Swiss private banking shaken up by key players’ shift

GENEVA - Agence France-Presse

The logo of Swiss bank Credit Suisse is seen in front of a branch office in Zurich in this Nov. 21. Credit Suisse Group AG is betting it can turn around its unprofitable U.S. private wealth business with new loan products and a focus on the ultra-rich, a strategy greeted with skepticism by some securities analysts and former officials at the bank. REUTERS photo

The exclusive Swiss private banking sector has been revolutionized by key players Pictet, Lombard Odier, and Mirabaud, amid a tough new regulatory environment and a crackdown on tax cheats.

On Jan. 1, the elite trio radically changed their business model by ditching the near-unique status of Swiss private banks and transforming themselves into operations almost like any other.

Switzerland’s two-century-old private banking sector has been based on rules which make the wealthy managing partners personally responsible for the money they manage for rich clients.

In other words, if the bank gets into trouble, the partners can lose all their assets, not just those they have invested in the operation.

Drawn from the elite of Geneva Protestants, in a city which was a driving force in the Reformation five centuries ago, Swiss private bankers have over time refreshed their ranks with wealthy, likeminded members from their own community.

Pictet and Lombard Odier have eight managing partners, and Mirabaud, six.

Not being listed on the stock exchange, private banks are not required to publish their results, and are the preserve of a closed circle of clients.

Unlimited responsibility for those who run private banks has long been seen as a selling point for wealthy clients who want the comfort provided by such a guarantee.

But the tougher regulatory environment seen since the global financial crisis, and scandals such as the Madoff fraud case in the United States which rippled across the world’s banking sector, have been a wake-up call.

In addition, Switzerland’s cherished tradition of banking secrecy has been battered as governments crack down on tax cheats who stash cash abroad.

Swiss banks against US solution

The United States has been at the forefront, and in August Switzerland struck a deal with Washington over the thorny issue of undeclared money banked by American citizens.

Swiss banks had until Dec. 31 to decide whether to take part in a U.S. come-clean program to settle past wrongdoing.

Banks that do so will ward off costly lawsuits but still risk being fined in proportion to the sums involved.

According to research by consultants EY, formerly known as Ernst & Young, the overwhelming majority of banks across Switzerland’s sector believe that the U.S.-driven solution is damaging business.

Three-quarters of the banks told EY that they expect the automatic exchange of customer information to become the global standard, meaning the final death knell for banking secrecy.
EY said private banking faced the greatest pressure.

“The increasingly unfavorable conditions are currently leading many banks to reassess their business models,” said Bruno Patusi, head of wealth and asset management at EY Switzerland.

“The competitive pressure and the tax agreement concluded with the U.S. will tend to accelerate the consolidation,” he added.

Each of the three banks has been recast into a “corporate partnership”, a hybrid status that will make it easier to compare them with fully-listed Swiss players such as Credit Suisse and UBS.

It is similar to the “limited company” structure in the British Isles, with its well-known “Ltd.” label.
Complex global finance has made it hard for private bankers to feel safe with a traditional approach that puts all their assets on the line as they expand their operations.

The reform means they will only risk the funds they have invested in the bank, rather than putting all their personal assets on the line.

In concrete terms, the change means that the banks will now have to publish their results, and have also brought outside individuals onto their boards.