Important factors to consider in residence planning
Dr. Ariel Sergio Goekmen, Member of the Executive Board, Schroder & Bank AG, Zurich
Many international clients bank in Switzerland are concerned about recent developments in the Swiss banking sector, where the number of banks decreased from 331 in 2006 to 275 in 2014 when the financial crisis of 2007/2008 took its toll.
According to a study by PwC, there are several reasons for the negative press regarding the Swiss private banking sector. Firstly, there are the non-prosecution agreements Swiss banks have negotiated with the US Department of Justice, and the unauthorized sale of client data. Secondly, there is the obligation of banks to create transparency for their clients regarding kick-backs on products, as well as the Automatic Exchange of Information (AEOI) starting in 2018 — which means that banking secrecy for clients in the European Union (EU) and a few other countries will cease to exist. This has contributed to a decrease in gross revenue margins, which have fallen by about 20% since 2006 and are now down to less than 100 basis points on assets under management.
However, securities holdings at Swiss banks have remained nominally stable since 2007 for all clients. Interestingly, when adjusted for outflows of client funds and performance, the holdings are only about 15% lower. In 2014, 26 private banks reported losses. In 2008, according to KPMG’s 2015 report on the performance of Swiss banks, none did. It would appear that the environment for Swiss private banking is tough and that the sector might be facing rapid decline. But is this true?
A Swiss social democrat recently said to me: “If you have nothing to hide, you can open your bank records to the world!” Quite so. The world, however, is not always a decent place. There remain corners where wealth owners and their families would be unsafe were it publicly known how much cash they have in the bank. This is one reason why discretion is a value which needs to be considered — even in a tax-compliant world.
Banking secrecy is Swiss law —if anyone disseminates information about bank clients without their consent to third parties, even by negligence, they face up to three years’ imprisonment and a fine. Thus janitorial staff, auditors, accountants, and even security guards working on a bank’s premises have to sign a statement confirming that they are aware of the law. The Swiss criminal code in Articles 271–273 additionally protects sensitive information within the Swiss economy in conjunction with another law which permits federal agents to listen to telephone conversations if they feel this is warranted. In principle, anyone who gathers intelligence by applying illegal means — which includes bribery — for a private organization or a foreign state can be punished by imprisonment and a fine. In the last 20 years more than 45 cases have gone to trial.
Switzerland has now accepted the political challenges outside its borders is leading the way in certain regulatory areas, for example in the regulation of systemically relevant banks. The Swiss banking industry has also accepted the requirements to support bank capital adequacy, stress-testing and market liquidity risk contained in the Basel III Accord, and local laws have been redesigned to align with EU directives. Switzerland and its banking industry have fundamentally changed course and are now taking a much more adaptive stance towards EU regulatory matters due to their wish to gain access to the EU market.
Turning to the AEOI Agreement, the guidelines for implementation are currently being established by the Swiss Federal Tax Department within the Swiss financial sector. On a political level, the Swiss Council of States accepted the AEOI Agreement without much debate on 14 March 2016. Switzerland has so far agreed to exchange information with all the member states of the EU, Australia, South Korea, Canada, Japan, the Channel Islands, the Isle of Man, Norway, and Iceland from 2018. However, the Swiss population may ask for a referendum on this agreement, which could lead to delays.
The agreement is often misunderstood and misrepresented by the press abroad. To clarify, the advent of the AEOI does not mean that all 194 countries in the world will automatically be privy to the Swiss data exchange of bank client information. Priority in the process of the bilateral agreement on the exchange of information with Switzerland is given to the 34 Organization for Economic Co-operation and Development (OECD) member states and approximately 40 remaining jurisdictions that have consented to apply the Common Reporting Standard. Of the total number of assets under management in Switzerland, 51% are assets from abroad. This amount of CHF 3.4 trillion is predominantly from Europe and will therefore be affected by the AEOI.
In January 2015, the Swiss National Bank abandoned its fixed peg to the euro. This meant that the Swiss franc immediately gained in value, thereby reducing Swiss banks’ revenues and increasing the cost for foreign clients to bank in Switzerland by about 10%. This is certainly not helping to export the private banking product. How can the banking sector adapt to the falling revenue trend and cope with eroding margins?
One solution is to turn to the core values of Swiss banking, which — with a market share of 26% — is the biggest private banking financial center in cross-border wealth management in the world. These core values focus on quality and diligence, professionalism, innovation, and delivering value to clients and shareholders. ‘Delivering value’ means achieving investment performance and putting relevant integrated know-how at the immediate disposal of clients. This concerns all aspects of client-facing work, from relocation to mergers and acquisitions, and from portfolio diversification to art collection and structuring solutions. Swiss banks remain the best capitalized banks in the world and, together with the country’s AAA rating, Switzerland is frequently selected as a location for custody, advisory or asset management, even by very discerning institutional clients such as pension funds, insurance companies, sovereign wealth funds, family offices and corporates. Deloitte suggests banks follow one of five business models to remain competitive. Besides the traditional universal bank model offering all services in-house, there is the managed-solutions model, the transaction champion, the product leader, and the trusted-advisor model. Trusted-advisor banks offer advisory financial services for end clients. The trust is acquired through in-depth knowledge of the client gained by a customer-comes-first attitude.
Banking secrecy still applies, first of all to Swiss tax residents domestically and vis-à-vis to all unauthorized data collection attempts by third parties. The culture of the Swiss banking industry is, whilst law-abiding, discrete by nature. Together with accuracy and reliability in execution and advice, as well as asset management, and thanks to the many domestic and international specialists and experts in Switzerland, the banking center will prosper in the future. There is a clear indication that the industry is focusing on what it has always done best: putting the clients’ interests first and providing high-quality, reliable performance.