Demise of Swiss banking secrecy heralds new era

Last updated: May 19, 2013 9:39 pm

Demise of Swiss banking secrecy heralds new era

By James Shotter in Zurich

Over the past five years, Switzerland has fought tooth and claw to keep its 80-year-old tradition of protecting the secrecy of its banks’ clients alive. It is looking like an increasingly forlorn cause. The latest blow came last week, when EU states – under mounting pressure to crack down on tax evasion following a rash of high-profile scandals – finally agreed to open negotiations on a new tax accord with Switzerland. The precise nature of the EU’s demands is not yet clear. It seems likely, however, that the bloc will request that Swiss banks automatically share information about the offshore wealth stashed away in their vaults by EU citizens.

Such a move, says Stéphane Garelli, a professor at the IMD business school in Lausanne, would be the “final nail in the coffin” for the system of secrecy that has helped Swiss lenders suck in SFr2.7tn ($2.8tn) of foreign assets. “Switzerland is now moving towards an orderly retreat,” he says.Other observers are more circumspect. “Bank secrecy has certainly weakened,” says Rainer Skierka, a banking expert at Bank Sarasin in Zurich. “But I would hesitate to say that it is dead, because it is not clear that a deal with the EU would cover all types of assets, nor is it likely to cover the contents of safe deposit boxes.”

The direction of travel, though, is clear. Switzerland broke its taboo on data-sharing in February, when itagreed to implement Fatca, a piece of extraterritorial US legislation that requires foreign banks automatically to provide information on the offshore assets of US citizens.

Data exchange with the EU would be more important still, argues Martin Brown, professor of banking at St Gallen University. “Funds of American clients make up a significant proportion of the foreign wealth managed by Swiss banks. But the share of funds from EU countries is higher,” he says.

The key question now, argues Prof Garelli, is what concessions the Swiss can wring from their European interlocutors in exchange for agreeing to automatic data-sharing.

Eveline Widmer-Schlumpf, the Swiss finance minister, said two weeks ago that she would be prepared to accept automatic information exchange if it were a globally applied standard, and if efforts were also made to shed light on the opaque trust structures popular in rival financial centres.

However, the importance of maintaining European market access for its banks means that the Alpine state’s negotiating position is not a strong one.

As a result, many Swiss private banks have already started adapting their models for a world in which they can no longer rely on secrecy as a source of competitive advantage.

Some have put up the fees they charge for managing their clients’ wealth, while others are attempting to shepherd clients out of discretionary and into advisory accounts, where banks can typically charge for a greater range of services.

The challenge of this approach, however, is that banks also have to offer services of a sufficient quality to justify the higher fees, says Prof Brown. “Not all banks will be in a position to do so, and they won’t be able to cater to all current clients,” he warns.

Banks that fail to make this change are likely to run into difficulties, and in the absence of buyers, smaller participants may even have to close.

Yet despite such upheavals, in the long run the demise of Switzerland’s tradition of bank secrecy ought to benefit both the country and its banking sector.

On an international level, it would resolve an issue that has soured Switzerland’s relations with its most important trading partner, the EU. And in doing so, says Mr Skierka, it would make it easier for Swiss banks to hunt for business abroad.

“Bankers will be able to go out again and focus on winning business, rather than worrying about the past. That is a big positive,” he says.

Prof Garelli is also confident that Switzerland’s banking sector can prosper without its mantle of secrecy. “Switzerland has a very diverse economy. It’s not just chocolate and watches. It is also pharma, mechanical engineering, food, tourism,” he says.

“All these sectors do extremely well internationally, not because they benefit from special laws, but because of their skills and competence. There is no reason why Swiss banks cannot do the same.”

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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