Switzerland struggles to find new role in post-secrecy world

Switzerland is not having the easiest time of things as a financial centre, admit some of its key practitioners. It has failed in the last three or four years to state its case for portfolio management and other services now that the veil of secrecy, under which banks previously thrived, has been discarded for good.

“There is a sense that we have been so badly treated by the Americans that we will take the ball away,” says a prominent Swiss banker, citing a common gripe in the country.  “But the world has changed and we need to be more effective at telling everyone that we are good at doing business effectively with a level playing field.”

Bankers say the jurisdiction needs to get better organised during the transitionary period for its business model, while capitalising on its advantages of a stable, neutral, low-debt economy, good rule of law and deep, if expensive talent pool.

“The industry has all the qualities to re-invent itself, including its traditional strength of stability, legislation and decades of high quality service provided to clients in the Swiss tradition,” says François Reyl, CEO of Geneva-based Reyl Private Bank. 

Banks must now compete on “strength rather than secrecy,” he believes, with value added in key areas including asset management and corporate advisory, not always part of the Swiss offer in previous eras.

“Our traditional core business is under pressure, hence the necessity to recapture margins through complimentary areas of activity,” says Mr Reyl. “But we cannot do this overnight. It is a long process.”

Switzerland is also caught between two posts when it comes to modernisation. It wants to maintain exclusivity and service the wealthiest clients, used to a luxury lifestyle and the services that go with it, yet its banks can no longer afford to provide them. Investments in a technology-led model, which can then eventually cut costs, must be financed by taking in many more clients, with more assets in total, but a lower net worth individually. Yet most Swiss banks are still reluctant to tread this path.

Reyl claims to have invested significantly in an IT platform to provide e-banking facilities and customised tax returns, yet breakneck digitisation runs contrary to the Swiss private banking ethos.

“Banks such as ours are not yet fully affected by the necessity to harness Big Data or provide mass market-type tech tools at this stage,” says Mr Reyl.  

There is a faint possibility of Switzerland’s getting close to its former glories when it was the world’s predominant wealth hub in the early 1990s, but much work needs to be done first. “Switzerland needs to redefine its challenges,” ventures James Holder, Geneva-based head of Northern Europe and Family Office business at Citi Private Bank. 

It is already hamstrung by lack of access to a huge EU single market next door, into which Swiss banks will find it increasingly tricky to sell, he says, with most institutions using London to serve European clients. The strength of the Swiss franc has also made Geneva and Zurich increasingly expensive places from which to do business. 

But global families are increasingly looking for key hubs to set up their family offices and business interests, and it is these clans which Switzerland must market itself to, says Mr Holder.

“There are 125 billionaires around Lake Geneva alone. We are no longer just an offshore banking centre, but a favoured financial hub for global families, looking for permanent residence. This is an opportunity that will continue to grow.”

Such families, he says, will best be serviced by global firms with a presence in Switzerland, rather than the smaller niche banks, likely to fall by the wayside if they do not take part in further consolidations. The likes of Banque Syz, EFG and UBP have all been busy buying up smaller competitors and more deals are expected, even if they are currently thin on the ground.

“We are in a stage of continuation of consolidation in wealth management and we need economies of scale,” confirms Eric Syz, CEO of Banque Syz in Geneva, whose group is currently integrating the local RBC franchise. While he feels Switzerland has been on the end of “economic warfare” from the US, Mr Syz believes the final result of regulatory pressure is that private banks are “cleaning up those things which needed to be cleaned up”.

He is scathing about some of the former business models of the main Swiss players and lack of interest in portfolio management, until they were forced to diversity away from traditional services. “In some cases, the banks were administering criminal enterprises in the US, these were not just haphazard dealings,” says Mr Syz, 

“There are people who went too far, working in an organised way, issuing manuals to staff,” describing the best way to acquire clients in the US, often contravening US laws. But most have already settled their differences with US authorities. “The biggest fines have been paid by large groups in the limelight…my estimate is that the worst part is behind us.”

A change in DNA means banks must build up expertise in investment performance. Smaller banks will have no choice but to either buy in or internally develop portfolio management, he says. In Europe, only London and Switzerland have this “discreet, professional” investment culture and the requisite talent pool, he believes. “If you are an Italian, Portuguese, a Finn, Swede, German or Austrian, would you want to give your money to the French? It’s very unlikely, but you would be happy to work with the Swiss or British.”

While Paris has some large banks such as BNP Paribas and Société Générale managing substantial assets, they have experience of running portfolios only for French, not international clients, says Mr Syz. “Switzerland is the only European country that knows how to open foreign currency accounts for international clients; that’s how we built our banking culture,” he says. 

“The Swiss underestimate the power of this and foreigners underestimate what can be done in our banks.”

Switzerland, says Mr Syz, is not really even aware of this huge advantage in competence over rival financial centres in neighbouring countries. “The UK and Switzerland are best positioned to take advantage of the pursuit of globalisation and the new release of resulting entrepreneurial wealth.” 

London is the key competitor to Zurich and Geneva for this type of business, but Swiss centres offer superior quality of life, superior transport connections and better education and healthcare facilities, believes Citi’s Mr Holder. 

Increasing competition is also coming from further east in Dubai, which has been growing as a financial centre post Arab Spring. “A lot of people are now choosing to base themselves there as a hub jurisdiction, as it is a convenient place to meet and transact,” he says, although Dubai’s lack of banking expertise means most clients continue to book assets in London, Switzerland or Jersey.

Delivering  a clear wealth management strategy for clients has to be something which successful banks can implement globally, independent of their home market, suggests Dirk Klee, chief operating officer at the Zurich head office for UBS Wealth Management, with Switzerland just one booking centre, alongside London, Singapore, Hong Kong and the Americas. 

But this is clearly a Swiss-built and honed model, being leveraged for wider success. “The backbone is built in Switzerland,” admits Mr Klee. “The choice is for clients to access the services wherever they are and where to book the money, but Switzerland is at the heart,” with the Zurich-built technology platform exported to other jurisdictions.

Non-core services are increasingly outsourced to up-and-coming financial centres including Nashville in the US, Krakow in Poland and Pune in India. UBS-owned “service hubs” are deploying outsourcing partners in these hubs and globally, including IBM and Cognizant. 

“There is no aggressive outsourcing strategy, as we need to be clear of our value proposition,” says Mr Klee, with investment advisory always core to the UBS business. “Only the commoditised services are outsourced.”

That said, there is increasing flexibility at UBS, Switzerland’s and the world’s leading wealth management player, about whether services should come out of Switzerland or not. “We are not entirely dependent on the Swiss expert model,” says Mr Klee. “Switzerland enjoys political stability and trust, it is in our DNA. But it is not an offshore model anymore, but a diversified global access model.”

Rival Credit Suisse is however in the midst of a huge restructure and cost-cutting process, with a net reduction of 1600 jobs targeted in Switzerland. “No CEO is happy to reduce the headcount,” says Tidjane Thiam, chief executive at Credit Suisse, with 3,500 further jobs to go in London, New York and the outsourcing “centres of excellence” set up in Poland and India. 

The plan here is to change the balance between investment banking and wealth management in favour of the latter. Mr Thiam told PWM that keeping the headquarters of his bank in Zurich, rather than New York or London, is central to the new private-banking and asset gathering centred strategy of Credit Suisse. 

But the real problem with the Swiss model is not the numbers of staff, but the costs per staff member, says Ray Soudah, Zurich-based founder and chairman of M&A and banking strategy consultants MillenniumAssociates. “A relationship manager should not cost SFr1m ($1.04m) a year to serve 300 clients. The cost per client is disproportionate. What are they doing all day?”