Beware ME 'investors': are Swiss banks about to be forced into giving up their secrecy?
If Swiss banks were to cast off their usual discretion and make a marketing pitch these days, it might start off something like this: ‘Dear Potential Client, While we would be delighted to open an account and manage your money for you, once you’ve complied with our anti-money laundering provisions, please be advised that we will no longer be able to help you avoid taxes back home, and in fact may soon start providing account details to your national tax authorities. Moreover, if you are American, please stay away. We’ve been so beaten up by the Justice Department that we’d rather not take your money at all’.
That may not sound like a compelling proposition, but it hasn’t scared off everyone — so far. In fact, according to the latest monthly statistics published by the Swiss National Bank, foreigners have been depositing a growing volume of assets into Swiss banks. The 45 billion Swiss Francs ($50 billion; Dh184.5 billion) invested in Swiss savings and deposit accounts at the end of March represent an almost 30 per cent increase from a year ago.
Yet these strong numbers belie the existential angst among bankers in Zurich and Geneva. Switzerland is bowing to massive international pressure — regulatory, judicial and political — to clean up its banking system, and the big question is how it can remain competitive as a financial centre once it has done so.
The fabled secrecy that Swiss banks used to provide — and which was a key to its attractiveness as a financial centre — has been cracked open and replaced by a more nebulous form of confidentiality and privacy, the full details of which still need to be hammered out in international agreements.
The US is leading the attack. After months of sparring with the US Justice Department, Credit Suisse, one of the two big Swiss banks, pleaded guilty to conspiring to aid tax evasion and agreed to pay a $2.6 billion (Dh9.54 billion) fine. The bank was just the latest such case; in 2009 its cross-town rival UBS settled with the US government over similar accusations. Last year a much smaller bank, Wegelin & Co, went out of business after pleading guilty to helping Americans evade taxes. Other cases are underway.
Pressure is coming from elsewhere, too. Earlier this month, Switzerland marked a sea change in its thinking by agreeing to sign up to a new global standard on automatic tax information exchange. (The exchange requires governments to collect data about non-residents from financial institutions, and share that information with the individual’s home government.)
In 2011, the Swiss government signed an automatic tax withholding agreement with Britain, under which account holders either declare their accounts or pay taxes anonymously on them. It came close to finalising a similar deal with Germany, but the German parliament failed to ratify it.
These measures are part of a worldwide crackdown on offshore finance and tax evasion, and Switzerland has little option but to comply if it wants to maintain its place in a globalised industry.
“It’s a huge shift in culture for Swiss banking,” says Stéphane Garelli, a professor at IMD business school in Lausanne. “Everyone is fed up and wants to turn the page.”
But without secrecy as a competitive advantage, what is the future of Swiss banking? Switzerland has some undeniable strengths, including a long tradition of wealth management, political stability, an independent currency and what Garelli describes as an extensive “ecosystem” of lawyers, fiduciaries, accountants and other experts alongside the bankers. Banking alone accounts for about 6 per cent of Swiss gross domestic product, and the banks are major employers.
Yet the financial crisis took a big toll on the industry.
The government had to mount an emergency rescue operation for UBS, and despite the inflow of overseas deposits, as many as one in four private banks have been losing money, according to Tomi Laamanen, a professor at the University of St Gallen’s Institute of Management in Switzerland.
Moreover, as Thomas J. Jordan, chairman of the governing board of the Swiss National Bank acknowledged, “the most important pillar of the Swiss banks’ export business — cross-border wealth management — has suffered major reputational damage.”
It’s quite possible that for both of these reasons, the inflow of new money may tail off in coming years and begin to decline, especially as Switzerland faces tough competition from emerging financial centres such as Singapore, as well as existing powerhouses like London.
In a report from Strategy& (formerly Booz & Co.), financial services expert Andreas Lenzhofer and his colleagues say they believe Switzerland could do well in the medium term if it positions itself as a fully compliant offshore hub for “white” (in other words, declared and taxed) money. But in the short term, there are significant costs — including fines imposed by the US — and banks will need to retool their business strategies.
How quickly can that happen? Experts say the big banks, including Credit Suisse, began adjusting to the new realities years ago. But some of the smaller private banks have been in denial until recently.
One sign of a shift is that they are increasingly changing their governance structures, abandoning the age-old practice of being unlimited liability partnerships. The change protects them personally, especially against legal action, but it also alters the trust-based relationship at the core of these private banks’ business models. When you knew that the banker sitting on the other side of the table was personally on the hook if there were problems, you may have been more willing to trust her with your money.
Today Swiss banks of all sizes are trying to determine what they can offer clients to make up for the erosion of secrecy.
The National Bank’s Jordan provided some answers in his speech, saying banks need to ensure they can provide “considerably above average” value added for their customers, as well as stability during crises and “business conduct and reputations far beyond reproach.”
In other words, that pitch to prospective clients will need to say more than “We can do what banks elsewhere can do, and maybe even as well”.
A more effective line, albeit in conservative Swiss banker language, would argue: “We may not be able to protect your secrecy as well as we once did. But boy do we rock — and here’s how”.
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