May 7, 2013 12:13 am

Switzerland: Haven feels pressure to conform with global data sharing rules

view of the headquarters of the Bank Wegelin und Co©EPA

Closed doors: Wegelin pleaded guilty to helping US clients avoid paying taxes on $1.2bn of assets

For a long time the Swiss tradition of bank secrecy was a potent calling card for the country’s private banks, helping them to draw in money from all over the world.

In recent years, however, it has become a millstone around their necks. Since the financial crisis, governments desperate for revenues have been cracking down aggressively on tax havens, and Switzerland is firmly in their sights.

The Alpine nation initially sought to counter pressure from the EU to share data automatically about the offshore accounts of EU citizens by, instead, negotiating a series of bilateral treaties. These let private banks’ clients preserve their anonymity in exchange for paying a one-off penalty charge and submitting to withholding taxes in future.

While this approach led to agreements with the UK and Austria, it failed with Germany. The German parliament rejected a treaty with Switzerland last December after more than a year of toing and froing.

The pressure from across the Atlantic has been no less intense. The US authorities are investigating at least 10 Swiss banks for allegedly helping US citizens evade taxes.

In January, the investigation claimed the scalp of Wegelin, Switzerland’s oldest private bank, which was forced to close after pleading guilty to aiding tax evasion.

A month later, Switzerland signed the foreign account tax compliance act, or Fatca, thus finally yielding to US demands that Swiss banks should automatically share information about offshore US clients with the tax authorities on the other side of the Atlantic. Perhaps the biggest blow came in April, when Luxembourg and Austria, whose own opposition to automatic data exchange has hamstrung the EU’s efforts to force Switzerland to share information, indicated that they were also reconsidering their stance.

“As soon as the EU reaches a common position on data sharing, Switzerland will come under extreme pressure to move in the same direction,” says Christoph Schaerer, a tax expert at PwC in Zurich.

“In a sense, that is even more significant than Fatca, as the EU market is more important for Swiss banks than the US,” Mr Schaerer adds.

The final outcome of the concerted international pressure is clear, says Martin Brown, professor of banking at St Gallen university in Switzerland. “Bilateral deals won’t be the global solution for tax affairs. It will be automatic information exchange.”

This revolution poses several problems for Switzerland’s private banks. The first is outflows. Last autumn, Jürg Zeltner, head of UBS’s wealth management division, said these could run into “hundreds of billions” for the SFr2.7tn ($2.9tn) Swiss offshore banking sector as a whole.

Analysts expect the process to continue for at least two more years. This dynamic is unlikely to pose too much of a problem for Switzerland’s giant banks, UBS and Credit Suisse, says Teresa Nielsen, an analyst at Bank Vontobel.

“UBS and Credit Suisse have roughly SFr1.6tn and SFr800bn of assets under management [respectively]. Even if they suffer outflows of SFr10bn-SFr20bn, it will not hurt them,” she says.

For Switzerland’s large undergrowth of smaller private banks, the outflows are far more of problem, because they lack a global scale to replace the haemorrhaging money with inflows from faster growing markets.

This problem is compounded by the higher compliance costs that a climate of greater transparency will demand.

In its full-year results, Credit Suisse revealed that in 2012 new regulatory initiatives cost the bank an extra SFr49m compared with the year before.

Such sums are loose change for a bank of Credit Suisse’s size. For smaller banks, they are not.

Some private banks are already altering their fee structures to remain profitable in the face of such changes.

The execution-only mandates that were once highly profitable for banks – and were often a popular destination for untaxed money – are likely to play a far smaller role in their revenue streams in the future.

Instead, banks are trying to shepherd clients towards advisory mandates for which, as well as being charged a flat fee for basic services, clients pay more for extra services.

Such mandates, says Ms Nielsen, are the future of Swiss private banking. However, the problem, says Prof Brown, is that not all of Switzerland’s smaller banks possess the expertise to offer the services necessary to command extra fees.

Those that cannot do so are likely to end up being bought by competitors, he predicts.

Other observers are less optimistic. “No one wants to buy these assets at the moment, because they don’t know what they are getting,” says one.

“It is more likely that small private banks that get into trouble will go bankrupt.”

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