As financial sector professionals in Switzerland and the UK continue to digest the impact of an important new trade deal with the countries, this news service was in Zurich recently to see what the Swiss Bankers Association has to say on this and other topics.

The UK-Swiss financial services regulatory pact could be a template for other countries to follow, seeing firms reshuffle operations – sometimes ending role duplication – while in other cases adding teams and setting up operations.

These are some of the observations that continue to emerge from the Berne Financial Services Agreement, as covered by this news service a few days ago. It took effect on 1 January.

WealthBriefing sat down with the Swiss Bankers Association in Zurich a few days ago for further discussions on how this mutual recognition of standards pact would play out. Away from the Berne deal, the SBA said it is continuing to argue against what it sees as excessively tough proposed Swiss capital rules on banks.

“You have mutual recognition [of rules] for goods but there has been [until the Berne deal] no such agreement for services,” August Benz (pictured below), deputy CEO and head of international issues at the SBA, told this publication. He spoke alongside Markus Staub (pictured below), head of prudential regulation.

August Benz

The coming years will show whether the agreement will significantly encourage wealth managers and insurers to enter the UK market or vice versa, Benz said. 

High net worth 

An innovation has been the new “High Net Worth” definition (at least £2 million ($2.68 million) of investable wealth or more) which is now used as a means of defining boundaries of the accord. Benz said that in crafting the pact, the parties recognised that Switzerland has its own concept of “opting-out professional clients” – a status that individuals may actively elect, accepting reduced investor protection in return for greater market access.

“This does not exist in the same form in the UK and EU. While both jurisdictions have established elective professional-client regimes, creating the £2 million limit is a starting point, intended to set an initial threshold for focus, which may be developed further within the framework of the agreement,” Benz said. 

The mutual recognition model for financial services is innovative and, depending on the Berne accord’s perceived success, could be an incentive for other pacts around the world, he said. “Other countries are interested in 'how have you done this?’” he said.

Consequences?

Ray Soudah, chairman of MilleniumAssociates, an investment bank and advisor in the private banking sector, told this news service that the consequences of the agreement, while taking time to come through, could be significant. 

There are three types of firms affected by the Berne deal: firms that are not in one place or the other; those operating in both countries already; and firms that have previously left one of the two countries, Soudah said. 

For banks and wealth managers operating only in Switzerland or the UK, the agreement allows them to expand their reach with minimal cost to the other market. Swiss firms might be more likely to take advantage of what's available because Swiss bankers tend to be more fluent in English than is the case with UK citizens speaking Swiss tongues such as German and French. Such an opportunity is more likely to apply to smaller than the largest firms. Where the agreement might have an uncomfortable result is for firms that are in both countries already. Managers might see the agreement as a chance to cut duplicate costs, starting with the operational side, and then moving across to the client-facing side, leading to redundancies, Soudah continued.  

Finally, for firms that previously left one of the two countries – as Coutts and Lloyds did on the international private banking side more than a decade ago – they might be tempted to return to both countries, rather as Barclays has resumed its private banking operations to Asia, Soudah added.

Imitators

The SBA’s Benz was asked which other jurisdictions might want to imitate the Berne accord. Singapore was mentioned. 

“I would not be surprised if there is an interest there as well. We see that as an opportunity,” he said. 

While this issue was not discussed, the eruption of conflct in the Middle East has, so various industry sources tell WealthBriefing, cast Switzerland's vaunted qualities of stability and safety in a brighter light – possibly adding to the upsides of the Berne deal.

Capital angst

The SBA has recently pushed back against proposals from the Swiss federal government to increase capital requirements on major banks. UBS is notably in the frame, and its CEO and chairman recently reiterated their opposition.

The SBA declined to talk about the specifics of the UBS case, but made a general point that the proposed regulatory changes could affect the Swiss financial centre’s competitiveness, and wider Swiss economy.

The federal government wants to change the way foreign subsidiaries are treated for the purposes of Common Equity Tier 1 capital. UBS said it would have to set aside far more capital to meet Swiss rules than is the case for its foreign peers, giving foreign rivals a competitive edge. UBS estimates that the proposed new rules to provide full equity backing for foreign subsidiaries would lead to about $23 billion in fresh capital demands. UBS said the Federal Council's proposal on capital requirements for foreign subsidiaries is based on the “extreme assumption” that the parent bank must be able to absorb the total loss of all of its foreign subsidiaries during ongoing operations without any negative impact on the parent bank's Common Equity Tier 1 (CET1) capital.

The report and suggestions of the Federal Council to the Swiss Parliament are expected to be published soon.

“We are very much in favour of optimising liquidity provision in the case of crises, especially regarding the lender of last resort financing from the SNB [Swiss National Bank]," Staub said. The challenge will be to “get the details right.”

Markus Staub

“The proposed [capital] measure is an extreme one and not internationally compatible. We fear that such a measure could severely hit our international competitiveness. We feel that stability and competitiveness issues are not well balanced at the moment,” Staub continued. “We have not seen a serious and holistic economic assessment of all  the measures affecting capital requirements,” Staub added.