A Geneva-based academic turns his gaze to the position of Switzerland's wealth management industry after banking secrecy and in an environment where protectionist tendencies are rife.

This article is by Philippe Braillard, emeritus professor, University of Geneva. Professor Braillard has already written incisive commentaries for this news service, such as on the recent controversy around the Panama Papers saga (see that article here). This item originally appeared in the French-language publication L’AGEFI and the German-language publication Finanz und Wirschaft. It is republished here with the author’s permission. As always, the editors here invite readers to respond.

Swiss wealth management has a long and successful tradition. For decades, Switzerland has had a leading position in the private banking industry. With 25 per cent of global cross-border assets under management (2014 figures), the country leads the world in cross-border private banking. Wealth management (private banking and asset management) therefore has great economic importance for Switzerland, since it represents almost a quarter of value added in the Swiss financial sector, which itself accounts for almost 10 per cent of the country's gross domestic product.

However, the industry is now facing several challenges, some of which are not specific to Switzerland. If they are not actively addressed, they could put the industry's future in serious jeopardy. 

Firstly, international pressure has prompted Switzerland to give up banking secrecy, which was an undeniable competitive advantage, even though only part of the funds managed in Switzerland had not been declared for tax purposes. Swiss banks had to clean up their books, forcing foreign clients to either become tax-compliant or close their accounts. Through that process, the Swiss financial industry is now fully compliant with new international standards regarding tax transparency and efforts to combat money laundering. However, the process has reduced assets under management and in some cases has damaged the Swiss banking system's reputation for trust and security. 

Some long-standing clients, given the ultimatum of either becoming tax-compliant or closing their accounts, felt they had been betrayed and that banks had been disloyal, which caused banks obvious reputational damage. In addition, the Swiss wealth management industry has not yet been able to turn the page completely on the past, because some countries – following the US's lead – are now trying to take action against Swiss banks that previously agreed to manage untaxed assets held by those countries' taxpayers. As regards the programme imposed on Switzerland by the US, although it was mainly successful in drawing a line under the past, its cost was exorbitant for Swiss banks because of the scale of the fines levied and the huge audit costs made necessary by the US authorities.

Secondly, banks that have wealth management activities are having to deal with increasingly complex regulations - such as the OECD standard on the automatic exchange of information, FATF and FATCA rules etc. - and this carries high costs. In addition, regulations mean that private banks are having to make more effort training staff, to enable them to remain competitive and offer high-value-added advice. Client requirements are also becoming increasingly complex. Finally, the competitiveness of the Swiss financial industry can only be guaranteed if there is a genuinely level playing field, i.e. if all competing financial markets apply international tax and anti-money laundering rules without restriction. At the moment, that is far from the case. This is shown by the stance of the US, which does not want any genuinely reciprocal arrangements with other states, despite imposing full tax transparency on them via FATCA. 

The US will not genuinely implement the OECD's new global standard on the automatic exchange of information, for fear that it will damage the US financial market, which is sheltering large amounts of untaxed assets owned by foreign taxpayers. As a result, there are serious doubts about the ability of the OECD and its Global Forum on Transparency and Exchange of Information for Tax Purposes to force all countries, including the most powerful ones, to comply strictly with new global tax standards.

Thirdly, in an environment where protectionist tendencies are rife, Swiss private banks and their large cross-border asset management businesses are facing serious problems accessing foreign financial-services markets. This is particularly the case in the European Union, which accounts for 40 per cent of cross-border assets managed by Swiss banks. If Switzerland cannot ensure access to those markets, many banking jobs could shift to other countries. The risk of operations being relocated abroad is made worse by the strong Swiss franc. The private banking industry is suffering from an imbalance between its revenues, which are mostly in foreign currencies, and its costs, a large proportion of which are in Swiss francs.

Fourthly, a financial market's competitiveness depends more than ever on its ability to innovate and adopt fresh business models that meet the needs of a growing proportion of its clients. As regards the wealth management industry specifically, fintech represents a key challenge.

Obviously, automated advice - provided by robo-advisors for example - cannot be the right solution in every case. However, digital technology can allow banks to provide products and services to increasingly mobile and connected clients, whose requirements are more and more complex and international.

Fifthly, banks' wealth management business model is facing profitability problems, because of the sharp reduction in indirect revenue (trailer fees obtained from financial products bought by clients) and increasing distribution costs arising from the greater regulatory burden. This situation is prompting some operators to diversify their revenue sources. It probably lies behind the initiative adopted by SwissBanking, together with the Swiss Funds & Asset Management Association, to spur development in Swiss asset management and even to make Switzerland a world leader in that industry.

This combination of challenges has inevitably prompted consolidation in the Swiss wealth management industry. Some small players are no longer able to cope with the costs arising from the regulatory upheaval and the damage to their traditional business model.

What is the best response to these challenges? Firstly it is the job of the banks to respond in a way that gives the Swiss private banking industry the means to maintain or increase its competitiveness. It is then up to the Swiss authorities to establish a framework that favours private banking activities. Finally, all those concerned, banks and governments, must design and implement a genuine communication strategy that promotes the high-quality service provided by the Swiss private banking industry. In other words, they must be able to convince clients, supported by the evidence, that the "Swiss-made" label is a key distinguishing feature when it comes to wealth management, a mark of quality and a guarantee of exclusive service.