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Switzerland: The wave of consolidation has only just started

Daniel Senn, Head of Financial Services and Member of the Executive Committee of KPMG Switzerland

Daniel Senn
Daniel Senn
The need for a clean money strategy has become a hot topic. Has Switzerland done everything it can to make this work in practice?

The Swiss Federal Council only gave a broad outline of the clean money strategy in the discussion paper it released on 22 February 2012. Now this needs to be fleshed out and incorporated into legislation and self-regulation systems. That said, key elements of the clean money strategy have already been discussed at a domestic policy level, with parliamentary approval granted for a number of OECD-compliant bilateral agreements on double taxation and the final withholding tax agreements with Germany, Austria and the United Kingdom. However, the acid test is still to come for the withholding tax agreement with Germany, which needs to be approved by the German Bundesrat and may be put to a referendum in Switzerland.

Where is there still work to be done with regard to the USA and the EU?

Negotiations are still underway with the USA regarding the settlement of the tax proceedings against eleven Swiss banks and an all-inclusive solution for resolving issues from the past for the entire Swiss financial center. The EU, on the other hand, is linking progress on further bilateral agreements – such as on market access in the financial sector – with an institutional reassessment of its relationship with Switzerland, particularly in terms of adapting to rapidly changing EU regulations and with regard to common institutions for monitoring both implementation and the resolution of disputes.

Are the banks ready for the clean money strategy to be implemented?

Implementation will be difficult for the banks for as long as key elements of the elimination of existing tax debts are still up in the air, such as the final withholding tax agreement with Germany, and as long as the regulations are not defined in detail. Nevertheless, they must be prepared for all eventualities and some individual institutions have already taken the proactive step of establishing their own clean money strategies.

Banking confidentiality has become noticeably more relaxed in relation to countries abroad. What is the situation like in Switzerland? Is banking confidentiality slackening at domestic level too?

There is no external pressure here, because foreign countries are primarily interested only in their own taxpayers. This allows us to make decisions on our own authority and without rushing. It would be possible, for example, to overrule banking confidentiality if there was any suspicion of tax evasion without necessarily making this a criminal issue. However, serious cases of tax evasion – high amounts over long periods – could, as is the case with tax fraud today, be punishable by imprisonment.

In what areas do you see further challenges facing banks in Switzerland?

The intensification of financial market regulation since the financial crisis struck – primarily driven by the EU – is now becoming virtually impossible for smaller institutions to deal with. The excessive costs of regulation risk clearing the market unless more attention is paid once again to the principle of proportionality. This requires differentiated regulation that takes into account the variances between individual institutions in terms of size, risk and complexity of business activities.

How have bank clients’ requirements changed? And what does this mean for the banks’ business models?

Clients want simpler products that are easy to understand, and they are more concerned about security than earning the kind of high returns on their investments that are, in any case, scarcely achievable in the current climate: “return of capital” rather than “return on capital.” This means lower margins for financial service providers, while cost-cutting is becoming an absolute must.

Does Switzerland have a sufficiently skilled workforce to cope with the new requirements?

The level of training in the Swiss financial sector is high by international standards. The complexity can be dealt with by sufficiently focusing business segments and by outsourcing to specialists. Even if tax benefits are no longer available, the quality of investment advice and the cost factor will separate the wheat from the chaff.

Is the wave of consolidation going to come to a halt in the Swiss financial center?

The wave of consolidation has only just started, for many institutions are still choosing to wait, given the major upheaval involved. However, it will roll on relentlessly, and small external asset management companies in particular will be forced into mergers or out of business.

Interviewer: S. Glarner, Marketing & Communications

Mercredi 12 Septembre 2012