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Swiss flight

Swiss banks are coming to terms with a world with less banking secrecy. But are they adapting fast enough to a public that wants more transparency?

It’s hard to know what makes a bank safe from collapse these days. The financial crisis a few years back turned everything on its head. But there are things a bank can do – you would hope – that can help stave off collapse.

These, say experts, are things like having a strong capital base, experienced management, and – even better – management with a share in the bank. A long history of surviving past financial crises would also help. You would have hoped the bank had learnt some lessons if it had survived a few financial meltdowns like the Great Depression, the oil crisis of the 1970s and the bursting of the dotcom bubble in 2001. So, applying these parameters, a bank like Wegelin & Co – Switzerland’s oldest bank, which is partly owned by its management and has a strong capital base – would be in pretty good shape to survive some difficult years.

But Wegelin (HQ pictured, right) hadn’t figured on the US authorities and their drive to ensure their citizens pay their taxes. In 2012 the bank was sued by the US Justice Department for conspiring with US taxpayers to hide more than $1.2 billion (€912 million) in secret accounts. Wegelin, realising its number was up, pleaded guilty, paid a fine of €44 million and sold its non-US business to a rival. The Swiss bank, which can trace its history back to 1741, before the founding fathers had even signed the Declaration of Independence, was effectively destroyed after it decided in the first few years of the 21st century to assist US clients with tax evasion by taking their accounts.

Hardly surprising then, that after the Wegelin debacle some began to ask questions about the viability of other Swiss banks. If it could happen to supposedly very safe Wegelin, couldn’t it happen to any Swiss bank, or at least those that had taken untaxed money? It even prompted some to ask even bigger questions like – “could the pressure for greater financial transparency undermine Swiss banking for years to come?”

Few are in doubt that Switzerland has to come to terms with a world wanting greater financial transparency of the rich and of the financial groups helping them. After all, the arguments for greater transparency have some pretty big forces fueling them. Not least near-bankrupt governments in Europe desperately seeking tax revenue to pay for debts built up in the high-spending years before the financial crisis, and electorates angry that the very rich aren’t paying their fair share of tax revenue.

These forces might be relatively new, inasmuch as they were much less apparent before the financial crisis, but pressure for greater scrutiny of offshore financial centres like Switzerland has been gathering since the late 1990s. Much of this early pressure has been led by the OECD, with the occasional government getting involved after discovering some of its citizens were banking untaxed money in Switzerland. But, for the most part, Switzerland was able to take these pressures in its stride, signing a few bilateral exchanges of information agreements and allowing the occasional so-called “fishing trip” by foreign tax authorities to obtain information about the accounts of its citizens.

Importantly, the latter sanction was only allowed after the accusing government could prove to the Swiss authorities that it had a good case to investigate accounts – it couldn’t be done randomly. The Swiss also levied a withholding tax on income earned on deposits held by some foreigners, depending on agreements with individual countries. It was onerous for Swiss banks, but by no means debilitating.

Then the financial crisis happened, which helped to initiate a big piece of legislation from the US called the Foreign Account Tax Compliance Act in 2010, or Fatca, as it is better known.

Fatca, with its requirements on foreign banks to disclose details on American account holders or face financial sanctions, took the issue of banking secrecy to a new level. It put the onus on the banks to clean up their act when it came to US account holders. No longer did the US tax authorities need proof to investigate, the onus was firmly placed on the banks to prove they were not harbouring untaxed accounts of US citizens.

This forced other banks to take a look at their businesses and see what they could do to strengthen their structures. Bigger Swiss banks like Pictet and Lombard Odier moved away from unlimited liability partnership structures towards limited ones, where the owners and managers of the business wouldn’t be personally liable if things went wrong.

Fatca has also spurred a series of mini-Fatcas like the recent automatic exchange of information agreement between the five biggest economies in Europe. Other types of agreement and their stringent application are inevitable, say analysts. And Switzerland is most likely to be a big target for them.

That’s making some Swiss banks nervous. Reports in the Swiss media say UBS, Switzerland’s largest wealth manager (HQ pictured, left), Credit Suisse, and Julius Baer may close the accounts of German clients who fail to provide documentation that they’ve paid their taxes. The move follows the German parliament’s rejection in early 2013 of a bilateral agreement with Switzerland on the grounds that it wasn’t tough enough on tax evaders.

Swiss banking secrecy is being seriously undermined by all these moves and this pressure isn’t about to ease off any time soon. A recent scandal over a French politician caught with a secret Swiss bank account has lead ministers in the Hollande (François Hollande, pictured, below right) administration to call for the issue of tax evasion to be moved to the forefront of the European Union’s economic concerns.

But how is all this anti-tax haven pressure actually affecting the bottom line of Swiss wealth managers? Are they seeing margins squeezed and revenues fall? Julius Baer, the biggest “pure play” private bank in Switzerland, said that adjusted net profit, excluding a one-off tax payment connected to Germany, fell 4% last year, but net new money rose by nearly 6% to CHF9.7 billion (€7.4 billion). Net new money is one of the best indicators of the health of a private bank. It shows how well a wealth manager is attracting new clients and strips out any movement in assets under management that was due to market fluctuations. It is also a good guide to future revenue growth, given that fees are charged for assets under management.

UBS, Switzerland’s largest bank and among the top three worldwide in wealth management, has been attracting strong inflows into its global wealth management business in recent years, after a number of years when outflows grew rapidly. Net new money flows at Credit Suisse haven’t been too bad either, with the bank reporting inflows of more than CHF40 billion in 2012 into its private bank and wealth management units. What’s happening at Switzerland’s non-listed private banks is harder to grasp given there is scant or no publically available results information. The ones with big international businesses like Pictet and Lombard Odier, like their listed counterparts, are likely to be attracting good inflows from emerging markets, say analysts. But for the myriad of smaller private banks, traditionally more reliant on European clients, the outlook is less certain.

Dérobert (pictured, left), whose association represents a number of smaller banks like Bordier and Gonet, as well as Pictet and Lombard Odier, thinks that it’s difficult to generalise on trends. “Yes, margins are under pressure at some of the banks, but across the board growth in assets under management is not too bad,” he says.

This mixed picture of the performance of Swiss banks isn’t surprising. At the same time that the number of customers of Swiss banks in places like North America and western Europe pulling accounts has accelerated, Switzerland’s safe haven reputation is stronger today than it has been for years. Ongoing economic and political difficulties like the euro crisis and the Arab Spring have heightened Switzerland’s appeal, say analysts. “There is plenty of nervous money in the global economy,” says Jay Rubinstein, a partner in the Zurich office of the private client law specialist Withers. “Switzerland continues to attract a lot of it.”

The strength of the Swiss franc and the Swiss National Bank’s efforts to suppress that strength in the last few years is the most obvious sign of the country’s safe haven appeal. So too is the huge price rises in prime property in the country, with Zurich and Geneva among some of the most expensive locations in the world. Rubinstein says Americans are still depositing their money in Switzerland, but obviously for other reasons than banking secrecy. “They still view Switzerland as an excellent financial centre, offering a competitive edge in many areas of finance and wealth preservation.”

But as one London-based banker points out, safe haven banking is altogether a much cheaper form of banking than the fees bankers can charge for secret accounts. This highlights a problem for Swiss banks, particularly those without international businesses – they can no longer rely on the fat fees they use to get on their secret accounts.

Despite pressures, the Swiss public still holds its country’s financial sector in high esteem (Swiss banks from the river, pictured right). More than 50% of the population still rate it as stronger than the UK’s, Singapore’s, Luxembourg’s or the US’. But there are some concerns, 35% of those questioned thought that the competitive position of Switzerland as a financial centre was set to deteriorate. This compared with just 13% the year before. As the Swiss Bankers Association, which carried out the survey, said: “These fears are being fuelled by the unresolved tax and market access issues currently being discussed with foreign authorities and governments.”

Intense competition is always an issue for any financial sector, whether onshore or offshore. But is Switzerland experiencing much more competition from newer offshore centres like Dubai and Singapore? There is evidence to show that some European money did switch from Switzerland to Singapore, particularly when tax transparency pressures began to intensify in the last few years. But bankers say the amounts involved were minimal. One banker, who wanted to remain anonymous, told CampdenFO that a combination of Singapore’s own stricter rules and exaggeration meant the inflow to the city-state was minimal. “You’re talking at the margin, nothing that would seriously undermine Switzerland’s status as the world’s biggest offshore financial centre.”

Yet, although European money isn’t necessary flowing rapidly to offshore centres in emerging markets, flows within these regions are increasingly going to their own local offshore centres. Money being deposited in Dubai and Abu Dhabi-based financial institutions grew rapidly during the Arab Spring. Bankers there talk about tens of billions being deposited into local accounts in the last few years. This is the type of money that would have typically gone to Switzerland and/or other financial centres in Europe a few years ago, but is heading for financial centres that are deemed “safe”.

Of course, a great deal of this money is being deposited in Swiss banks with a presence in Dubai and Singapore. And it’s no coincidence that banks like UBS and Credit Suisse have redoubled their efforts in these centres – both banks have two of their biggest wealth management units outside of Switzerland in Singapore. After all, banks always go after the money wherever it is to be found.

Statistics from the Swiss National Bank show that overall employment at Swiss banks, in their home market and abroad, increased by 0.4% in 2011 to 132,542, but most of the new job creation in recent years has been generated abroad, especially by the big two – Credit Suisse (its Swiss HQ, pictured left) and UBS. As the big Swiss banks move more of their business to places like Singapore, this presents a dilemma for Switzerland, which is summed up by Dérobert. “The banks will be OK, but maybe [the movement of money] is more of a problem for the Swiss financial sector as a whole,” he says. “It’s a macro issue.”

This problem is exasperated, say analysts, by the fact that the Swiss government is often muddled in its approach to dealing with the financial sector. “Of course the government knows how important banks are to Switzerland,” says a Zurich-based banker who commented on the basis he would remain anonymous. “But that often gets confused with politicians’ efforts to appeal to the public’s desire to see bankers punished for excessive pay and creating the financial crisis. That means the sector is often neglected by the government.”

That might be hard for some to swallow given the huge lobbying efforts by parts of the financial services sector to influence government policy. Nevertheless, the Swiss federal system of government, years of coalition politics and a tendency for politicians to take a low key approach on policy initiatives than their counterparts in places like the US, the UK and even Germany, means that the financial sector has often been less well-heard in Switzerland than its size would suggest. The SBA reckons the financial sector comprises more than 10% of GDP – that’s higher than in any other economy in Europe, with the UK the next biggest at around 8%.

That said, groups like the SBA do an excellent job at representing the interests of banks, says bankers and politicians. As a trade association, it gets its money from membership fees. And there is little doubt where the SBA sees the banking sector in the country in the years ahead.

“Private and institutional investors rely on Swiss banks for four reasons: a stable political and economic system, the availability of a broad range of products and services, excellent quality and the respect of norms and values,” said a spokeswoman for the association.

“The Swiss financial centre therefore will continue to count among the most important financial centres in the world in future.”

The SBA is probably right. Switzerland’s financial sector has shown great resilience in the past and it will continue to do so in the future. But the country’s banks and asset managers would prefer to be facing the future without mounting pressure on Switzerland, whether it’s justified or not.

Swiss family refuge
Switzerland and its banks might be reluctantly giving up their treasured banking secrecy, but that doesn’t mean the rich are closing their accounts in the Alpine country. Indeed, the further up the wealth chain, the better Switzerland looks to be competing with the rest of the world.

Philip Higson, who runs the European business of UBS’ global family office unit from his base in Zurich, says there’s been a net inflow of money into family office structures in Switzerland during the last few years. “Activity is high in locations with sustainably low tax rates like Switzerland, resident non-domiciled UK and Monaco. Families are changing domicile to these locations.”

Higson adds that banking secrecy isn’t so much of a problem for family office clients in Switzerland. “Double tax agreements and pro-active moves by UBS to encourage fully compliant approach means that tax uncompliant clients aren’t a topic in the family office space. It’s an issue for core affluent and, to some extent, for high net worth clients.”

It’s difficult to put a number on how many family offices there are in Switzerland given the unregulated nature of the sector. Some say there are at least 200 and others say less, particularly if a strict definition is used, which would exclude private equity-like structures and family offices serving more than just one family. But Geneva and Zurich are among a handful of global cities, which include London, New York, Hong Kong and Singapore, where family offices are concentrated.

Where there is some change in Switzerland’s dominance in the family office world is the trend to base offices in Zurich or Geneva and then to have a second office elsewhere. That’s most obvious, say experts, in family offices splitting their business between Switzerland and London. Reto Jauch, who sits on the remuneration committee of a single family office with such a structure, reckons it increasingly makes sense for the biggest family offices to be based in the two locations. “You get access to the best expertise in both financial centres. That’s difficult if you’re just in one,” he says.

For the most part, family offices might be little concerned with the wider problems of the Swiss financial sector, but that doesn’t mean that they haven’t been affected.

Gero Bauknecht, president of the Zurich-based single family office Bauknecht Capital, says tougher regulation is creating some unnecessary bureaucratic hassles. “We recently had a direct real estate deal where the German bank required me to have a lawyer certify that I am the legal officer of my company and have the right to sign the deal,” he says. “A simple look into the company registry in Switzerland would have yielded this information, but they wanted it from a lawyer.”

But he does not believe Swiss family offices are suffering more than others. “Other countries are introducing new regulations, sometimes faster than Switzerland. So although things get more and more complicated here, it sometimes stays less complicated than elsewhere,” he says.

“Switzerland is still an attractive domicile for family wealth.” 

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