What the Future Holds for the Swiss Tradition of Privacy for Private Clients

Switzerland has an impressive tradition in private banking. Unlike other financial centres it was already concentrated on the private client business from an early stage. This has been appreciated by worldwide clients, in particular because Switzerland has consistently offered both excellent service and a very safe, stable country.

Until more recently the source of money did not, in general, receive much attention. For a variety of reasons, not least the events of and following 9/11, this has changed. We often hear the opinion that the success of Swiss banking depends largely on the handling of non- tax compliant money. This is a misconception. To better understand this, it is important to take a look at Switzerland’s various areas of strength and expertise.

The political position of Switzerland

Switzerland is a federation of 26 cantons. Important decisions are made at federal, cantonal and communal levels. The federal government represents the country, but it is directly influenced by the active use of referendums. This system has created an enviably active and open democracy. In general, the French speaking part of the country is a bit more liberal than the German speaking part (which has a majority).

The country puts a very high value on its independence. Historically it has invested significantly in the safety of food supply and in other security measures. A reflection of this attitude is seen in the fact that a clear majority of the Swiss population has no desire to become a member of the EU.

As a financial centre Switzerland acts independently, in the same way as other important commercial jurisdictions like the US and England, but it is clearly in a different position than, for instance, the Channel Islands, the Caribbean and Hong Kong. While Switzerland does not live in isolation, it is a fact that the level of Swiss independence limits the impact of pressures and influences from outside.

This independence is a valuable asset and has, in critical situations in the past, been highly valued as it has enabled Switzerland to remain a neutral state, in which difficult political negotiations could be conducted. It is also one of the reasons for a strong United Nations presence in Geneva.

The economic position of Switzerland

Old traditions are still highly valued. Switzerland tends to be a country with a careful level of consumerism. Budget deficits are not appreciated. The national debt is not yet 40 per cent of GDP. By having well controlled government spending, the country/cantons are able to keep corporate tax rates at an attractively low level.

The SNB (Swiss National Bank) has a clear mandate to avoid inflation. They have been very successful in this area and the result can be seen in an on-going strengthening of the Swiss Franc (Chf): during the past decades CHF investments have outperformed the market.

In recent years there has been a lot of discussion about the financial crisis. The SNB managed this situation very well. Despite having two large banks (UBS and CS) with toxic material in their portfolio, the SNB succeeded in finding an acceptable solution at an early stage. Timely action avoided market tension and undesired speculation.

In this context it is nonetheless relevant to mention that the role of the banks, and especially the importance of non-tax compliant money, is often overstated. In 2009 there was a feeling that Switzerland would get in deep trouble as a result of the UBS situation with the US. It was anticipated that the banking industry would take the country and CHF down. So far the contrary has happened. The CHF is stronger than ever, despite financial institution earnings dropping substantially. The Swiss economy has some other strong pillars. This is best illustrated by a quick listing of the names of some well known Swiss companies such as Nestle, Novartis, Roche, ABB, Swatch, Givaudan, Glencore etc. In the meantime, Geneva has become a centre for physical commodity trading and is now the world leader in the energy and grain business. Nearly all trading/shipping companies have a strong presence in Switzerland, and large financial institutions provide a valuable support to trade finance.

Geographic position of Switzerland

Switzerland takes advantage of its position right between the East and the West. In the morning it can serve the Asian client and in the afternoon an American one. By being in the centre, Switzerland attracts people from all over the world; the result is a very multicultural society. A large number of foreigners live in the country, but the strict rules on residence / work permits and integration have resulted in a pleasant and peaceful co-existence. The dynamic and educated workforce is also a blessing for all the multi-national companies with headquarters or operating entities in Switzerland. It is quite typical to see that a company that employs 500 employees has at least 30 nationalities in its workforce. This provides a natural multitude of skills and experience.

What is good enough for Swiss banks

Everyday another article is published about the new Basel III requirements and how they will strangle the banks etc. The SNB clearly does not share this opinion and, in fact, considers that the Basel III capital requirements are not yet good enough for Switzerland. Understandably this creates a concern for the large Swiss banks, since they need to compete in the international arena. However, on the other side, it illustrates very well the conservative approach of the SNB. It will eventually make Switzerland an even safer place for private client money.  

The regulatory environment

Working with non-tax compliant money is not a criminal offence in Switzerland. This contrasts with the position in a large number of other countries in the world. Under pressure from the OECD, EU, US and so on, Switzerland is reviewing its position. Currently Switzerland is in discussions with the EU concerning how to deal in the future with old and new non-tax compliant money. In a world that is becoming more and more transparent, the direction of these discussions is clear. It is generally felt that Switzerland will continue moving towards a regime in which the financial institutions are no longer allowed to accept non-tax compliant money. It is not yet entirely clear whether this will be applicable for a group of countries or worldwide. What does seem to be clear is that full confidentiality will be maintained in relation to lawful money, since a confidential approach is part of the basic nature of the Swiss. However, where criminal action, whether in Switzerland or abroad, is committed then Switzerland will not allow the perpetrators to hide behind a veil of secrecy (see, for example, the recent freezing of Mubarak, Ben Ali and Gaddafi accounts).

In the meantime, the country has enforced a strict anti-money laundering regime. Banks and fiduciary companies are audited on an annual basis. FINMA (Swiss Financial Market Supervisory Authority) is very active in this field.

The FATCA/HIRE Act legislation passed in the United States will have an impact on all financial institutions worldwide.   Each non-US financial institution, including international fiduciary companies, now defined as Foreign Financial Intermediaries (FFI) in legislation, will need to decide whether to enter into an agreement with the IRS governing its obligations for US clients.  Since US clients and US securities are of great importance, it is unavoidable that a large number of companies will elect to enter into such agreements with the IRS. This legislation will compel non-US financial institutions to develop a keen understanding of these regulations and to enforce them. In this environment internal compliance will become more and more important. In general, the banks have accepted these developments, but many fiduciary companies still need to upgrade their standards. Those fiduciary companies with an existing focus on compliance standards and procedures, such as ATC, are best placed to face the challenges ahead.  

Strength of Swiss private banks

High level service, confidentiality, regular client contact, extensive language skills, experienced management and private bankers – these have all made Switzerland a prime location for private banking. The new environment seems likely, generally, to bring about lower margins and thus lower profitability, not least because the move towards becoming a tax compliant jurisdiction will effectively remove one of the historical justifications for higher fees for banking in Switzerland. On the other side, FATCA and international regulatory requirements will almost certainly result in an increase in the costs for those clients who retain services in this area.

Financial performance of the portfolio will become more important and more transparent. Swiss bankers will have to prove that they can also be the best in this field.

The banks benefit from the presence of a large range of other specialised services, including reputable law firms, specialised fiduciary companies, and a range of family office related services. Clients will have more and more access to high level financial-legal-fiduciary support. A growing number of clients appreciate having a bank account in Switzerland, combined with a Swiss trustee who manages the various estate planning aspects of their structure via a trust or foundation established in jurisdictions such as New Zealand, Guernsey, Bahamas, Curaçao etc.

The above illustrates the current situation, but is this enough? Is Switzerland ready to continue to be the location of choice for private banking? Nearly, but not quite - there is clearly more to be done. In this context one can, amongst others, think about the following:

• Clarification about what constitutes lawful money for Swiss banks (they may justify their actions in the UBS case by the “scheme of lies” approach but more clarity will be required in the future)
• Clarification as to how pre-2010 non-compliant money will be regularised
• Continuing need for FINMA to regulate independent private bankers and portfolio managers
• Regulation of the fiduciary industry, although steps have been taken towards this by the creation of the SATC (Swiss Association of Trust Companies).

In view of the above, what is the future for Swiss private banking and its confidentiality? It has to be considered very promising. The combination of stability, expertise, independence, and so on, provides Switzerland the opportunity to become the world boutique of private banking for lawful money. It will surely remain the world custodian of choice.

But what will happen with confidentiality? It is a misperception that a business strongly regulated by FINMA will undermine confidentiality - no, it simply ensures that high standards are applied and that international clients with lawful money will feel very well protected. This regulation, combined with the natural Swiss respect for confidentiality, will continue to support the private banking industry.

The success of most of the above is in the hands of Switzerland and the government; however, there is one factor that is not controlled solely by the government, and that is the value of the Swiss Franc. Any further significant strengthening of the CHF will make it increasingly difficult for the Swiss banks to be cost competitive.

Recently two large private banks, JPMorgan and Barclays, have announced an intention to substantially increase their Swiss private banking activity. That can only be seen as a clear vote of confidence in Switzerland as a jurisdiction and as a confirmation of a positive outlook.