Taming the ‘strange animal’ of Swiss private banking

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It was exactly one year ago that Zurich was awash with doom-mongering whispers about what the future held for one of the world’s most preeminent private banking nations.

At that time, professional investors attending the Fondsmesse ’12 Conference in the Swiss city had forewarned that 270-year-old private bank Wegelin & Co.’s decision to sell off parts of its non-US client business could set a dangerous precedent.

Fast forward to today, Wegelin no longer stands and two of the other old boys of the Swiss banking fraternity have undertaken seismic shifts in their legal structures.

Both Lombard Odier and Pictet this week announced plans to alter their operations and bring to an end their respective unlimited liability partnerships, which had been in place for nearly 200 years.

The changes, which come into effect on January 1 2014, will leave the bank’s holding structures, rather than the top level partners, liable for the actions of the banks.

Speaking to me at Fondmesse ‘13, both Pictet and Lombard Odier were quick to assert any links to the Wegelin & Co. case were incidental.

Regardless of FATCA legislation and the further reach of US authorities into tax endeavours, the legal changes were reflective of wider moves in the Swiss industry to make their business accessible to outside clients.

‘The Swiss industry is a strange animal,’ said a spokesperson for Pictet. ‘Everyone outside Switzerland does not understand the unlimited liability partnership structure and this is an important consideration when doing business internationally.’

This transparency issue is understood to be one of the reasons Pictet failed in its first attempt to achieve a private banking licence in Hong Kong. The Pictet spokesperson said the existing corporate structure was seen as a stumbling block by the Hong Kong authorities.

‘There were questions over our core one capital and, under the old structure, the partners did not have to reveal their assets and where their private wealth ended and the bank's began. This caused a difficulty in dealing in different business climates,’ he said.

Wegelin legacy

A spokesperson for Lombard Odier offered a very similar explanation as to why the changes had taken place and the benefits going forward. However, investors, most of whom wished to remain anonymous, were not as convinced.

One said the direct comparison to Wegelin was not incidental. ‘If you look at what happened to Wegelin, you can’t believe Pictet and Lombard Odier aren’t conscious of that.’

Despite the prominence of the issue, the majority of attendees spoke with a degree of begrudging acceptance about the changes to the Swiss private banking climate.

‘For hundreds and hundreds of years, Switzerland was the home of secrecy and transparency was not an issue. The world has changed and the banks are having to change with it,’ said another investor.

The change in structure is seen as ‘monumental’ in terms of the Swiss banking landscape, another source said, as there are now just two banks in Geneva with the unlimited liability partnership structure in place and a handful in Zurich.

Will the Swiss private banking landscape be further tamed by the beginning of 2014? Will the ‘strange animal’ of Swiss banking be fighting fit or heading to the endangered species list?