In my previous article (May 2011), we discussed the current political and economic position of Switzerland. There has not been significant change in this regard; the open democracy continues to function well and our positive economic performance has surprised many. In spite of a Swiss franc that many believe is over-valued by about 10 per cent, the country has continued to produce positive growth figures and balance of payment surpluses.
It is, however, timely to address the main developments and changes since May 2011.
Action of the Swiss National Bank (SNB)
My May 2011 article mentioned that one of the main threats to the Swiss banking industry was a highly overvalued Swiss franc. The SNB clearly shared this concern and decided, in September 2011, to peg the maximum value of the CHF at €1.20. This was seen as a bold move. As a result the SNB has been obliged to sell close to 500 billion of CHF against various currencies, but mostly against the Euro. This has worked out well with the current CHF/Euro rate around 1.24. It is generally believed that the SNB would have introduced negative interest rates if it had been obliged to intervene for a substantially larger amount.
The influence of the UBS- Wegelin case, the Leaks & EU/OECD/G20 etc.
In recent years the Swiss Government has spent a significant amount of time debating the future of the Swiss banking industry. In this context it is important to realise the diminished importance of the Swiss banking. Today it represents no more than about six per cent of GDP (some reports even valuing it at no more than four per cent). Approximately 60 per cent of that amount relates to domestic clients. These numbers illustrate well that the success of the Swiss economy does not depend in any great measure on the foreign money that is managed by the Swiss banks.
Nonetheless Switzerland wants to remain a leading player in worldwide private banking, but in a modern, tax compliant way. It wants to be seen as a highly respectable jurisdiction. To achieve this, the government has made a number of decisions and driven forward several initiatives.
Some of the main ones are:
- the February 2013 draft Law that considers the acceptance of any foreign non-tax compliant money by banks and fiduciary companies as a money laundering offence, with criminal penalties. The consultation period has recently been extended. It is unlikely to be applicable (as planned) from January 2014 because the financial industry is pushing the government to keep a level playing field with other jurisdictions. The Federal Council has recently stated that it does not intend to be stricter than the FATF/GAFI proposal.
- the Swiss High court ruled in October 2012 that clients with discretionary bank accounts in Switzerland can request the relevant bank for a refund of any retrocessions that have been received and kept by the bank since 2002.
- it has accepted the application of FATCA, albeit as an IGA 2. This implies that Switzerland will provide the IRS with all the required relevant information, but will not require the IRS to provide similar information to Switzerland.
- the government has indicated that it will accept an exchange of information with the EU countries, provided that other countries also go along with it. It is generally expected that Luxembourg and Austria will accept it and that this will be applicable from around 2016-17. At the same time, this implies that the Rubik agreements with the UK and Austria will be phased out by that time.
- the EU/OECD have criticised the dual corporate taxation system of Switzerland, which demonstrates that the international pressure does not only have an impact on private banking. This system has allowed Cantons to apply a substantially higher corporate tax rate to companies with domestic activities, while international companies, with mostly foreign business activities, have enjoyed substantially lower rates. The government has indicated that this will change and that a single rate of around 12-14 per cent will potentially be introduced over the coming five years. This will be combined with some other tax changes. The intended changes may well result in a very effective and competitive new corporate tax regime. This may also offer new opportunities for private client structures, which would then be subject to regular Swiss taxation.
How did the banks fare over the last two years?
For employees it has been a tough environment with a lot of uncertainty. The anticipated loss of non-compliant money has resulted in serious job cuts in both front and back offices. Higher paid employees have often been obliged to accept a reduction in salary/bonus. On the other hand, banks have engaged additional numbers in compliance and IT departments and at the same time took on younger private bankers, who will be trained for the new environment. The banks have suffered from the increased regulation, high CHF costs, and pressure on fees. It is believed that about 30 per cent of financial institutions were not profitable in 2012. This primarily concerns smaller operations.
At the same time, it is impressive that nearly all the larger banks have enjoyed an increase in the amount of assets under management during 2012. The average increase of assets has probably been around six to seven per cent. The healthy stock market certainly made a significant contribution.
What is the outlook for the coming years?
Switzerland will remain the preferred custodian of the world. Economic and political stability are of crucial importance; recent developments have increasingly highlighted this. Many people with a bank account in Europe were unhappily surprised by the way the Cyprus bank crisis was handled and there is a lot of concern that this may also happen in other countries. At the same time, there is a growing feeling that governments with large sovereign debts may introduce surprise taxes on bank accounts etc. Recently a number of Swiss banks have enjoyed a strong inflow of tax compliant money from EU clients, which was unexpected. The hope of the Swiss banks is that one of these days Chinese / Hong Kong residents will also start to appreciate Swiss banking!
The legacy problem needs to be solved as soon as possible. This does not only concern Switzerland but all countries with financial institutions holding non-tax compliant money. Rubik will no longer be the solution. It is hoped that the relevant governments adopt a fair and pragmatic attitude to find a solution.
An agreement has been made with the US finalisation. The Lex USA was recently introduced, but it was not accepted by parliament. Nonetheless, the Federal Council wanted to finalise the US legacy. So, to enable the banks to cooperate with the USA authorities and to disclose various information, the Council will provide individual banks, based on article 271 of the Swiss Criminal Code, with special immunity from criminal prosecution in Switzerland. The agreement with the US mentions four categories for the banks. Most banks will belong to group two. The banks in this group will need to pay a penalty of 20-30-or 50 per cent over the legacy assets under management. The applicable percentage depends on the date. Assets that existed already before August 1, 2008, get taxed 20 per cent. Assets taken on after February 28, 2009 will be taxed at 50 per cent. This settlement may cost the banks up to Chf 10 billion.
It is to be hoped that the EU countries will not follow suit and also present large claims (don’t forget that they have learned a lot from the USA with FATCA). Large claims from a number of EU countries could have a very damaging impact. It is estimated that up to 25 per cent of the Swiss private banks may be forced to close in the coming five to 10 years.
The banks’ offerings will need to become more sophisticated. The typical high quality Swiss client service should remain, but performance and especially after-tax results will become of crucial importance. At the same time the banks will, in general, become more selective with their offerings. Higher risk activities will be abandoned. In this context it is likely that most banks will drastically reduce their wealth planning and trust administration services. A large number of industry experts actually believe that most of the banks will fully exit this activity and anticipate that it will get shifted towards the more specialised independent trust companies, like ATC/ Intertrust. This will have to be done in the coming five or maybe 10 years. The role of the Swiss Trustee is becoming more and more appreciated. Clients often appreciate having the bank account and the trustee in one and the same location. It is efficient and provides proper confidentiality.
Fees will be much lower than everyone has been used to in the non-transparent era. Banks will be faced with ongoing competition from Asia, especially Singapore, but also the UK (London) is showing that it wants to become a more important player in this field. Some of these jurisdictions are not as strictly regulated as the Swiss banks. This risks creating a degree of unfair competition. Fees will have upside potential when the bank shows an above average after-tax performance result.
Confidentiality is fully respected in Switzerland, but it will only be applicable to tax compliant money. In this context the Federal Council has recently proposed the creation of a register for the shareholders of bearer shares of non-listed companies. This will further enhance transparency.
Switzerland is currently in a transition period. The outcome will be that the Swiss banks will adopt the OECD guidelines, have a strong Tier 1 ratio, and at the same time enjoy and capitalise on the rock solid reputation of the country and the sophisticated knowledge of the banking industry and all its auxiliary services.