these still centres of excellence for managing the wealth of rich customers and how can they preserve any historical advantage against rapidly improving rivals?

Swiss banks have paid $1.36bn to the US Department of Justice in the most recent set of settlements of claims regarding their role in non-payment of taxes by US citizens.

Although this has led to major structural changes in Swiss private banking, those who wrote off the whole ecosystem appear to have jumped the gun.

“The banking system in general has proved quite resilient and assets advised by banks have increased,” says Shelby du Pasquier, head of the banking and finance group at Geneva lawyers Lenz & Staehelin. “People were afraid at the top level about flight of capital, but there has been no disaffection with the Swiss banking system, despite disappearance of banking secrecy.”

Where he fears Swiss banks could be hit is through rising compliance costs, fuelled by requests for information from other jurisdictions under the Common Reporting Standards regime. He also feels numerous enforcement actions from newly self-confident local regulator Finma have spurred stricter compliance, especially for smaller banks, in turn leading to falling profitability and margins. Boutique players managing less than $10bn may no longer be viable.

“You will see smaller banks sell up or disappear or become asset managers and some larger institutions will also exit the market,” predicts Mr du Pasquier. 

Switzerland should expect a continued, healthy consolidation of a sector now comprising 280 banks, compared to 350 a decade ago, according to Michael Welti, head of Zurich for the family-owned bank Reyl & Cie. He expects those banks “with unclear business models” to remain prime acquisition targets.

These developments are hugely positive for both Geneva and Zurich as financial centres, leading to keener competition between higher quality banks, says Mr Welti, auguring well for standards of service offered to private clients. 

In order to operate in this new reality, banks such as UBS, Credit Suisse and HSBC have invested in opening onshore businesses elsewhere in Europe while others have diversified into asset management. Pictet has made a great success of this new strategy, while other local rivals have proved less convincing. 

Key challenges to these trends will include international competition from rival centres around price, transparency and digitisation, which has not always been culturally akin to the Swiss heritage. In addition to increasing costs of back office automation and tightening up cyber security, banks transacting with customers digitally are faced with increasing commercial risks, plus the business impact of data protection regulation, including GDPR. 

With banks trying to maximise cost efficiency, many are moving offices, reducing expenses previously dedicated to maintaining expensive lakeside properties, by moving to less glamorous suburbs. However, the likes of Credit Suisse and UBS are revisiting some outsourcing arrangements to return some functions to Switzerland, though not to Zurich and Geneva.

Although Switzerland has lost the ultimate “competitive advantage” of banking secrecy, the industry is still thriving and has not suffered the slow demise which many commentators were predicting, says Guy de Picciotto, CEO of Geneva’s Union Bancaire Privée.

“This is probably because there is a need to have the kind of service for clients that Swiss banks deliver,” he says. “This is essentially a mix of technical expertise, performance generation and relationship management, backed by the trust and stability clients associate with Switzerland.” 

He sees private clients being served adequately not just by the giants of UBS and Credit Suisse, but also those smaller players which make up the fabric of Swiss private banking.

“Small Swiss banks are still viable, it’s just a question of them managing costs, outsourcing technology and combining platforms,” says Mr de Picciotto.

Goodbye to London

Brexit has also been a major spanner in the works for the Swiss financial ecosystem. Banks such as Lombard Odier, Pictet and UBS have invested substantially in centrally positioned, prime offices in London, containing hundreds of top staff. Other mid-sized players were set to follow, but plans appear to have been iced. Luxembourg is now more likely to be the beneficiary of new staff and investment, with Swiss banks unlikely to benefit from a favourable distribution deal while the impasse between London and Brussels continues.

“Without Brexit, Switzerland would be able to solve a couple of major issues with the EU,” believes Mr de Picciotto. London remains a key focus, albeit one with a diminishing sheen. Plans to boost UBP’s presence in London have been postponed, while Mr de Picciotto examines viable alternatives, including Luxembourg. Investments are also likely to target onshore infrastructure in Italy, Spain and France. Other Geneva-based private banks, including Citi and Banque Syz, also plan to increase resources in Luxembourg. Citi, which already has 70 staff in Luxembourg, plus “a lot of office space, infrastructure and a big platform in the institutional space” is monitoring the situation closely, according to James Holder, Geneva-based head of Northern Europe at Citi Private Bank.

“It is relatively simple to build out our Luxembourg presence in the private banking space,” he says. “How that plays out will depend on Brexit and how London will be able to compete for pan-European business. It will be incredibly important for us to have a centre in the EU, so I will be spending more time in Luxembourg. It is a jurisdiction which understands private banking.”

Safe haven

But he is also becoming more positive about Switzerland’s role, which he had some doubts about three years ago, when the country was losing its “USP” [unique selling point] of banking secrecy. 

Even post-secrecy, Switzerland still feels safer in terms of data privacy than many rival centres, while clients also view it as an oasis of calm in a turbulent world. “The data protection laws in Switzerland are creating an environment that will have to be recognised as potentially attractive,” says Mr Holder.

Increased political risk globally has played into the hands of Switzerland’s credentials. “A cocktail of populism in the West – manifested through the election of Donald Trump in the US and Brexit in the UK – combined with regional clashes in the Middle East involving Qatar and Saudi Arabia and Near East involving Russia” has increased the attraction of holding assets in Geneva and Zurich.

“Multinational families operating in multiple jurisdictions have realised those things just don’t happen in Switzerland. The risk premium is pretty much zero here,” he says. 

Multi-jurisdictional families typically want “at least a few of their assets” held under custody in such an environment, claims Mr Holder. As Reyl’s Mr Welti puts it, “Switzerland is the world’s least controversial place”.

Service is also a vote winner for private clients. Eric Syz, chief executive of Banque Syz in Geneva, believes the way banks in Geneva and Zurich serve private clients remains streets ahead of centres in Spain, Italy, Germany and France. 

“If you have experienced Swiss service, compared to local service, then you are prepared to pay for it,” he says, adding that even simple customer requests such as opening a US dollar account are almost impossible to fulfil elsewhere in Europe. “Then if you want to add in exotic markets and ask for instance for advice on Japan or Russia or on derivative instruments, most of them don’t know how to do that. They only know about their local market.”

Most continental European banks are only open from 9.30 am to 4 pm, adds Mr Syz. “We had a Chinese client who came over one weekend, so we opened up the bank for him specially. This is a different way of offering solutions for clients – the Swiss way.” 

While both Geneva and Zurich currently punch well above their weight, Switzerland’s ultimate success will rest on its ability to negotiate multiple challenges, believes Ari Tatos, joint managing partner at family office Stonehage Fleming. He says its future depends on ability to adapt to multiple reporting platforms provided to a variety of jurisdictions, in addition to its success in transforming digitally plus adapting to changes in portfolio management. 

The quality of local staff will swing the balance in favour of the twin Swiss hubs, he adds. While London leads in asset management and Jersey in fiduciary services, Switzerland will always triumph as a wealth management centre, he says.

“The Swiss really understand wealth and the discretion around wealth. That’s one of the biggest attractions of Switzerland, not only for ourselves, but for wealthy client families,” says Mr Tatos. “It’s a great place to have a foothold if you are serious about the multi-generational aspect of your wealth. Switzerland is far, far better than other jurisdictions when it comes to discretion.”

Luxembourg

Much of Europe’s funds industry is still in a quandary over Brexit, not knowing how to respond to potential changes to Europe’s key trading bloc, believes Renaud Oury, deputy managing director of Luxembourg-based SGG, which provides asset and compliance services to alternative investment funds and wealthy families.

“Asset managers are asking us: ‘How do we secure access to the European market, but most of this is still at the discussion level,” says Mr Oury, whose firm employs 800 staff, servicing assets close to $250bn. “A number of these actors are saying they will come to Luxembourg. The interest is definitely there.”

Indeed, some of these potential arrivals are already scouting out properties among the huge building sites in the financial district on either side of Avenue Kennedy, the city’s main commercial artery which connects the historic centre with the airport.

He expects to add a handful of smaller boutiques to his client base rather than a large juggernaut with hundreds of staff. “These firms are not going to put a lot of people in Luxembourg,” he says. “Luxembourg is specialised in administration; it is not currently a country for asset management.”

The areas which Luxembourg will continue to add new business include funds investing in private equity and those with an environmental, social and governance (ESG) focus.

So far, several alternatives players such as Blackstone and Carlisle have set up management companies in the Grand Duchy and he expects more to follow. “The objective of Luxembourg is not to attract all the jobs from the UK and bring them here, but to give assistance to UK asset managers, to allow them access to the European market in an efficient way. We want to partner with UK asset managers to help them continue to keep this access.”

Aside from Luxembourg, Mr Oury believes Paris is also in a “leading position” to benefit from Brexit, due to its intellectual property services, plethora of start-ups and expertise in artificial intelligence. Some redistribution of financial muscle across the rest of Europe to the benefit of Frankfurt, Amsterdam, Brussels and Dublin is also expected.

“On the new map, there will be more benefits spread across a variety of jurisdictions,” he says.