Offshore private banking: Switzerland may benefit from new rules

By:
Helen Avery
Published on:

It is not the only offshore centre, but it is the biggest. As the private banking industry moves to an onshore model, what now for the country?

One trillion Swiss francs are banked in Switzerland by Swiss clients. Two trillion Swiss francs are banked in Switzerland by international clients. It’s the biggest international hub globally and always has been: its banking secrecy laws date back to the Middle Ages. But banking secrecy is dead. Can it be that Switzerland’s reign as the home of private banking has come to an end? "It’s a rhetorical question, but certainly a time to pose it," says Michel Derobert, head of the Swiss Private Bankers Association.

Increased regulation, particularly around knowing the client and tax transparency, has lessened the appeal of cross-border banking. The cost of complying with domestic regulation and international regulation of offshore money has driven several banks out of certain countries and, in the case of Switzerland, has forced some private banks to close accounts to foreign clients.

It is not necessarily a positive move for high-net-worth individuals. Although offshore banking centres have undoubtedly sometimes been used to avoid domestic taxes, they have also been used for valid reasons. In the case of Switzerland, foreign high-net-worth investors have been attracted to the country’s political and economic stability. Derobert says: "There is virtually no unemployment, a high innovation rate and the political system is incredibly democratic. Everything is voted on, so you read about it years in advance and have time to prepare and take action on future legislation. That makes for a very stable environment."

Adrian Künzi, chief executive of Notenstein Private Bank
Adrian Künzi, chief executive of Notenstein Private Bank
The country also offers currency diversification and boasts more experienced private bankers than any other country. "There are more than 100,000 people in the private banking sector in Switzerland. The pool of highly talented people is large and it’s a major strength for the banks here when they want to hire specialised people," says Adrian Künzi, chief executive of Notenstein Private Bank. "Twelve months ago we had, for example, 20 people in our institutional clients division and now we have 80. That kind of mass recruitment in a short time would not be possible in other countries."

He also points out that Switzerland benefits from being a destination country: "Don’t underestimate the fact that Switzerland appeals to high-net-worth individuals because of its natural beauty. These clients have second homes; Switzerland, with skiing, lakes, and close proximity to other European countries, is very appealing as a base, and they therefore want to be able to bank there."

Notenstein has around SFr22 billion ($24.4 billion) in assets and emerged two years ago from Wegelin & Co, Switzerland’s oldest bank. Wegelin was forced to exit the business after being targeted for aiding tax evasion by US citizens; Notenstein took on the non-US accounts.

Switzerland has been a target of the US authorities, which have insisted that any US money banked in Switzerland must be declared by the Swiss banks. As a result, many of the Swiss banks have found it easier to apply a blanket rule of no longer banking US clients offshore. Swiss bankers lament that even in instances where they think they have been compliant with US tax requirements and disclosures, the rules change or are just so complex that it turns out they have not been compliant. "It’s too much of a risk to mess around with the US," says one Swiss banker.

Künzi, who was formerly with Wegelin, says there are only a few banks now in Switzerland that can handle US clients. "You need to be set up to deal with US clients and meet all the requirements, and unless you have SFr2 billion to SFr3 billion of US client assets, it is unlikely to work profitably for you."

It is not just US clients that the Swiss private banks are being forced to avoid. The Swiss authorities are encouraging all the country’s banks to reduce the number of international markets they do business in. It makes sense for the smaller and medium-sized banks in light of increased regulation and cost to take their advice and select target markets.

"Mastering the tax issues of the clients’ countries is more complicated than ever", says Kunzi. "Banks will have to decide which markets they can deal with and become specialists of these markets" Notenstein reduced the number of key markets it deals with to 12 to 15. "It’s difficult to tell clients that they are no longer going to have access to the same offering or service." For Most banks end up pulling bankers from the least impactful regions, and reduce the amount of country visits. It’s then left up to clients whether they still want to bank with the bank.

Künzi says it is not a case of chasing the markets where the wealth is growing fastest but those who are more relevant to your business. "If we were to focus on the wealth we would be in Asia, for example, which means opening in Hong Kong or Singapore – but that is not suitable for our size or service and product range. We target a handful of eastern European countries, neighbouring countries and South Africa."