Two of Switzerland’s oldest “family” private banks, Pictet and Lombard Odier, both operating with unlimited liability to losses for decades, aim to scrap this business model from 2014 because of rapid expansion, they announced today.

The Pictet Group and Lombard Odier intend, subject to regulatory clearance, to organise as a “société en commendite par actions de droit Suisse” (SCA) – or partnership limited by shares under Swiss law. 

The change, the banks said in their statements, is designed to preserve the ownership and management of the groups by their current managing partners. The new structures are due to take effect in January next year.

The moves highlight how the traditional Swiss model of private bank partners facing unlimited liability – seen as a cause for the great conservatism of such banks – is seen as unworkable at a time when such firms are expanding overseas and increasing staff and client assets. As Swiss banks of all types have also come under global pressures over bank secrecy laws, there have been concerns about whether partners face litigation and associated risks from far-flung business units. For example, Wegelin, the country’s oldest private bank, has seen its name vanish in the wake of a tax evasion legal case in the US.

The unlimited liability model has its supporters, however. The UK financial economist, Kevin Dowd, for example, has argued in a study of the 2008 financial crisis, Alchemists of Loss, that limits on liabilities of bank owners may have played a part in encouraging foolish lending, whereas the traditional unlimited liability approach may keep bankers cautious. The issue also throws light on debates on how to better align rewards of bank employees with the interests of their firm and clients over the long run.

Pictet

Pictet & Cie had been the only entity in the group that had been a general partnership and it will transform into a limited company, alongside the rest of the businesses under the Pictet brand.

The growth of the Pictet businesses had meant that making bank partners liable for losses on an unlimited basis was unworkable going forward; other banks structured in this way are also changing course, a spokesperson for the firm told this publication.

Pictet’s group of business have expanded, and become far more international, over the past few decades. Since 1980, when the Pictet Group had 300 staff, most of whom were in Geneva and SFr9 billion ($9.9 billion) under management, the firm now has 25 offices and over 3,300 staff, overseeing SFr374 billion. The expansion has continued. Last year, it logged inflows of SFr13 billion of client money, adding over 100 employees. It plans to hire a further 100 people this year, the statement said.

The firm said it has considered revamping its structure several times since the middle of the past decade. “This [new] legal form has the advantage of reproducing the strengths of a general partnership at the group level. Under the SCA the partners will, as before, remain both owners and managers of the Pictet Group. Above all, it preserves the fundamental principle of the group’s independence,” it said.

“The ownership and management of the SCA will be under the eight current partners, while the Swiss bank will have its own executive committee, headed by one of the partners,” it said.

Lombard Odier

“This evolution is the result of a discussion over many years between the managing partners, in order to equip the group with the most efficient and solid structure to allow the firm to maintain its business culture while continuing its development,” Lombard Odier said in a statement.

Lombard Odier said the change will enable the firm to “adapt to a rapid-changing regulatory environment, both in Switzerland and abroad”.

Lombard Odier has expanded from when, in 1992, it had SFr36 billion of assets and 650 staff, mostly in Geneva, to a business with SFr188 billion of AuM and almost 2,000 staff in 24 sites across the world.

“This legal structure allows us to maintain the benefits of a private partnership, such as our independence, strict sense of responsibilities and our long-term management outlookm while ensuring that our interests remain aligned with those of our clients,” said Patrick Odier, senior partner of Lombard Odier & Cie.

“The Lombard Odier Group will continue to be distinguished by its partnership structure, which offers a personal and lasting commitment on behalf of all of the partners to the management of the group,” said Odier.