The Changing Profile Of Switzerland
The introduction in Switzerland of legislation on Financial Institutions (LFI) applicable to trustees, and Switzerland’s agreement to implement the Automatic Exchange of Information (AEI) in tax matters, are the main developments affecting Swiss based trustees’ practices.
Key developments for Swiss trustees of LFI:
- Expected entry into force in 2018
- A move from a system limited to AML regulations (AML legislation) and controls/sanctions (by SRO / FINMA) to a future system of authorisation subject to conditions (adequate organisation, risk controls, professional qualifications, min. capital and professional insurance)
- FINMA grants the authorisation, monitors and sanctions, which is a good and credible system internationally
- Ordinary monitoring delegated by FINMA to select Supervisory Bodies financed by its members
- Monitoring of compliance with new legislation through regular audit, giving credibility to the system
Key developments for Swiss trustees of the AEI:
- Swiss trustees will have to inform their clients
- collect the information in 2017 and exchange it in 2018
- reconsider clients’ on boarding policies if clients are coming from a country with whom Switzerland has signed up AEI
- review existing clients
- The impact of the above developments on trustees' business model might be "business as usual" for trust companies which anticipated or even advocated these changes (like SATC members) but might become painful adaptation for those who didn't. In any event, it will increase the costs of running a Swiss trust operation and creates greater complexity for the sector
- Swiss trustees’ dealings with Swiss banks will be more challenging especially on the subject of clients’ tax compliance e.g. signing by trustees of the new Confirmation Form – Tax compliance Legal entity/structure, putting disproportionate onus on trustee whilst not exonerating banks from their own independent DD anyway…
- We often experience Compliance Departments of banks struggling with the practical implications of these developments on more complex trust structures. Typical examples are FATCA and CRS. The latter is requiring our Legal Dpt to spend unnecessary time to educate banks on trust and CRS in the context of opening bank accounts due to lack of understanding of the trust concept, CRS or the combination of the two! Since this is more the norm than the exception, it creates an opportunity for banks having dedicated trust desks specialising in trust and understanding the issues
- I would argue that most UHNW international families are structured through offshore trusts, foundations or SPVs, not holding their bank account personally. Banks must see that a lot of their larger accounts (USD 25M plus) are held through structures for legitimate estate planning, asset protection and privacy reasons. It is therefore critical to get the first experience of a family trustees with a bank – opening of a bank account - right from the start! Banks not bothering to invest time and engage will suffer...
Why would Switzerland still be attractive as a banking or business location in 2017?
Switzerland has largely addressed its role in the global problem of undeclared funds and it is fair to say that one shouldn’t come anymore to Switzerland to hold undeclared money. This change of paradigm has improved Switzerland’s reputation internationally as a quality and cooperative jurisdiction.
The global move towards transparency, increase in exchange of information, new reporting obligation, demand for privacy are all driving UHNWI to look for stable and well regulated financial centres with favourable and predictable tax environment. Such centres should provide multi-lingual/cultural professionals covering all the spectrum of the wealth management industry (custody, asset management, fiduciary, legal/tax/estate planning) and should abide to high standards for data security and legitimate confidentiality of clients’ affairs. Switzerland ticks all these boxes.
However the precondition for success is for the whole Swiss wealth management industry, especially private banks and trust companies, to work together with a view of building a global and reputable financial centre, providing the all-rounded quality wealth management services that families are looking for. Swiss Private Banks and asset managers should welcome situations where the "thinking head" / legal owner of the family’s assets i.e. the trustees, are close to home. Otherwise they will expose themselves to foreign trustees, located in Asia, Channel Islands, US or Caribbean, who might have the temptation to transfer assets over there for convenience... Swiss private banks need a strong, well-regulated and professional fiduciary sector operating from within Switzerland to protect in the future its dominance in the offshore wealth management industry.
Why would someone choose a Swiss trustee today?
The launch of the Swiss Trust business rocket in 2007 is now fully completed! The framework has never been as favourable and stable as it is now on all fronts:
- Legal :
- Ratification of the Hague Convention on Trust in 2007
- In absence of Swiss trust law, Switzerland grants the freedom to settlors in selecting the relevant trust law applicable to their trust which can be administered by a Swiss based trustee
- 2007 Tax Circular on tax treatment of trusts
- Trust as such not subject to any Swiss taxation
- Swiss trustees not subject to any Swiss taxes on trust assets
- Possibility to secure advance tax ruling for clients setting up trust and for trust companies
- Attractive in context of pre-immigration trust for lump sum tax payers (settlors and beneficiaries)
- AML legislation controlled by SROs and FINMA
- Set up of SATC in 2007 leading up to the inclusion of trustees in the legislation on Financial Institution and the professionalisation of the sector
- Trustees will be subject to authorisation and supervision of FINMA if services offered to the public (to contrary of PTC)
- Trustees must be licensed to use the terms "trust or trustees" in company's name. So this is the end of the one-man-band lawyer or asset manager offering trustee services as an aside
- Outcome is finally a credible regulatory framework applicable to Swiss trustees which I am sure will remain less onerous and more pragmatic in long regulated jurisdictions like CI
- Favourable political context
- Favourable votes for the maintenance of lump sum taxpayers
- No vote for introduction to 20% IHT
- No "witch hunt" on the rich compared to other EU countries' stated agenda
- Swiss courts recognise validly constituted foreign trusts, even in complex disputes
- Swiss courts familiar with trust concept and apply correctly Hague Convention on Trust
- Large STEP antenna with more than 1600 members
What changes in the Swiss trust industry are coming up in the next five years?
Of note is that global private wealth still grew by more than 5% in 2015 and the expectation is that private wealth management will continue to grow at pace of 6% pa until 2020 (source BCG) mainly driven by Asian-pacific, ME and Africa and LATAM. Switzerland is expected to remain the largest single offshore centre through 2020. Swiss trustees will benefit from these trends.
Upper segment USD 20M plus saw to strongest growth and is an obvious one for Swiss trustees, bearing high operating cost structure.
We are all living in a "VUCA" world (Volatile, Uncertain, Complex, and Ambiguous) where businesses must be agile to adapt constantly. One can notice that the average revenue and profit margins declined for wealth managers from 2012 to 2015 (BCG Report), suggesting a difficulty to adapt and the need for new strategies and approaches!
I suspect the same applies to Swiss trustees who have not all been able to anticipate and deal with the major trends altering the face of Swiss trust industry:
- tightening regulation on key areas of the business :
- tax transparency : industry must ensure that "families are playing by their tax rules of their home countries" but, it is fair to say that today tax compliance and transparency is at the top of our Swiss wealth industry agenda. Hopefully that will help us to transition smoothly now into the new "big" world of tax compliance so that Switzerland stops being a systematic target of the US, our neighbouring EU countries and the intergovernmental organisation for combatting money laundering and tax evasion (FATF, Global Forum, etc…)
- conflicts of interest : Swiss trustees have a key role to play in pointing out to banks and asset managers those conflicts when they arise for the benefit of their trust beneficiaries
- increase transparency on fees and charges : Swiss trustees must keep under close watch Total Expense Ratios applied by asset managers and banks
- increasing operating costs and number of FTEs to render same services due to new IT systems, controls, legal and compliance
- accelerating digital innovation
- Clients are becoming more sophisticated and require detailed "real time" knowledge of their structures, their assets, the risks associated with the assets. To meet these requirements one needs to invest in technology whereby interphase web portals are created and accessible by clients from any device.
- Moreover investment in technology infrastructure is also required to meet simultaneously clients and other demands for reporting from:
- Tax authorities & regulators (FATCA/CRS)
- Custodians and banks (credit ratings, PEPs and consolidations)
- Asset Managers and intermediaries
- Focus on client and business data protection is a big challenge for the industry. One must ensure that both company and client data are protected. Indeed there are only 2 types of companies in the financial services arena: a) those that have been attacked and b) those that will be attacked. We owe our clients clear answers to questions like:
- Where is the data stored both soft and hard copies?
- How is the data secured and protected from any outside influence or access?
- What protection do we offer the clients from cyber-attacks?
- globalisation and access to growth markets
- From an offshore perspective overall, the shift from developed regions (the “old” world) to developing regions (the “new” world) as the primary source of offshore wealth has become more pronounced (today, 65% of offshore wealth originates from the new world) mainly due to economic and political tensions with investors actively search for the most attractive locations in which to domicile their assets.
- So it is critical to get access to new growth markets e.g. Africa, ME, Russia & CIS, but this requires investment in KYC/AML new technology and partnership with specialist firms to assist with new clients' KYC/DD screening and on boarding.
- handling the huge intergenerational wealth transfer of clients within Swiss private banks is a big a growth opportunity for Swiss trustees providing they can effectively add value to banks by expert services in inheritance tax planning, estate planning and asset administration.
- the need for societal and economic sustainability as well as global responsibility resulting in:
- global private philanthropy being on the rise
- clients’ demand for sustainable investments
In both cases, Swiss trustees can be a driving force in these areas.
So where are the opportunities for Swiss trustees in a market going through banks’ de-risking strategies and “forced” PE-backed consolidation?
Agility and “lightness” are crucial: winners will be trust companies that feels lighter, quicker, more agile, more collaborative, more trusting and more worthy of trust and finally true to their DNA, subject of course of minimum scale and depth.
Since agility is a mind-set, I expect more global war for talent
- trust companies with a “caring culture” and values-based leadership will be conducive to attract the best talents out there
- being ethical as trustees in assisting our clients in protecting their assets whilst reinvesting part of it to their wider communities through charitable projects or otherwise
Need for minimum scale and the resources to expand otherwise risk of being at the mercy of an industry consolidators and their short-termism and financial centricity as opposed to client centricity.
Which clientele finds Switzerland still attractive?
For the UHNWI segment, the British voters' decision to exit the EU coupled with the current panic about the consequences of the UK Budget might bring to Switzerland families who used to live in the UK. In doing so, they simplify their lives by making Switzerland the centre of their family and wealth’s interests.
Alternatively HNWI might take up tax residence in some EU countries promoting new beneficial tax regimes for residents like Italy, Portugal, UK (still) and combining it with the centralisation of the management of the family wealth in a tax neutral and safe nearby platform like Switzerland.
Wealth owning families coming from emerging and new growth markets being particularly subject to geopolitical turmoil. They are restructuring their personal and business assets through Switzerland in view of the deadly combination of introduction of CRS, perceived political and asset protection risks.
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