Offshore private banking: Switzerland may benefit from new rules
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|
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."
As a result of the more complex environment around cross-border banking consolidation is expected in Switzerland. "If you want to play in the offshore space now you need size, and a lot of the smaller and mid-sized banks are having to rethink their models. Everyone is trying to solve the legacy topics in western Europe. Self-declaration is a big challenge. While those issues are being resolved there will be outflows at some banks for sure," says one banker at a large Swiss bank.
There is also the ‘Swiss finish’ that some bankers say might end up causing the Swiss banks and the Swiss banking regulators to "shoot themselves in the foot". The ‘Swiss finish’ is the tendency to have more stringent capital adequacy rules than other countries. The concern is that the Swiss finish might be applied to other rules, putting Switzerland at a competitive disadvantage.
Derobert does not believe the current challenges around cross-border banking spell the end of Switzerland’s reign as the largest offshore centre however. "There is certainly a challenge for the smaller banks if they are not clear about what they want to to do," he says. "They could be overwhelmed by the complexities, but there is no one single business plan in my mind that brings success. Wealth management is not like making cars. You don’t have to be big to compete. It’s a relationship business, and bigger does not necessarily mean better. There is still room for smaller banks that keep it simple and know what they are doing."
Kunzi says that consolidation would be positive: "We were able to reinvent ourselves and design a new bank focusing on transparent asset management and a new cross-border policy. This will give birth to other new banks, with new ideas also."
Derobert says he expects the most consolidation to be among the foreign banking subsidiaries in Switzerland. "There are some small actors here, and I would think as European banks look at the complexities they may choose to sell or close their Swiss operations." If they do, it might be just because of lack of certainty about how the global regulatory playing field will turn out.
He adds that as the EU is rethinking its rules, there is the possibility that it will become more protectionist and some businesses will have to be transferred back into EU countries. It is also unclear whether or not the US is going to play fair with regards to Fatca by reciprocating the automatic exchange of clients’ tax information. The state of Delaware, for, example is a haven for money from domestic and international private clients.
Switzerland’s future depends largely on whether or not the playing field around regulation will be level. Derobert admits that he is a little sceptical. "If the US and other large G20 countries expect full transparency from smaller countries, but don’t reciprocate on the know-your-customer rules, then money could leave those smaller countries very fast," he says. "The OECD would have to look at it. We have to be careful, but we should take it that there will be an even playing field."
If that is the case, Switzerland will benefit, says Derobert. "If all the financial centres – Miami, London, Singapore etc – are subject to the same rules of transparency, then the Swiss banks would benefit as they are, in many respects, further along in the process of applying the rules."