In a radical about-turn, UBS is
effectively retreating from the much-lauded ‘One-Bank’ model under
which private and investment banking is integrated across the
group. The move follows growing concern across the industry about
investment banking dumping toxic products on private banking
clients.

The announcement of the retreat from the integrated model by UBS
came after its second-quarter earnings results, which again showed
how badly the subprime crisis has damaged the bank, and was
unusually frank.

“Our review has clearly revealed the weaknesses associated with the
integrated ‘one firm’ business model,” UBS chairman Peter Kurer
said, in what was regarded an admission of has been discussed
privately within the wealth industry for months – the implicit
contagion of vital private banking operations by high-risk trading
and financing from the investment bankers.

Kurer added, “Some of these weaknesses – such as the blurring of
the true risk-reward profile of individual businesses – are the
source of substantial risk, as we have seen in the past few months.
Others have led to the creation of excessively elaborate processes
and unnecessary layers of complexity. The new structure will create
a spirit of transformation, clear accountability and transparency,
and will allow us to optimise funding and capital usage. This
repositioning of the bank will create maximum strategic flexibility
to capture the best possible opportunities for shareholder value
creation in the future.”

This revised approach will now see the group operate with three
autonomous units – private banking, investment management and
investment banking.

UBS will re-erect internal Chinese walls within the organisation,
allowing wealth management to fend off pressures from its
investment banking opposite numbers, though it stressed that
private and investment bankers will still co-operate in making
approaches to ultra-wealthy clients, with inter-linked business and
personal needs.

In UBS’s own words, cross-divisional collaboration will be promoted
and driven to yield the maximum possible revenue generation for the
firm, but it will be “within a clear framework of servicing,
revenue sharing and referral arrangements at market terms”.

UBS’s repositioning poses a dilemma for rival Credit Suisse, which
has publicly centred much of its strategic business model on
“One-Bank” integration. Zurich bankers say Credit Suisse will
continue along the path of closer private and investment banker
co-ordination, but may drop the high-profile branding of its
‘One-Bank’ approach which is understood to have made clients at a
number of institutions nervous over potential conflicts of
interest.

There’s another factor that argues against the integrated model, at
least in Switzerland. The Swiss regulators have made it clear that,
under their tough new capital requirements for their banks, private
banking will no longer be allowed to subsidise investment
banking.

Elsewhere, Citigroup, Deutsche Bank and Merrill Lynch all seem
committed to presenting a ‘one-firm’ face to clients, both private
and corporate, but could well start to play it down during the
current period of extreme market turbulence and client concerns
about being sold toxic securities.

For UBS, the need to reassure high net worth clients that it was
absolutely clear of any internal conflicts of interest had become
paramount. The bank has accumulated some $42 billion of subprime
write-offs, and has had to deal with the embarrassment of a US tax
evasion investigation and interlinked court case, as well as a
leading role in the auction-rate securities debacle in the
US.

UBS, meanwhile, continues to be beset by problems in Britain, where
its struggling UK wealth management arm has been hit by multiple
staff defections and it has been forced to go to court to bar
predatory recruitment by a rival.

After hearings in the High Court, Vestra, the startup wealth firm
which UBS accused of conducting a ‘smash and grab raid’ on its UK
wealth management operations, agreed that it will not approach any
UBS staff or clients until at least next April.

In return, UBS is dropping its action against Vestra, its founder,
David Scott, and four departing UBS managers for unlawful
conspiracy after 75 of its staff resigned to join the start-up. The
full trial had been due to begin in October.

Neither UBS nor Vestra would comment on the terms of the settlement
but people familiar with the case said that UBS withdrew its action
after Vestra agreed not to approach any of its staff or clients
until next April. Some reports, however, suggested that the
agreement prevented Vestra from tapping UBS clients until the end
of the year, and from trying to recruit UBS advisors until next
August.

A spokesman for Vestra said: “Following an interim hearing which
took place in the High Court pending full trial in October, we are
pleased to say that a settlement has now been reached. Due to the
confidential nature of this agreement we are unable to comment any
further.”

Fifty-two UBS employees, comprising front and back-office staff
resigned to join Vestra last May, followed by a further 23 staff.
In its action, UBS claimed its UK wealth management division was
“devastated” by the departures.

In the court hearings, Vestra introduced 40 letters and e-mails
from departing UBS employees that showed unrest at UBS since it
acquired Laing & Cruikshank in 2004, and made it a key part of
its UK wealth operations. The evidence included alleged talk about
a UBS plan to sell the division to Barclays Wealth.

The affair has cost John Pottage, the highly-regarded head of UK
wealth at UBS, his job. He will be replaced by Andre Cronje, an
investment banker, and who ironically was associated with the
original deal under which Laing & Cruikshank was acquired by
the Swiss bank.

Cronje, who joined UBS in 2000, started his career with UBS Warburg
corporate finance in Johannesburg before switching to the firm’s
wealth management arm in 2003 to establish its internal M&A
team.

Pottage, meantime, is to assume the role of head of UBS Wealth’s UK
domestic client business on an interim basis, replacing Emmanuel
Fievet who has left to take over as managing director for Barclays
Wealth’s private banking operation focusing on Europe, Middle East
and Africa (EMEA). Gerard Aquilina, who joined two years ago from
HSBC to help grow the EMEA business, has in turn been promoted to
vice-chairman of Barclays Wealth.

Aquilina’s new role will involve the management of the firm’s most
important and high profile international client relationships as
well as new business development.