How to circumnavigate a perfect storm
It is no secret that Switzerland is the one of the world’s most important offshore centres for private wealth. Ours is a country that despite its size has been known for economic and political constancy, has a strong currency (according to many, too strong), and one of the lowest public debt amongst mature economies.
Adding to the appeal, the 1934 Swiss Banking Act created the until recently impregnable secrecy rules that further attracted funds to the Swiss financial centre, allowing Swiss banks to oversee approximately CHF 2.5 trillion, a staggering 27% of cross-border private wealth. But as of late, secrecy laws have been under sustained attack and as an un-named Swiss banker exclaimed “secrecy rules were our ‘magic potion’ for decades and there is no straightforward replacement for their future demise”.
Now Swiss banks are looking with some urgency for a new remedy. Cash strapped governments in the wake of the financial crisis have pumped billions of dollars and euro into their financial systems in an attempt to mitigate the situation. Many believe that their politicians have been fear-mongering about the extinction of Swiss banking secrecy simply to distract from their own problems, leading a prominent ex-private banker to undiplomatically claim that ”the political campaign against Swiss banking secrecy is nothing more than a large-scale diversionary tactic”.
The banker in question, Konrad Hummler, fell afoul of these ‘tactics’ when in January the institution he oversaw, Wegelin & Co., the country’s oldest private bank, entered into a plea agreement with US prosecutors to resolve charges that it had helped American taxpayers to evade taxes on undeclared income held in accounts. Less than a month later, Swiss authorities agreed to implement legislation that would require foreign banks to provide information automatically on the offshore wealth of US citizens: the Foreign Account Tax Compliance Act. But passing the appropriate legislation proved impossible and on June 20, the Swiss National Council rejected the whole idea and the Federal Council began the unenviable task of finding an alternative solution to the “Lex USA” in order to resolve the longstanding dispute.
In addition to the erosion of Switzerland’s bank secrecy laws, other factors, both external and internal, have contributed to a particularly unpredictable environment for Swiss financial institutions of all hues and colours, creating headaches for their captains who must circumnavigate these troubled waters.
Switzerland has a long history when it comes to managing other people’s wealth, and private bankers represent the oldest form of the Swiss banking establishment, an important, more exclusive subset of wealth management that have not only excelled at this task, but have learned over centuries to face up to an ever evolving landscape. With roots in the late eighteenth century, Geneva Private Bankers have seen it all before. Until recently at least, the partners of these establishments accepted unlimited personal liability for losses, the main condition for earning the title of ‘private banker’. In other words, if the bank gets into trouble, the managing partners can lose all their assets, not just those they have invested in the operation.
Yves Mirabaud represents the sixth generation at the helm of Geneva private bankers Mirabaud & Cie, founded in 1819, which he and five partners oversee. Bearing the name was not a sufficient premise for joining the family owned bank and, after having spent five years with different banking institutions in Geneva, Zürich, Boston and New York, Yves Mirabaud joined Mirabaud & Cie. in 1993. Much like his predecessors, his countenance bears the understated efficiency that conceals the drama and volatility of history that his family firm – and generations of its clients – has lived through.
In late 2011, having proven his mettle, Mirabaud replaced his cousin, Thierry Fauchier-Magnan, as senior partner of the bank and who had previously, as a member of the Board of Partners, played an important part in determining the long term strategies of the institution.
Fit, affable, and forty-some, Yves seems pensive when reflecting on the state of Swiss banking over the past few years. ”Adapting to new situations and taking the long view is second nature to us,” he explains. ”My associates and I had felt the wind turning a while back and, evidently, anticipating that Swiss banking secrecy – one of our industry’s competitive edges – would be under attack, it became obvious that if we were to keep on track and continue to grow, consolidation and diversification were necessary”.
Swiss private bankers avoid using big words, and Mirabaud takes a dispassionate stance when describing the upheavals and challenges he and his colleagues faced.
”It hasn’t been easy,” he smiles. ”Corrections in the markets since 2008 were certainly not helpful and created pressure on us as well as our customers – as did the strength of the Swiss Franc and historically low interest rates. On top of this issues dealing with transparency have been ignited, further troubling the waters.”
Mirabaud’s views on the matter ring true. With the Internet bubble crash of 2001 and the financial situation we are living today, capital and yield evaporated. As a result, investor tolerance of equity volatility is much reduced. This is pushing banks to offer more sophisticated and diversified portfolios, and to develop their advisory skills in less traditional asset classes.
”Things are getting better, nevertheless,” he continues. ”Especially over the last year, markets have stabilized somewhat and volumes as well as customer’s tolerance for risk have grown. Assets have also recently been boosted by inflows from wealthy Southern European clients who worry about the situation in Europe and want to have their assets booked in what they believe is a safer place. The one issue that remains to be put to rest is that of ill-conceived all-out transparency of individual private holdings.”
But he remains adamant that the private sphere of individuals must be protected. He clarifies:”It follows that our secrecy laws should not be abused in matters of taxation and criminality, and I believe that many important steps have been taken over the past 20 years to regulate such matters. But the new stance of divulging every aspect of one’s life, including a person’s wealth, is not acceptable. After all, do we not protect the inviolability of a general practitioner’s, a lawyer’s or a priest’s obligation to secrecy? One must proceed with caution and we believe that it is extremely unhealthy to society to have all aspects of an individual’s life open to the world’s scrutiny.”
Clearly, banking in Switzerland is going through a transitional period and Mirabaud has earned a reputation as being able to move with the times. Along with a number of his colleagues, he belongs to a group of Switzerland’s financial figures known for their long-term approach and who have been expecting dramatic change for at least a decade. Mirabaud, for instance, understood that relying heavily on cross-border business in Europe alone may not suffice to attain necessary growth, and have consequently worked to expand their operations in other parts of the globe, not least the Middle East where the absence of income tax in many countries makes evasion less of a concern. In 2007, Mirabaud was granted a license to operate in Dubai, where it provides wealth and asset management services for its clients across the Middle East and South Asia.
They have been determined to not only add value by improving and innovating their services to customers but have also contrived ways of doing so while diversifying their sources of income, by moving into areas such as asset management that overlap with their core business.
”Over the years, we reviewed our service offerings and expanded operations, developing a range of customized services for our private and institutional clients alongside our traditional private banking,” explains the prescient Mirabaud. ”Within the folds of the Mirabaud Group, we have a considerable pedigree in asset management services and have teams for institutional management in London, Geneva, Zurich, Paris and Montreal. Furthermore, the Group’s intermediation activities were launched in the late eighties and have since become highly regarded in the industry.”
If there is one lesson that Genevan private bankers have learned over the centuries, it is to adapt and be nimble. As of late, a complex global financial world has made it very difficult for their partners to feel safe with a traditional approach that puts all their assets on the line as they expand their operations. Fellow Private Bankers Pictet & Cie. and Lombard Odier & Cie. abandoned the structure under which they assumed unlimited liability. Although initially hesitant, in early July Mirabaud announced that it would be following the trend, albeit within a structure in which partners would continue to commit their personal assets but now to a new partnership, limited by shares. In a recently issued official announcement, the bank explained its decision by saying that the new structure will help them grow at home and overseas as a crackdown on secrecy makes it less profitable for Swiss banks to manage assets from across the globe.
And yet, with all the uncertainty and unpredictability, this country’s financial centre remains attractive. The disquiet that the financial crisis has brought to many countries increases, if nothing else, the allure of Switzerland’s tradition of stability – and with it, a few more centuries of growth for Swiss Private Bankers.
Article by Raymond Langley