Swiss Regulator Urges Firms To Reconsider Cross-Border Clients

Wendy Spires Group Deputy Editor London 25 October 2010


The Swiss regulator, FINMA, has warned that Swiss banks may have to pull out from some markets to avoid laying themselves open to the legal and reputational risks associated with serving cross-border clients.

Such risks have “increased markedly in recent years” and they could “threaten the continued existence of some institutions and have a destabilising effect on the economy,” FINMA said in a paper issued on Friday. Institutions with both on and offshore businesses in the same market are particularly vulnerable, it continued.

Swiss firms must, therefore, move to mitigate or eliminate these risks and this could entail ceasing to serve certain markets or client segments, FINMA warned. Those firms not adhering to the regulator’s recommendations could have their banking licence revoked, it said.

While by no means the whole story, Switzerland’s legal wranglings with the US tax authorities over the past few years spring immediately to mind in relation to FINMA’s warnings. UBS was at the centre of allegations that it helped US citizens to avoid their tax obligations and became entangled in a bruising legal tussle in which it was forced to pay a $780 million fine to settle criminal charges and to agree to hand over details on up to 4,450 US account holders to the US authorities. That the Swiss were forced to make such concessions was seen by many as an extremely damaging erosion of the Alpine state’s famed banking secrecy tradition and a development which could spur clients to move money elsewhere.

Another worrying development coming from the US is its new FATCA legislation, under which any institution, anywhere in the world, which serves US citizens will have to provide in-depth reporting on their accounts to the IRS. And it is far from the US alone which is turning the spotlight on those attempting to evade tax. Among other worrying developments is the fact that nations such as Germany, France and the UK have shown themselves to be more than willing to buy stolen bank data in their efforts to catch tax evaders and recoup much needed lost tax revenues.

“In its capacity as supervisor, FINMA expects institutions to take due account of foreign supervisory legislation in particular, and to define a service model appropriate for each individual target market,” the regulator said in its paper.

Of course, redefining service provisions for each individual market is no easy task and one which has the potential to make operational and reporting costs rocket. In light of this, some markets, in particular the US, are clearly looking to be more trouble than they are worth. In one notable example, last year the Swiss private bank Wegelin & Co told its clients they had to sell their US assets or leave as there were concerns over taxation liabilities and a dramatically increased compliance burden.

At a press conference in Geneva Urs Zulauf, FINMA’s general counsel, is reported to have admitted that implementing the regulator’s recommendations will entail “considerable effort and cost” and said that it would be “regrettable but understandable” if institutions instead opted to pull out of certain markets.

“All these measures have a cost which will, sadly, be greater for smaller institutions. That means there will inevitably be more pressure and consolidation within the wealth management industry,” Zulauf said, according to Bloomberg.

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