Swiss banks gear up for global competition

Regulatory changes mean Swiss banks are going to have to compete on equal terms in the global marketplace.

The forecast is not good. After unprecedented regulatory attacks from the US and the EU, which have long been the Swiss bankers’ happy hunting grounds, the Swiss private banking sector is now facing a future without its key business proposition: banking secrecy.

Swiss banking has become synonymous with the ‘fiscal refuge’ that has for decades given Swiss banks a major advantage over other banks, enabling them to attract assets from all over the world. But this long-held advantage has also allowed a certain complacency in terms of money management performance, in part because clients did not always expect the banks to ‘work’ their money.

Facing the FATCA

The Swiss banks are now going to have to compete on equal terms with other banks around the world. Peter Damisch, partner at Boston Consulting Group, speaking at a Swiss Finance Institute conference in Lugano, said: “It is difficult for the banks, because it is the first time in 50 years that the Swiss have had to face change. Now they have to redefine their business model.”

Stefan Jaecklin, a wealth management partner at Oliver Wyman, estimates that Swiss banks could lose up to half of their undeclared assets through fines and repatriation. Yet, faced with this prospect, Swiss banks seem surprisingly complacent.

“The Swiss banking industry has the highest density of banks, each with different strengths and weaknesses,” he said.

“However, there is no convergence of views on the future of offshore banking. I have not seen a single bank that has worked out the pros and cons of its business proposition. This is surprising for a CHF2.5trn industry.”

Consolidation will be the result of an impending wave of regulation that will transform the Swiss banking industry. Looming over the sector is a series of negotiations with the US authorities over the implementation of the Foreign Account Tax Compliance Act (FATCA). It is a US law, but with profound implications for non-US banks and other financial institutions and their US clients throughout the world.

Under FATCA, US taxpayers must declare to the Internal Revenue Service (IRS) any foreign financial assets of more than $50,000. The Act is retrospective and applies to all US citizens, wherever they are around the world. Crucially, the law also requires non-US financial institutions to report to the IRS all data on US-linked citizens and assets.

As the IRS website says: “Foreign financial institutions [FFIs] must report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.”

Co-operation is not optional. The website adds: “To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by 30 June 2013.”

Under this agreement, ‘participating’ non-US financial institutions will have to carry out identification and due diligence procedures on their account holders; report annually to the IRS on account holders who are US persons or foreign entities with substantial US ownership; and withhold and pay over to the IRS 30% of any payments of US source income. To ensure all the requirements are met, each company has to appoint an ‘FFI officer’, whose role will potentially be that of a whistleblower, reporting his employer to the US authorities.

In addition, the FFIs will be required to withhold gross proceeds from “the sale of securities that generate US-source income, made to non-participating FFIs; individual account holders failing to provide sufficient information to determine whether or not they are a US person; or foreign entity account holders failing to provide sufficient information about the identity of its substantial US owners.”

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