Increased regulation is likely to lead to consolidation in Switzerland’s private banking industry, say insiders. SFr1 trillion ($1.12 trillion) is banked in Switzerland by Swiss clients and SFr2 trillion is banked there by international clients. Both markets are under threat.
In the domestic market, new regulation on charging for advice is forcing Swiss banks to rethink their strategy or quit the business. Christian Wiesendanger, head of wealth management Switzerland at UBS, sees compliance costs forcing banks to offer either pure discretionary accounts or pure execution accounts. "That makes the market poorer in terms of choices for the client and it would drive some small banks out of existence as the middle way requires just too much documentation and oversight," he says. "It would lead to an oligopolistic marketplace, which is not a good thing for wealthy individuals."
Last year UBS introduced a new fee structure on its home turf to counterbalance some of the increased costs of giving advice. For clients who want advice, but not a purely discretionary portfolio, the bank introduced a new contract with a flat fee. That fee pays for brokerage, custody, administration of assets and a guided asset allocation that is guaranteed to meet certain quality criteria.
Over the first seven months, 2,000 Swiss clients with more than SFr2 billion signed up to the pilot. The fees are between 90 basis points and 120bp depending on the amount of client assets. "Advising on SFr1 million costs more than on SFr10 million," says Wiesendanger.
It is the quality agreement that Wiesendanger says is the most challenging for the industry to accept. "Institutions don’t feel comfortable extending a guarantee, so we haven’t seen anything similar yet from our peers."
Christian Wiesendanger, head of wealth management Switzerland at UBS
How do you guarantee quality advice and asset allocation? Wiesendanger says it would simply be a PR disaster not to. "Firstly we have the technology to check every day against market risk and counterparty risk. If we don’t follow some stocks then we announce that. And each day the adviser gets a list of which clients’ portfolios seem at risk and what to propose to fix it. And then we promise a deadline of five days for the adviser to reach out to the client and advise a change," he says.
For purely discretionary clients (those that choose a strategy and then delegate the management of the portfolio to the bank) UBS has changed its fee to avoid lack of clarity around retrocessions.
"Up until 14 months ago, the clients paid 80% of the fees directly and then there were some collective investment instruments like mutual funds that bore retrocessions," says Wiesendanger. "Now clients are questioning the legitimacy of retrocessions – so we chose to do away with them by autumn last year – threatening 20% of the business P&L. To cope with that threat, we chose to bill the clients 100% instead – but now all fully transparent and clear what we are charging for upfront. And clients have accepted that."
Wiesendanger says that he hopes the UBS approach will be regarded as a standard for the industry to adopt.
For the cross-border business, increased regulation, particularly concerned with knowing the client and tax transparency, has lessened its appeal.
A banker at a large Swiss bank says: "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."
Michel Derobert, head of the Swiss Private Bankers Association, 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."
Derobert adds that as the EU rethinks 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 on Fatca (the Foreign Account Tax Compliance Act) 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.
Derobert, however, does not believe the current challenges on cross-border banking spell the end of Switzerland’s reign as the largest offshore centre.
"There is certainly a challenge for the smaller banks if they are not clear about what they want 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."