It made me smile last November when Patrick Odier, group chairman of the Swiss Bankers Association, observed that “we have an image problem.” Understatement of the century. He was referring to Swiss banking’s Easter Bunny being increasingly redundant since America clipped the wings five years earlier of banks that facilitated tax evaders.
Nevertheless, according to the Economist, Switzerland is still world leader in wealth management, minding US$2.1 trillion (HK$16.3 trillion) in assets. But the game is changing fast. Where should Swiss banks go now? How should they re-invent themselves? In 2009, UBS paid America US$780m (HK$6.05 billion) to halt a tax-evasion probe and when Switzerland’s most venerable bank, Wegelin & Co, vacuumed up many of UBS’s undeclared clients, they were prosecuted. The bank pleaded guilty, paid whopping fines and shut up shop.
UBS handed over thousands of client names to the US authorities, rendering their once impenetrable wall of secrecy more like a colander. The Americans are chasing eleven other Swiss banks, including Credit Suisse and Julius Bär. Germany, the Economist reports, is underwhelmed by the Swiss proposal to levy and pass on penalties for German tax cheats while preserving their anonymity.
The Swiss banks are apparently worried that their government could end up with a muddle of bilateral arrangements, and presumably very confused clients. Switzerland’s offshore private banking used to be highly profitable too, but that’s also looking uncertain. Previously they could charge twice as much as British banks, apparently, because they could massage some of the tax savings on undeclared funds into their fees. Not any more. So Swiss bankers are at the cross roads.
What Lies Ahead?
Consolidation probably lurks around the corner for Swiss banks, with smaller banks unable to go it alone. After the Swiss Easter bunny vanished back into his hole in the bank, Asia’s private-banking centres, particularly Singapore, were expected to pick up the slack. But interestingly, they haven’t, the Economist says. The share of wealth of European origin managed in Singapore and Hong Kong has gone up by only one percentage point in the past three years, to 8-9% of the total, according to BCG. But the Asian offshore centres are doing fine without funds from Europe.
Singapore has invested a fortune in advertising dollars to attract South-East Asian funds, from Indonesia, India and China. If the recent growth trend continues, Singapore and Hong Kong together could overtake Switzerland in the next 15 years, reckons BCG.
But how will they handle the secrecy issues as the culture of financial transparency spreads? Singapore’s tight bank secrecy laws and lacklustre record on exchanging information could lead it to fall foul of international regulators. Recently it has made some moves forward, signing bilateral information accords and making tax evasion a “predicate” offence for money-laundering.
Evading tax in low tax regimes is much less of an issue in Singapore and Hong Kong anyway. Most people choose Singapore as a safe and stable haven rather than tax advantages. Meanwhile Hong Kong, which registers 150,000 new companies each year, is headed the other way, burying the identity of private company directors.
Asia’s offshore centres have ramped up sales of corporate and investment vehicles, some of them deliberately opaque, the Economist observes. Singapore is big in trusts—unregistered asset-protection vehicles that practitioners describe as “relationships”, instead of owned entities and beloved by rich Chinese keen to keep their newly acquired stash. But Asia becoming the new wealth management hot spot means stiff competition for all concerned. The UBS bunny might feel the need for a smaller burrow than that atop the IFC. And all the Swiss banks might look the other way, to south and Latin America, where bunnies face a more prosperous future.