The future’s bright

Friday, 01 October 2010
The fast-changing environment within Swiss private banking and the impact on the country's trust administration sector.

F or a country such as Switzerland, which has built a solid reputation for quality, stability and permanence, the fast changing environment within the private banking sector has been surprising, but welcomed by many. The recent inflows of tax-compliant new money to Swiss banks from clients concerned about the stability of their local banks, particularly within Europe, demonstrates Switzerland’s position as one of the key global wealth management jurisdictions, with a currency that is still seen as a safe haven by many clients and their advisors. The country’s central position in Europe, combined with the client-focused expertise of its bankers, supported by a high quality professional network of lawyers, tax advisors and fiduciaries will ensure Switzerland’s dominance in the private wealth management arena.

Reviewing strategies

Many of the Swiss based private banks have been reviewing their corporate strategies to determine whether they need to develop and expand outside of their Swiss-based offering. This has also included a review of their target markets and the associated capabilities of their private banking teams, and the implementation of training programmes to increase tax and wealth-planning understanding where required. As many recruitment firms will testify, compliance and regulatory risk managers are in strong demand, with cross-border marketing and reputational risk at the forefront of many bankers’ minds. This has created a challenging environment for banks with increasing competition in certain target markets and a renewed focus on performance in a new world of reducing margins. Thus it is important that banks be given time to make the transition, implement new strategies and adopt associated training programmes.

It is important that banks be given time to make the transition, implement new strategies and adopt associated training programmes

For some banks, wealth-planning solutions such as trusts, companies and foundations have in some instances been viewed as ‘wrappers’ to assist in the retention or acquisition of new assets under management. A number of Swiss private banks have trust operations based in various global jurisdictions including Switzerland, administering structures based in both onshore and offshore jurisdictions. The approach to such operations has varied; for many the pricing of such structures will not be commercial with the businesses being more of a cost centre and the main function being the retention of the bankable assets. Many of these operations are not profitable in their own right. The owners would be quite risk averse when it comes to assets under management, preferring to focus on structures owning bankable and investable assets and in some limited circumstances residential property. Of course, this is not true of every institution, with some adopting a broader asset acceptance approach. For many private bankers, however, it has at times been difficult to balance the demands of their parent with the needs of their clients in this area and for many, having their clients’ trust relationships administered by quality independent third party providers has benefits for the client and banker alike.

Valuing independence

As has been widely reported by the financial press over the past weeks, some private banks are considering divesting themselves of their trust and corporate fiduciary arms within Switzerland. For many trust practitioners this will not come as a surprise with the associated ‘conflict’ when acting as banker, investment manager and trustee. Given this back drop how will the industry develop within Switzerland?

In my experience, working with bankers, lawyers and tax advisors within Switzerland I see a developing trend with high-net-worth and ultra-high-net-worth clients retaining the services of independent experts in their own professional fields. The days of the ‘one stop shop’ are over and clients are seeking an independent, no conflict approach from their advisors. For some trustees this will raise the question of how to handle retrocessions they may receive from banking and investment partners. From a trust perspective, within Switzerland high-quality independent trust companies are finding themselves increasingly in demand, as the banks seek to divest themselves of certain clients or their trust business altogether. This is good news for the corporate advisors who are benefiting from an increased level of activity in this area and it is also creating opportunities for good quality independents to increase their presence or to enter a key market.

Expansion

Switzerland’s trust sector is expanding, actively supported by STEP. New STEP centres are opening, more students are joining and education standards, already at a high level, are increasing. Many UK law firms now have, or are seeking, a permanent presence in the Swiss market, which demonstrates the importance of Switzerland as a market. Switzerland, post ratification of the Hague Convention on Trusts in 2007, is rapidly developing into a core jurisdiction for trust administration, which is a natural evolution when one considers the levels of global wealth that continue to be managed from Switzerland. This, combined with access to quality cross-border tax and legal advice for client’s who increasingly prefer to access that advice within Switzerland rather than their home country for legitimate confidentiality reasons, makes Switzerland a key jurisdiction for many global fiduciary businesses. For a number of clients the ability to meet with advisors, private banker and trustee in one jurisdiction is compelling.

Staffing continues to be a challenge but with the increasing student membership within STEP, and with some global trust professionals looking to Switzerland as a jurisdiction to expand their experience and career prospects this is manageable, albeit at a cost.

The future

Looking forward, the future of the trust business in Switzerland will involve more high quality independent trust businesses, managing tax compliant wealth planning and asset protection structures. Private bankers will need to feel comfortable with trustees who actively manage and control structures, which may involve a cultural shift for some. For the Swiss banks, there will be different models, some will retain an active trust function with a wide asset acceptance policy; however these will be in the minority. The majority will move to an ‘open architecture’ approach offering the services of their own trust division alongside a number of high quality independents on a panel of possible providers offered to new clients. The remainder will exit the business altogether, preferring to refer business to independent experts. That said, the reality is that in many instances the private banker is pivotal to the client relationship and they work with their clients to determine the right solution given the individual circumstances.

For some clients the security and ‘deep pocket’ status of a bank-owned trust business will continue to be attractive, and the banks will remain key players within the trust sector in Switzerland, especially for ultra-high-net-worth families. However they will often need to work with quality independents to provide holistic solutions especially for those in high-risk jurisdictions or with regard to structures holding high risk assets or trading businesses. For many private bankers, working with quality independent trust businesses, has a number of attractions; fees being one, as independent firms have more flexibility to agree fixed fee pricing; asset and client acceptance – generally more flexible; service – equally high standards in most instances.

The real ‘Nirvana’ for many will be to work with a ‘deep pocket’ independent business, with a global office network of real substance, thus allowing access to global wealth planning solutions under one roof, with the added security of the ultimate parent’s deep pocket. Such businesses do have an active presence in Switzerland.

The future may also bring change regarding the regulation of the trust sector within Switzerland. The country’s regulator, FINMA (Swiss Financial Market Supervisory Authority), are currently reviewing the procedures of the banks with regard to their cross-border activity and, in my view, it is only a matter of time before the authorities consider regulation of the trust sector here. As many of us have experienced within other key offshore trust jurisdictions this generally leads to consolidation and a flight to quality, because of the cost of meeting compliance and regulatory standards. This is an area that the SATC (Swiss Association of Trust Companies) is already looking at, as it is better for the industry itself to take the lead and establish a regulatory environment that works for everyone. As we know, get it right and it can have a very positive impact across the board.

A changing banking and regulatory environment will not suit all and for some practitioners the so called ‘new world’ will provide significant challenges to their business model.

For the trust industry in Switzerland the future on the whole is bright, although there will be challenges along the way, but with these will come opportunities.

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Carl Darnill

Carl Darnill TEP is a Senior Manager with IFG Trust (Switzerland) Ltd, part of the International Division of IFG Group Plc.

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