Swiss Private Bank Chief Outlines Challenges
Wednesday, January 19, 2011

During a recent press conference delivered in Bern, President of the Swiss Private Bankers Association (SPBA), Konrad Hummler, discussed Switzerland, its banks and the financial crisis, alluding to Switzerland’s financial centre strategy as well as to the major challenges currently facing the Swiss financial centre.

Noting that the financial crisis between 2007 and 2008 had left deep marks in the global economy, including fast-growing emerging markets, eager to attract capital, a USA determined to use all available means to boost growth, and Europe, with its aging population and single currency, exposed to increasingly complex problems, Hummler stated that, due to its diversified economy and conservative management of public finances, Switzerland is in a relatively good position. The Confederation should not, however, simply ignore difficulties experienced by neighbouring counties, Hummler warned, pointing out that a soaring Swiss franc had had an impact on the country’s export trade.

Yet, according to Hummler, although the Swiss financial centre undoubtedly proved itself in the crisis, it nevertheless faces major challenges. These include:

• Repositioning in relation to banking secrecy. Within the framework of its new strategies, the Swiss Federal Council has initiated negotiations on the introduction of a withholding tax. It has also renegotiated double taxation agreements (DTAs) with numerous countries;
• The political uproar surrounding ratification of the state agreement designed to resolve the legal dispute involving UBS in the US;
• Verbal attacks carried out by ministers in neighbouring countries;
• The theft of Swiss banking data made available to foreign states.

International strategies for the Swiss financial centre

Outlining key international strategies for the Swiss financial centre, Hummler stated that in view of the current unstable environment, there is a need for the financial centre to re-orientate itself. Adopted since 2009, the new financial centre strategy focuses on four axes:

• Financial privacy;
• Decriminalization of the past;
• Tax compliance of bank clients;
• Free market access.

In addition, there is a fifth element, Hummler emphasized, namely the requirement to improve the legal framework conditions for the financial centre at national level as a matter of priority, given that reorientation in relation to banking secrecy reduces the attractiveness of the Swiss financial centre when compared to foreign, non-cooperative states, resulting in fewer inflows, fewer jobs and lower tax revenues. Greater attention to international competition must be given, Hummler stressed.

Withholding tax and negotiations with Germany and Great Britain

Hummler pointed out that the SPBA’s strategy is broadly consistent with the Swiss Bankers Association 2015 financial centre strategy, adding that both strategies crucially follow the same direction defined in the Federal Council’s report from the end of last year entitled “Strategic directions for financial market policy”.

Alluding to successful preliminary negotiations conducted with Germany and the UK on the idea of a withholding tax, Hummler underlined the fact that the model will serve on the one hand to avoid retroactive criminalization of the past and on the other to guarantee tax compliance for customer deposits held in Swiss accounts for the two countries concerned.

In future, Hummler continued, Switzerland will no longer levy a tax merely on income in the form of interest, but also on income in the form of dividends and capital gains. No other EU country has such a regulation, Hummler remarked, adding that in return for the withholding tax, Switzerland has facilitated access to its banks for foreign markets.

By imposing a withholding tax, Hummler maintained, Swiss banks do not become involved in the relationship between clients (in their capacity as taxpayers) and foreign tax authorities. The amount of the withholding tax has not as yet, however, been determined.

While negotiations are currently only at the initial stages, and promise to be highly intensive, the SPBA has, Hummler maintained, welcomed the outcome, noting that it would fall to the Confederation’s banks to implement the withholding tax model in future in accordance with requirements.

The USA

One of the greatest challenges for Swiss banks, Hummler explained, is America’s new legal Foreign Accounts Tax Compliance Act (FATCA), rendering the provision of financial services in relation to the US considerably harder.

Enacted on March 18, 2010, FATCA imposes reporting requirements on foreign financial institutes (FFIs).

FFIs are required to deduct and withhold a tax equal to 30% of the amount of any payment to an FFI unless the FFI agrees to disclose the identity of the US residents and report on their bank transactions.

However, Hummler pointed out that as it is not always possible to determine whether a certain customer is a “US person”, the risks for financial intermediaries for adhering to the rules are considerable. Consequently, and in view of the huge costs resulting from implementation of FATCA into the global banking system, many institutes may turn away from American markets, Hummler continued, adding that it is unclear as to whether or not Swiss banks will be able to conclude such an agreement with the American administration. In contrast, the Confederation’s banks had agreed to the introduction of the Qualified Intermediary Agreements, Hummler pointed out.

Concluding his speech, Hummler warned that having managed to successfully overcome the financial crisis, it would be paradoxical if the Confederation’s banks are now shaken by regulatory excesses for reasons which simply do not affect the majority of Swiss banks.