The financial crisis and the subsequent storm of shifting rules and regulations hit all banking centres. But the country that survived the strongest winds of change is arguably Switzerland. Aleya Begum takes a look at what has been and what lies ahead.


Slightly more infamous than famous, banking in Switzerland is typically known for its privacy policy and non-disclosure compliance – often linking the idyllic location as a safe haven for the wealth of dictators, mobsters, corrupt officials and tax evaders. But since the financial crisis of 2008, this previously accepted policy of discretion has been under serious scrutiny. This, coupled with digitalisation, has seen the sector experiencing accelerated structural changes.

Of course, privacy laws are not the only thing that has made the Swiss financial centre appealing: the country also offers economic and political stability, universality, a strategic location in Europe and competitive tax conditions. But while the latter all remain more or less intact, there is no denying the financial sector has struggled in recent years, and experts believe the end of secrecy is at the root of the problem.

“Switzerland has lost its unique proposition as a financial centre, which was shaped and protected by banking secrecy,” says Ernst & Young in its Swiss Fintech Report 2016.
“This development has not only directly impacted efforts to generate new business, the underlying regulatory requirements have also tied up the industry’s resources in recent years and the fallout has tarnished Switzerland’s reputation as a financial centre.”


The end of the secrecy legend

The turning point came in 2009 when US authorities successfully prosecuted UBS, which was forced to reveal data on thousands of US citizens holding offshore accounts in Switzerland and suspected of evading taxes. Although the case, which saw 4,450 client profiles being handed over, was a small portion of the original 52,000 requested, it effectively opened up the flood gates to data requests from all over the world and to other Swiss banks.

But the US win was no walk in the park. The case, which can be traced back to 2007 when whistleblower Bradley Birkenfled first reported the bank’s practices to the US Department of Justice, dragged out over years and saw intense legal and diplomatic wrangling between the two countries and within Switzerland. However, the tax treaty between the two countries, which formed the legal basis for the final disclosure in 2010, became the springboard for the US to push other Swiss banks to reveal data of similar clients and accounts.

After initial resistance to changing its centuries-old secrecy policy, Switzerland revised its course. In 2013, the Swiss parliament approved a law that allows Swiss banks to co-operate with US tax authorities as specified in the US Foreign Account Tax Compliance Act (FATCA) of 2010.

“I think in the end the banks realised that times are changing. After the financial crisis, and the increased tax awareness, the increasing international laws and regulations [that followed], banks in Switzerland accepted this new reality,” Daniela Fluckiger, head of communication, Latin world, at the Swiss Bankers Association (SBA), tells GTR.

In May last year, Switzerland signed an agreement with the European Union (EU) to align Swiss bank practices with those of EU countries. Under the agreement, both Switzerland and EU countries will automatically exchange information including not only income, such as interest and dividends, but also account balances and proceeds from the sale of financial assets. This scheme is expected to be implemented in 2018.

The EU agreement comes in line with the Automatic Exchange of Information (AEOI) – a global standard for reporting account information that is being driven by the Organisation of Economic and Cultural Development (OECD) and the G20.

So far, 101 countries have committed to implementing the AEOI, with 54 countries – including Switzerland – expecting to see first information exchanges next year, and the rest in 2018.

Switzerland will be particularly affected by the AEOI because more than a quarter of global assets invested cross-border are managed in the country.

A sticking point for the agreement has been that not all countries will be complying with the same regulatory protocols, or sharing the same level of information, depending on their regional and national policies. Swiss banks have highlighted two cases that they find particularly unfair. Firstly, and ironically some might say, the US has not signed up, and therefore US banks are not obliged to identify the controlling persons for investment companies in non-participating states. Secondly, in relation to different information sharing protocols, which will be based on national money laundering regulations, Swiss banks will be obligated to identify the controlling persons of companies and vehicles: this is not always the case in other countries.

The secretary general at the Association of Foreign Bankers, Martin Maurer, explains to GTR that this discrepancy will mean that countries do not start on an equal footing, which raises the question of “whether the level playing field that is talked about is actually assured or given”. The difference in shared information between different centres will mean that clients may move their business to a centre that has less disclosure agreements in place. Even if these banks eventually move to having more agreements in time, the customer would have already moved, “and when you lose them you don’t get them back”, he adds.


Tougher environment

Together with many banks elsewhere in the world, Swiss banks have been hit with higher capital requirements from regulatory authorities following the financial crisis. This, together with the the crackdown on secrecy, has meant the Swiss have received a double blow to their systems.

After implementing ‘too big to fail’ (TBTF) regulations in 2012, the country decided that more enhancements were needed and tightened the reins further last year. Systematically important banks in Switzerland must now meet a leverage ratio of 5%.

“According to both the Federal Council and the Brunetti expert group, Switzerland should be among the countries with the most stringent capital requirements for global systemically important banks, not least because these institutions form such a vital part of the Swiss economy,” says the regulatory authority, Finma.

The banks have argued that meeting the new rules means a higher cost of funding, which could lead to less lending and ultimately undermine economic growth.

Speaking at the Swiss International Finance Forum earlier this year, UBS CEO Sergio Ermotti warned that up to 30% of Swiss banks will go bust under the weight of increasing regulations within the next five years.

He criticised academics and the “so-called experts” who continue to call on banks to set aside more capital to cover potential losses. “Such erroneous principles give no thought to the actual practices of banking or the consequences. The ongoing discussion on increasing regulations undermines banking,” he said.

The business environment for banks in Switzerland is also proving challenging. In a bid to control the value of the Swiss franc, the Swiss National Bank (SNB) last year unpegged the national currency from the euro. This has been followed by negative interest rates, increasing costs and making it difficult for banks to earn. The over-valued franc also results in bad cost ratios when earnings are made in euros and dollars, but bills are paid in francs.

Add to that the reduced profit from taxed money compared to untaxed money and operating in Switzerland for the typically smaller private foreign banks becomes difficult, says Maurer.

“In 2009 we had 156 foreign banks, now we have about 105 to 106. Some of those are in the process of winding down, leaving around 100 of them still active. So over a third of them have left. It is a lot,” he says.

However, most of the assets have remained in Switzerland as most banks have either merged with or sold to other banks in the country.

Nevertheless, Fluckiger believes that despite the mergers and decline in banks, the number employed in the sector has not reduced as dramatically, “indicating the centre is still very solid”.

In the face of these changes and challenges, banks have had to find ways to adapt including, for some,
by exiting private banking.

“[Private banking] used to be a cash cow, with low risk and high income. Now it’s much more complex and difficult and the liabilities are much bigger around the disclosure regulations. So it’s not that they [the banks] want to do it somewhere else, they don’t want to do it all,” says Maurer.

The foreign banks operating in Switzerland have sought to diversify their product and service offerings, and one trend has been to turn to trade finance. Some banks, such as those from China and Brazil, have sought to make the most of their knowledge and relationships with markets and companies in their home countries, says Maurer.

He explains that these are mostly “classical” trade deals of products or equipment that the larger banks are not interested in, and the smaller Swiss banks can’t conduct as they lack the know-how in those regions. Although the figures for these trades might not be huge, they offer a new activity with an alternative revenue flow.


A digital outlook

While banks have been processing their recent history, the world has been turning digital. In a recent study by Deloitte, the consultancy found that among trends affecting Swiss banks, digitalisation was the most significant. However, the Swiss banking sector has been hesitant to react.

“It’s true that in the beginning, compared to Silicon Valley, London or Berlin, we were not on the fast track, but we are catching up. The Swiss are never the fastest. But once we get something done, it’s normally done pretty well,” says Fluckiger.

Despite the slow start, activity in the start-up space has picked up pace, and there are many reasons why the Swiss are primed to do well with innovation. Switzerland’s solid commercial infrastructure, educational system, stable internal market dynamics and strong technology and knowledge transfer make it an optimal location from an entrepreneurial perspective. According to Swisscom, today there are 185 fintech start-ups, most of which are in the investing and asset management space.

Ernst & Young’s report on fintech, which is co-authored by the Swiss Finance & Technology Association (SFTA), finds that when compared to other financial hubs such as London, New York and Singapore, the Swiss have sweet spots that could be focused on.

Unlike the other hubs, Switzerland’s total early-stage entrepreneurial activity (TEA) (a measure that looks at the percentage of working age population about to start an entrepreneurial activity, or who have started one in the last three years), scored highest in the above-55 age group, leading the report to argue that the country should consider developing a hub for senior entrepreneurs within the industry.

While the younger age groups lacked the same innovative drive, the first-rate education system should mean that founders have access to well-educated graduates. The economic and political stability of the country is more important for older founders, given they invest a portion of their assets and need to secure retirement benefits. Furthermore, because senior entrepreneurs are typically able to finance the early stage of a business without assistance and are well-connected, they don’t depend on government and institutional support in the same way as younger entrepreneurs.

It may seem ironic to some to think of Switzerland taking a leading role in a digital future, since the digital world is built on openness and transparency while Swiss banking stands for discretion. However, as the former head of innovation for the digital private bank at Credit Suisse Holger Spielberg says: “‘Swissness’ is a strong value established over centuries and which, at its core, remains a solid one. Especially these days when so much is ‘shared’, trust and security mean a lot. This is what the Swiss banks should build upon, redefining discretion in a digital world.”


Swiss banking: the facts and figures

According to the Swiss Bankers Association, the financial sector accounts for around 6% of total gross economic output, equating to CHF35bn. A total of 275 banks employ 169,000 people and contribute CHF5.4bn in taxes.

One of the most significant segments of the sector is wealth management, with Swiss banks managing CHF6.7tn-worth of assets. Over half of these originate from abroad and bring over a quarter of global cross-border asset management business into Swiss hands – making the country the global leader in terms of market position.

According to research agency Bakbasel, in 2014, the banking sector provided the Swiss economy with loans equivalent to twice its GDP, while private life insurers managed pensions and insured sums of the same amount.

Participants in the Swiss finance sector fall into six main categories: large, cantonal, foreign, private, regional and the Raiffeissen Group banks. In physical terms, the Raiffeissen Group accounts for the largest share, with 312 banks under its command, while foreign banks come in a distant second with 118 banks. There are only two large banks in the country, namely UBS and Credit Suisse. In financial terms, however, UBS and Credit Suisse account for 48% of all banks’ total balance sheet, while foreign banks and the Raiffeissen Group account for 11.6% and 6.1% respectively.

Switzerland is also home to the Bank of International Settlements (BIS) which facilitates co-operation among the world’s central banks. The BIS was founded in 1930 and is headquartered in the city of Basel. It hosts the Secretariat of the Basel Committee on Banking Supervision and has played a central role in establishing the sector’s regulatory frameworks.