What is the future of Private Banking in Switzerland?

Dr. Konrad Hummler, managing-partner, Wegelin & Co. Private Bankers

Chairman of the Swiss Private Bankers Association
 

As we all know, 2009 was an "annus horribilis" for our financial centre. To start with, we all noted with horror that certain Swiss banking institutions formed part of the hard core of those responsible for the systemic crises. At the same time, our country and in particular we, the private bankers, woke up to the fact that there is a high level of interdependence in our activities and stable framework conditions (payment transactions, forex services, clearing and settlement transactions) are of vital importance for our system to function. It is certainly not our job to draw up business models for other banks, and we have no intention of doing so. But the crisis has nevertheless taught us a good lesson: the unwise combination of fundamentally important functions and high-risk operations has no future. If we want to avoid an over-reaction leading to measures designed to regulate the size of institutions or their capital adequacy – which would lead to a virtual rationing of the system - the world's large banking establishments will have to make structural changes to their operations. For reasons linked to the system and to competition, steps must be taken in the future to ensure that any implicit or explicit state guarantee must only be given where it is obviously essential, namely to the part of the banking sector which is systemically relevant.

Moreover, in 2009, Switzerland and its financial centre fell victim to generally successful attacks on their cross-border asset management business models. Shaken by the destabilization of its leading bank, in the spring of 2009, our country faced a phalanx of prime ministers and ministers of finance from countries whose cross-border asset management strategies are frequently problematic, but who nevertheless had no scruples about focusing international pressure on Switzerland.  The violation of international law in this respect, and the fact that an international organization created for cooperation was used as a vehicle for blackmail, should make us think, because the rule of law is one of the axioms of a functioning financial industry.

Basically, our cross-border asset management activity is exposed to attacks from two angles: there is the generalized criminalization of tax avoidance through the broad interpretation of tax liabilities on the one side, and on the other, the efforts made by certain countries to apply internal supervisory law on an extraterritorial basis, thus moving the boundaries between active and passive services in order to serve their own interests. This situation also carries the risk of seeing the activities of our banks and their staff criminalized.
 
At last year's annual general meeting, the Swiss Private Bankers Association outlined a strategy for the financial centre, which it presented to the media. It is built on four pillars: two embody principles on which there will be no compromise and the two others are of a more relative nature, meaning they are negotiable.

• The first pillar concerns personal financial privacy which, in our opinion, is one of the fundamental rights of individuals worldwide and therefore applies to any Swiss or other national in our country. But, of course, it provides no entitlement to circumvent national tax liabilities.
• The second pillar establishes the principle that any changes made in the future that could affect our financial centre should criminalize neither our clients nor the upstanding bank employees that we are, be it abroad or even in Switzerland. We cannot insist enough on the importance of our country's loyalty to foreign individuals.
• The third pillar upholds flexibility in fiscal matters. Whereas the first and second pillars are fundamental obligations, pragmatism can - and should, according to the context - apply here. In principle, this is not limited to the rate of taxation but the anonymous levying and reimbursement of taxes. The limits for the tax rates will be set according to the assessed risk of flight of capital to tax havens.
• The fourth pillar clearly stipulates that there could be no tax allowances without compensation from abroad. The risk of continued criminalization would be reduced all the more if Swiss banks were to be allowed greater freedom in the services they offer abroad.

According to the facts set out, the proposed final tax levied at source, now part of the official policy, clearly covers pillars 1 and 3. It is about trying to reconcile, as well as possible, personal privacy with a withholding tax at source recognized abroad, while respecting the legitimate tax requirements of civilized and democratic countries. This tax is a logical step in Switzerlands agreements with the EU on the taxation of savings. On this point, we fail to understand those who declare that it is "too late". It comes at just the right time for the review of the agreements on the taxation of savings scheduled for 2013.

Without beating about the bush: the four pillar strategy is diametrically opposed to the automatic exchange of information. For us it is out of the question even to contemplate a path which would reduce to zero the chance of success of a final tax levied at source. Therefore, we specifically congratulate the Federal Council's position as presented in the "Strategic directions for Switzerland's financial market policy" report of December 16 2009. Yes, we recognize in this official strategic document not only a good number of our ideas, but also the desire to voice legitimate claims concerning financial market policy with regard to foreign countries.
 
In conclusion, I would like to address one key concern:

The report entitled "Strategic directions for Switzerland's financial market policy" (the Federal Council's response to the Graber postulate) published on December 16 2009 is unequivocal in emphasizing the difficulties the financial sector encounters regarding market access. This is particularly true in the case of our European neighbours. In principle, services may only be offered through subsidiaries and branches, with all the negative repercussions this has on jobs in Switzerland as well as added value and tax revenues in our country.

Swiss claims for market access are often countered by our partners' demands for trade-offs in other fields. It appears that Switzerland is not used to this kind of bartering. As recent events have clearly shown, it has often thrown in the towel. The DTAs tend to embody this kind of policy.  It is undeniable that the EU and its member states have a liking for protectionist measures, as seen in the recent European draft proposal for a directive on alternative investment fund managers, whose field of application also covers hedge fund and private equity fund managers. The financial crisis is being used by these regulations to enforce what are, undoubtedly, protectionist objectives.

In our opinion, the policy of concessions without clear compensation must now stop. In any negotiations - in particular tax negotiations where the other countries are usually the petitioners - concessions should only be granted when one can simultaneously make one's own demands – in the sense of give and take.  In this respect the revision of the agreements with the EU on the taxation of saving and the taxation of holding companies in Switzerland are exemplary. It is precisely in this kind of negotiation that Switzerland can impose its own goals. The Federal Council's report on this subject contains good intentions but they nevertheless remain to be put into practice. Having said that, when it comes to market access, a distinction must be made between not putting up new barriers and abolishing existing ones. This kind of status quo has to be an integral part of any negotiation.  All negotiations have their appropriate procedure and pursue their goals – for our country. Free market access is of prime importance not only for the Swiss financial sector but for the others too.

Bern, January 14, 2010 - Press Point