Swiss must use crisis to forge new models

The Swiss private banking industry, holding client assets of almost SFr4.5tn (€3.65tn), is going through a worse crisis than it did in 2008, warn the country’s consultants.

Problems are coming from several sources, including the US authorities, increasingly-critical private clients and a developing economic model which determines that banks must become more competitive to survive. Individually, these challenges can be faced and overcome. But together they amount to a toxic cocktail.

Swiss banks Frey and Wegelin have already closed following assaults from the US authorities linked to the apparent avoidance of taxes by US clients. And there could be more to come, plus billons in fines, warns Ray Soudah, founder of Zurich-based consultancy MillenniumAssociates. Many, who have had even small exposure to US clients in the past, could be caught up in dangerous agreements which could leave them open to further liabilities.

“This amounts to the worst crisis yet,” believes Mr Soudah. But there is light at the end of the tunnel, he says, with this watershed moment actually acting as a positive catalyst for many of the banks in Switzerland.

“Medium to large banks have the opportunity to decide what their real purpose is,” he says. “This should be safety and investment performance, as opposed to secrecy, tax evasion and money laundering, which they are not engaging in any more, yet still suffering from past business.”

The terms of a US programme agreed with the Swiss authorities are vague at best and “depending on their representation by the Department of Justice, could result in devastating, if not life threatening consequences for a number of Swiss institutions,” says leading Swiss financial services lawyer Shelby du Pasquier of Lenz & Staehelin. He nevertheless welcomes the initiative as a “positive development” for Swiss banks, keen to achieve closure with the US authorities over their past dealings with US clients.

Most will look to the example of UBS, which not only struck a $780m (€577m) deferred prosecution agreement with the US in 2009, but also provided “administrative assistance” relating to the submission of 4,450 US client files by the Swiss federal authorities. This effectively sounded the death knell for Swiss banking secrecy and the clandestine services surrounding it.

These measures have allowed UBS Wealth Management to successfully refit and rebuild, with a portfolio-management-led structure already emerging from the flames and winning awards from the likes of PWM.

The challenges also come at a time when the largest Swiss institutions may be forced to concentrate on wealth management, because they are being directed to raise their capital bases and scale down investment banking operations.

It is no bad thing, therefore, for banks both big and small to re-assess their raison d’être and find more efficient models of serving their clientele.

Oliver Wyman’s head of European financial services, Stefan Jaecklin, believes Swiss private banks must develop a more active and sophisticated private banking model in order to compete with increasingly savvy onshore players.

They face additional costs in providing these services, while compliance requirements are ramping up the pressure on fees. This “new normal”, encapsulating lower margins and higher costs, will require economies of scale, believes Mr Jaecklin.

Not only will salaries be cut, but bankers will need to significantly improve their skills and knowledge in order to serve new client segments, keen for the banks to upgrade their expertise.

“There is an awakening of the client in wealth management,” suggests Scorpio Partnership founder Seb Dovey. “For those prepared to understand them better and use this intelligent data constructively, these clients are going to take our industry to a new level of excellence.”