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February 4, 2014updated 05 Jun 2017 11:21am

Exclusive: Switzerland: The beginning of the end for banking secrecy?

Despite not having gone to war for over five hundred years, Switzerland faces a battle if it is to keep its banking tradition. The Swiss private banking system has been a mainstay for over two hundred years, despite its inherent, and increasingly apparent, flaws. With increased regulation and stronger demands for transparency, it begins to even look outdated. In reaction to this, three key players, Mirabaud, Pictet and Lombard Odier, have decided to make some revolutionary changes to adapt to the ever-changing times. However, is this just a fluke or the beginning of a new era in Swiss private banking? If so, is it also the death of secrecy in banking?

By Patrick Brusnahan

Despite not having gone to war for over five hundred years, Switzerland faces a battle if it is to keep its banking tradition. The Swiss private banking system has been a mainstay for over two hundred years, despite its inherent, and increasingly apparent, flaws. With increased regulation and stronger demands for transparency, it begins to even look outdated. In reaction to this, three key players, Mirabaud, Pictet and Lombard Odier, have decided to make some revolutionary changes to adapt to the ever-changing times. However, is this just a fluke or the beginning of a new era in Swiss private banking? If so, is it also the death of secrecy in banking?

Traditionally, the Swiss private banking sector had rules which made wealthy managing partners personally responsible for their clients’ money. If the bank fell into trouble, these wealthy partners could lose the entirety of their assets, not just those invested in the operation. Private banks are not required to publish their results, are not listed on the stock exchange and usually have an exclusive circle of clients. Unlimited responsibility has long been a huge selling point for wealthy private clients who prefer the comfort that this guarantees.

On the other hand, there has been tougher and more widespread regulation ever since the 2008 global financial crisis and in the wake of scandals, including the Madoff fraud case and the fall of Lehmann Brothers. Moreover, Switzerland’s common banking secrecy has been slated as governments and regulators begin to close in on tax cheats who store cash abroad. Swiss banks had until the end of 2013 to decide whether to take part in a come-clean programme designed by the United States to settle past wrongdoing. This could avoid many lengthy and costly lawsuits, but cause huge fines in proportion to the amount of money involved. Research has shown that many banks believe the proposed solutions are actually damaging towards business and that it could lead to the absolute end of banking secrecy.

Pictet, Lombard Odier and Mirabaud have decided to recast themselves in a ‘corporate partnership’, similar to the ‘limited company’ structure in Britain, a status that allows them to be compared with larger, fully-listed Swiss players such as UBS and Credit Suisse. This reform, which officially began on the 1st of January 2014, makes sure that the only things at risk are the funds invested in the company rather than all of their personal assets. This also means that banks will now have to publish their results.

Another consequence is the hiring of outside individuals. Pictet, which manages assets of 372 billion Swiss francs have added two to their board. Lombard Odier, with 174 billion Swiss francs AuM, and Mirabaud, with 25 billion Swiss francs AuM, have both brought in three new members each. The three banks have withdrawn from the Association of Swiss Private Banks and others are predicted to follow.

The reasoning behind the change, at least in Mirabaud’s case, is to react to an ‘evolving regulatory and governance framework on a global basis.’

Lionel Aeschlimann, managing partner of Mirabaud SCA, said: "Recently, the levels of regulatory and political uncertainty have increased significantly for all financial institutions. The unlimited liability feature of our bank, a symbol of our Swiss banking history and tradition, could have become more vulnerable in the future to outside and unforeseeable events than our prudent risk management would wish to cope with."

He added: "With this in mind, the change from an unlimited partnership to a limited liability company at the bank level was a natural decision, in order not only to adapt a governance model that is more in line with today’s regulatory requirements, but also better to protect the sustainability of our business model, and thus the interests of our clients in the long run."

He continued: "[The new partnership structure] will ensure that the values which have been at the core of Mirabaud since 1819 will remain intact: sustainability, independence, alignment of interests, family and private ownership, the long term vision and the strong personal commitment of its managing partners who will remain at the helm of the group."

Pictet and Lombard Odier declined to comment, but they both had opinions when first announcing these changes. Jacques de Saussure, senior partner of the Pictet Group, said: "This evolution of our structure will make it easier for our group to grow and adapt in an increasingly complex international environment. At the same time it will ensure that we keep the traditional strengths of Pictet’s business model, such as independence, the manner in which business is managed and passed on, and the long-term vision in the interests of our clients and the bank, while the Pictet Group will continue to hold capital well in excess of Swiss legal requirements, which are amongst the most stringent in the world."

Lombard Odier had similar views. Patrick Odier, senior partner of Lombard Odier &Cie, said; "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 outlook while ensuring that our interests remain aligned with those of our clients." This was reinforced by another executive, Theirry Lombard, managing partner of Lombard Odier, who said: "Lombard Odier has taken this long-considered decision from a position of strength. Our firm is one of the best-capitalised in Europe and our clients will benefit from an improved governance and increased transparency."

The new legal system is only in its early stages, but Mirabaud are already beginning to see benefits. When asked how, Aeschlimann said: "By allowing us to continue to leverage our core values and activities while adopting a new governance structure more in line with the 21st century’s regulatory models and expectations."

In conclusion, the era of the super secretive Swiss banks is slowly coming to an end. Banks are beginning to reject the old, traditional ways towards a more modern approach. While it may end the privacy they once had, it may just save face, and more importantly, their clients. Whether the new system is the answer is unclear. Mirabaud has seen the benefits, but admits it may not be for everyone. Aeschlimann said: "Each institution, given its size, its background and its tradition will have to weigh the pros and cons of such corporate change."

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