In 2008, Mark Branson stood before a US Senate subcommittee and apologized for UBS’s offshore dealings with wealthy Americans who had committed tax fraud.
He was not in his current position as chief executive of the Swiss financial regulator, Finma, but was speaking as the chief financial officer of UBS’s global wealth management and Swiss bank.
It was a pivotal moment for both UBS, which was ultimately fined $780 million and required to reveal information on 4,450 clients, and for Branson, who, two years later, exchanged a banking job for one in regulation.
More importantly, it was a watershed moment for wealth management globally because the model of Swiss banking secrecy was changed fundamentally.
“In every industry, you have developments perhaps long-foretold that, when they begin to crystallize, come thick and fast,” says Branson. “It had probably been clear to many that the environment around private clients’ tax affairs would change, but instead of changing slowly, it got catalyzed. For the Swiss banks, that catalyst was their handling of US clients.”
(After UBS, several other Swiss private banks and banking divisions were also investigated and fined for helping clients evade US taxes.)
Tax transparency replaced secrecy as a guiding principle for Swiss private banks; the tax authorities in Switzerland now exchange information with clients’ jurisdictions.
“It was an enormous paradigm shift and one that came on the back of a financial crisis that diminished the risk appetite of clients, also reducing revenue margins,” says Branson. “But it probably had to come. The tax-driven business model just wasn’t accepted anymore.”
He says despite the challenges that greater tax transparency has brought with it, it can also prove to be positive for the Swiss banking industry.
“The era of absolute bank secrecy maybe had a protectionist or anti-competitive effect that stifled innovation,” he says. “The more your business environment is protected, the less incentive you have to make yourself fit for competition. Now there is no excuse for not investing in the type of service and investment management quality that clients demand.”
What has been encouraging he points out is that the Swiss private banking industry has proved it is more than capable of competing on the new playing field.
“Inevitably margins and profitability per unit of assets under management are lower – but Swiss private banking is still a highly profitable industry with a global reach and reputation that has remained competitive,” he says.
“We like to think these changes have also been for the good of our industry; to some extent we hope we have shown the way, not just around tax transparency but also around financial crime and money laundering risk. We live in such an interconnected financial system where products are virtual, these problems are global and not local in nature, and certainly not specific to Switzerland.”
The fear for some private banks is that more regulation will come, bringing higher costs and squeezing margins further. Is more regulation needed? Branson says that the legacies of the Swiss private banking industry have now largely been resolved, even though some lawsuits are still ongoing.
He is also candid that regulation can only take banking so far with regards to misconduct.
“Regulation can set clear goals and principles. That clients are transparent to their home tax authorities was a game changer, but unfortunately misconduct is dynamic, develops over time and comes in 1,000 shapes and forms that cannot be regulated away. Attempts to do so haven’t worked out.”
I’ve never met a chief executive who doesn’t believe that misconduct is unacceptable, but success lies in the effectiveness of driving that down- Mark Branson
On the topic of suitability, for example, Branson points out that a rule that states you shouldn’t sell risky products to clients who don’t understand them makes sense.
“But if you codify that or get too granular it doesn’t necessarily follow that you will see better behaviour. There’s an argument to be made that if you create a ‘check the box’ approach, compliance becomes rote and a sense of responsibility diminishes.”
He refers to money laundering as an example of where the right regulation didn’t stop misconduct.
“In the spectacularly large and, in hindsight, obvious money laundering scandals of the last five to 10 years, few have to do with faulty regulation, but rather faulty adherence to existing regulation.”
Since Branson joined Finma in 2010, becoming chief executive in 2014, he has been known as a tough enforcer, holding senior banking executives personally responsible for slip-ups in their firms. This is important, he says. Having worked in the past at the two largest Swiss banks, and with nine years of experience supervising banks, Branson says that culture is key in avoiding misconduct.
“Firstly, private banking is challenging because the maxim is to put your client first – but this can’t apply if clients want to misuse the financial system. Then there is inherent pressure to generate new assets and revenue. There can be conflicting incentives and dilemmas, so integrity in doing business has to become second nature to a firm.”
He says there is no one recipe – that tone from the top is important, but if you look at where laws are broken, it is typically by employees doing what they thought was acceptable.
“I’ve never met a chief executive who doesn’t believe that misconduct is unacceptable, but success lies in the effectiveness of driving that down,” says Branson. “How you discipline people matters, how you align their incentives, how you supervise the risk takers in your company. It all helps.”