Download - September 2007 Swiss Banking â€“ Roadmap 2015

Swiss Banking – Roadmap 2015September 2007

E_UG_Roadmap 2015 20.8.2007 10:48 Uhr Seite 2

Contents

Editorial 1

Summary 2

Overview of the study 4

Private banking 8

Retail banking 10

Investment funds 12

Pensions business 14

Hedge funds 16

Private equity 18

Swiss capital market 20

Commodity trade finance 22


1

Dear Reader

Switzerland’s financial service providers, with banks leading the way, enjoy a respectedposition on the international scene. They are among the world’s market leaders in manyareas and, with a share in the country’s overall value added of 15%, represent the mostimportant sector of the Swiss economy, making a key contribution to the country’s prosperity and standard of living. In order to ensure that this remains the case in the fu-ture, the banks, under the aegis of the Swiss Bankers Association, have carried out a care-ful analysis of individual areas of business that are particularly important for the futureand worked out specific measures that are essential for continued success. Together withinput from other members of the financial community, such as insurance companies, thefunds industry and the SWX Swiss Exchange, these findings will provide the foundationfor an overarching 2015 financial centre strategy. The objectives and measures drawn upare intended as a basis for discussions with politicians and government authorities aimedat ensuring that the economic contribution made by the financial sector remains high overthe years to come and that Switzerland does not fall behind in global competition withother financial centres.

We are pleased to present this brochure, containing the key findings from the analysisfor the banking sector.

Pierre G. MirabaudChairman, Swiss Bankers Association

Editorial

SBA – Roadmap 2015

E_Inhalt_Roadmap 2015 24.8.2007 7:42 Uhr Seite 1

2The financial industry accounts for 15% of Switzer-land’s economic value added, making it the most im-portant sector of the country’s economy and a crucialpillar of its prosperity. The Swiss financial centre isalso the world’s biggest cross-border asset manager.However, this success – which is based to a large parton the effective protection of privacy (bank-client con-fidentiality) – should not be taken for granted: compe-tition in the global financial industry is fierce, both between individual players and, in particular, betweenthe different financial centres.

With a view to ensuring that the Swiss financial centreremains competitive and can become even more suc-cessful in future, the banks in Switzerland, under theaegis of the Swiss Bankers Association (SBA), have con-ducted a comprehensive analysis of opportunities andrisks and have drawn up a roadmap for the future ofSwitzerland as a banking centre. The resulting object-ives and measures are intended as a basis for discus-sions with politicians and government authorities, andhave been drawn up with a view to sustaining and fos-tering Switzerland’s position as a financial location.This analysis is to be complemented by similar studiesfrom other members of the financial community, ultim-ately resulting in a consolidated and coherent financialcentre strategy.

Central to this investigation are areas of business whichhave major growth potential or already enjoy a very

good position and need to be further strengthened. Thefocus is on the following eight areas of business:

• private banking;• retail banking;• investment funds;• pensions business;• hedge funds;• private equity;• Swiss capital market;• commodity trade finance.

These eight areas of business have been analyzed indetail as part of a broad study. Developments in thedifferent segments over the last ten years have beencompared with those seen in the Swiss financialcentre’s direct competitors (London, New York, Luxem-bourg, Singapore or Ireland). This location analysishas been used to form a clear picture of the prospectsfor the future and to determine what action is neededin the different areas of business in order to enhancethe competitiveness of the Swiss banking sector.


Summary


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On this basis, more than seventy specific institution-al, regulatory and tax-related measures have beendrawn up, of which, after careful deliberation, twen-ty were given priority status and included in this po-sition paper. Core elements of these proposed meas-ures aimed at realizing the growth potential of theSwiss financial centre are:

• strengthening competitiveness in tax matters;• strengthening competitiveness through appropriate

implementation of international standards whilemaintaining bank-client confidentiality;

• fostering the effectiveness of the authorities in mat-ters relating to Switzerland as a financial centre;

• fostering the attractiveness of Switzerland for col-lective investment schemes;

• improving the framework conditions for trusts andfoundations;

• making the regulatory framework more flexible forpension funds business.

One key to success is to ensure better coordination ofcurrent and future measures with the authorities. Withthis in mind, regular discussions are to be put in placebetween the senior officers of the different associations,the authorities and politicians.

We firmly believe that a well-functioning and competi-tive financial sector is essential to every economy andultimately helps to ensure the well-being of the coun-try’s citizens. We are pleased, therefore, to be able tomake a contribution, through this position paper, to anin-depth discussion of the future path to be taken byan important part of the Swiss economy.



Future success has to be earnedWith a share in national economic value added of15%, the financial industry is the most important sector of Switzerland’s economy and makes a decisivecontribution to the country’s prosperity. However,this success is not set in stone and needs to be earnedanew every day. Switzerland is internationally recog-nized as a financial centre and has a leading positionin individual sectors such as asset management. Com-petition in the global financial industry is fierce, notjust at company level, but also between the differentfinancial centres. It is against this backdrop that theSwiss financial centre and its protagonists must maketheir presence felt. Many financial services are alreadybeing bought in from other countries, and it is therethat the value added is being created. Competitivepressure on the Swiss financial centre remains at ahigh level.

If the Swiss financial centre is to remain competitive,action is needed. The banks, under the aegis of theSwiss Bankers Association (SBA), have therefore con-ducted a comprehensive analysis of opportunities andrisks and have drawn up this position paper, based ona detailed study. The objectives and measures derivedare to form the basis for discussions with politiciansand government authorities. The analysis is to be com-plemented by similar studies from other members of thefinancial community, resulting finally in a consolidatedand coherent financial centre strategy.

The institutional, regulatory and tax framework has acrucial role to play in the potential of individual areasof business. The way an initial advantage can be squan-dered more or less overnight, to the benefit of other financial centres, has been demonstrated in recentdecades with the migration of the gold business or offund production out of Switzerland. In contrast, the recent growth in structured products promises positivedevelopments. Shares in a global marketplace will onlybe maintained or won if business, legislators and regu-lators are pulling in the same direction. There are clearexamples of how focused measures can lead to verypositive financial sector outcomes (e.g. the “Big Bang”in London).

Overview of the study

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Swiss financial centre under growing competitive pressureGrowth of real-term value added for the financial industry

Source: UBS, BAK Basel Economics

60

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140

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220

260

300

340

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Swiss financial centre in

Swiss financial centre in

Swiss financial centre


This investigation focuses on eight areas of business:private banking, retail banking, investment funds, pen-sions business, hedge funds, private equity, capitalmarket business and commodity trade finance. Allthese areas have significant growth potential or al-ready enjoy a very good position which needs to bemaintained.1

In drawing up this paper, the aim of the Swiss BankersAssociation (SBA) is to help foster Switzerland’s position as a financial location: similar initiatives havebeen undertaken in the past, such as the SBA study ofFebruary 2003: “Swiss Banking: a programme for thefuture”. In view of the strategic importance of system-atically promoting Switzerland as a financial centre, aprecise and fundamental analysis of the frameworkconditions needs to be carried out at regular intervals.With this in mind, the present document is part of aglobal and integrated study of developments in the financial sector in Switzerland and abroad.

Core elements and aspirationsFrom a strategic point of view, certain core elements ofthe national framework are essential for the well-beingof the financial centre. They form the basis for the other framework conditions, which have to be adaptedto current requirements from an “operational” point ofview. One of these core elements is the importance attached to protecting financial privacy, which itself is based on a democratic decision of Switzerland’s citi-zens. Additional core elements are

• political stability;• the guarantee of Swiss National Bank policy aimed

at ensuring stability;• a modern, efficient, reliable and independent finan-

cial centre infrastructure;• sound, market-based supervision and regulation,

which ensures legal security and a level playing-fieldin the international context;

• the importance attached by government authoritiesto ensuring equal status and mutual recognition forour financial market rules in the internationalsphere and freedom from discrimination in marketaccess;

• an attractive economic policy environment (in par-ticular, tax framework);

• up-to-date, practice-based education and training atall levels.

In order to enhance the competitiveness of the Swiss financial centre, the banks aim to ensure that new busi-ness opportunities can be tapped and effectively ex-ploited. Switzerland’s banks need to pay particular attention to:

• the maintenance of financial privacy;• outstanding advisory and service quality;• a competitive cost-earnings relationship or a high

level of productivity; • innovation and technology (in particular, the on-

going development of different services);• responsible reputation and risk management;• overall attractiveness as a “location of choice” for

internationally-mobile and highly-qualified employees.

SBA – Roadmap 20151 No detailed analysis has been conducted of areas of business in which the Swiss financial centre has little

chance of creating a significant cluster by international standards (see details on pg. 6f below).

The objectives or aspirations can be summarized as follows.

The Swiss financial centre

• is to remain the world’s market leader in inter-national asset management. The asset pool generated by this is central to the success of thefinancial centre as a whole.

• is to be a centre for innovative new financial instruments with global reach. Affluent inter-national clients expect innovative products withsignificant potential for diversification.

In order to realize these aspirations, the Swiss financial centre

• depends on an independent legal frameworkthat meets high international standards andenables providers to meet national and inter-national needs in a tailored and flexible way.

• seeks further to reduce international barriers tomarket access in order to be able to take advan-tage of the opportunities arising from global-ization.

• supports cooperation between different super-visory authorities and mutual recognition ofequivalent regulation and supervision.

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Crucial to Switzerland’s prosperityThe financial sector is of major importance to the Swisseconomy as a whole. It accounts for 15% of overall value added and around 16% of all direct and indirecttax receipts. 200,000 people, or 5% of the entire workforce, enjoy above-average pay. Productivity in the financial industry, at CHF 337,000 per employee,is around three times higher than the Swiss average.Banks train 3,600 or 12% of all apprentices. Banks inSwitzerland commission services from third parties to the value of several billion Swiss francs every year. Substantial contributions are made to education, sponsorship and charitable foundations. These servicesto the economy are recognized and appreciated by the people of Switzerland, with 90% stating that theythink the sector makes an important contribution to theoverall economy. A well-functioning and competitive financial centre is essential to any economy, featuringmarket-led capital allocation for investments, interme-diation between savers and investors, and a platformfor payment transactions. The financial sector is indis-pensable for the domestic and international operationsof Switzerland’s open economy.

Important domestically and internationallyThe Swiss financial sector supports effective domesticregulation, which seeks to achieve its aims with theminimum possible intervention in the market. Theguidelines on financial market regulation issued by theFederal Department of Finance in September 2005 area step in the right direction, but they still need to be implemented. There is still a tendency to over-regulate,in Switzerland as elsewhere.

With regard to international operations, the bankswish to achieve as much freedom of market access aspossible within the framework of the WTO. In relationto the EU, the analysis in almost all the areas of busi-ness shows that lack of access to the EU single marketis of central importance, particularly on the retail side.The SBA has analyzed the advantages and disadvan-tages of a financial services agreement with the EU andfound that currently the disadvantages outweigh theadvantages. Switzerland would systematically have totake on board EU laws, which hardly equates to mu-tual recognition of legislation. Furthermore, the indi-vidual EU countries retain a great deal of autonomy inmatters of consumer protection. The objective, rather,is non-discriminatory market access (based on mutualrecognition of equivalent [but not the same] regula-tion) and the creation of concrete solutions at a tech-nical level.

Tax, regulation and supervision in focusThe subject of this comprehensive investigation is national and international market structures and theregulatory, tax and supervisory framework conditionsin Switzerland and the main rival financial centres suchas London, New York, Luxembourg, Singapore andIreland. The eight areas of business mentioned abovewere selected for close investigation because they appear to offer special business potential or to bearsome relevance to the competitiveness of the financialcentre. The emphasis was on looking at measures whichcan be initiated or implemented in Switzerland in thenext legislative period. Of particular importance werethe presence of clusters or conditions favourable fortheir emergence, i.e. situations in which a number of financial service providers form a critical mass for expertise and services, specialists are available, and re-lated servicing sectors can establish themselves. For thisreason, no detailed investigation was conducted for areas of business in which the Swiss financial centre haslittle chance of forming a significant cluster in inter-national terms.

Offensive and defensive measuresFor the individual areas of business, a range of prima-rily “offensive” measures were identified, i.e. measureswhich would serve to improve the relevant market environment in Switzerland. On the other hand, in theprivate banking area in particular, “defensive” meas-ures predominate, aimed at preventing the frameworkconditions from deteriorating. It goes without sayingthat these defensive measures are central to the area of business which creates by far the biggest share of value added. In some areas of business, such as retailbanking, investment funds and pension funds, inter-national growth in terms of EU market access andcross-border business is limited. Here, efforts need tobe focused on making individual, specific improve-ments. Swiss regulation should be adapted as far as ispossible and appropriate to European legislation, andthe competitiveness of the domestic sector should bestrengthened such that efficient markets can beformed. There is a high level of potential in newerareas of business such as private equity and hedge funds,where things have not yet settled down and regionalclusters are only just beginning to form. Switzerland asa financial centre with global reach must do everythingit can to achieve a leading market position in theseareas of business. Niche areas like trade finance needto be further expanded. One of the key prerequisitesfor sustained success in all business areas is world-classeducation and training at all levels. The establishment

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of the Swiss Finance Institute at university level was agood move. But similar efforts are also necessary atother levels.

The proposed measures aimed at achieving the ambi-tious objectives set, and their positive impact on the in-dividual areas of business, are summarized in the tablebelow.

Better coordination of all current and future measureswith the authorities is vital if the proposed measures areto be implemented successfully. With this in mind, regu-lar discussions are to be set up between the senior offi-cers of the different associations, the authorities and, ofcourse, politicians.

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Measures Effects on areas of business

Strengthen competitiveness in tax matters Makes Switzerland more attractive for investment funds, private equity and hedge funds. Strengthens Switzerland’s leading role in private banking. Impacts positively on retail,trade finance and capital market business.2

Strengthen competitiveness through Appropriate implementation of 40+9 FATF recommendations appropriate implementation of while maintaining bank-client confidentiality, clear proceduresinternational standards in administrative and legal assistance, credible insider

trading provisions and a clear stance towards the EU areessential for private banking, retail banking, trade financebusiness and capital market business.3

Foster the effectiveness of the authorities Better staff resources and a more collaborative approach in matters relating to Switzerland as a with the approval, tax and commercial register authorities financial centre will be favourable in particular for investment funds

business, hedge funds business and private equity business.4

Foster the attractiveness of Switzerland More flexible investment rules will enable a free and for collective investment schemes risk-based investment strategy for qualified investors.

Easier registration will be favourable for investment fundsand hedge funds business. Greater legal security in distin-guishing between retail and qualified investors is a locationadvantage for private equity.5

Improve the framework conditions for Improved legal framework in Switzerland and in the taxationtrusts and foundations of foreign trusts are of great importance for private banking.6

Greater flexibility in the regulatory Opens up greater scope in investments, more freedom framework for pension funds business to choose for investors and new business opportunities for

the pensions business in Switzerland and abroad fromSwitzerland.7

2See proposed measures 1.3, 1.6, 2.1, 3.2, 5.1, 5.4, 6.1, 6.5, 7.1 and 8.3.3See proposed measures 1.2, 1.4, 2.2, 7.2, 8.1 and 8.2.4See proposed measures 1.5, 2.3, 3.3, 5.2, 6.2, 6.3 and 8.4.5See proposed measures 3.1, 3.4, 5.3 and 6.4.6See proposed measure 1.1.7See proposed measures 4.1, 4.2 and 4.3.


Aspiration

High value added per employee

Private banking is a core competence of the banks inSwitzerland and is the biggest area of business overall.Private banking contributes around a half8 of the banks’overall share of value added, making it a very importantpillar of the Swiss economy. As well as the two big banks,private banking is carried out by 14 “pure” private bankswith unlimited liability partners, almost 60 other privatebanks, some cantonal banks and 130 foreign banks. Atthe end of 2006, the value of securities held in bank cus-tody accounts in Switzerland was almost CHF 5,017 bil-lion.9 Of this, around 42% is accounted for by domesticclients and around 58% by foreign clients; institutionalinvestors have a share of around 57%. Value added peremployee is about four times the Swiss average. With ashare in the world market in cross-border asset manage-ment of around 30%, Switzerland easily outstrips all oth-er international financial centres. Singapore, the biggestof the emerging Asian financial centres, is around tentimes smaller than Switzerland in terms of assets undermanagement, but is growing significantly more quicklythan the Swiss financial centre.

Ongoing adjustment of the business modelThis area of business is vital for Switzerland. The domestic and international framework conditions areof great importance. The banks are faced with a dualchallenge. Firstly, they need to adapt their businessmodels to prevailing business trends on an ongoingbasis. Secondly, national and international regulationand tax frameworks need to be permanently monitoredat all levels, and influenced with a view to retainingleadership of the world market.

Globalization presents both opportunities and risks.On the positive side, there is the chance further to expand onshore business worldwide as a result of im-proved market access. At the same time, however, com-petition among offshore centres is becoming stiffer,leading, for example, to increased pressure on Switzer-land as a booking location. New competitors such ashedge funds and private equity are bringing additionalimpetus to the private banking market and are likely todrive fragmentation forward. The choice of an opti-mum business model is becoming ever more important.Clients want comprehensive financial advice and per-formance, not just investment tips. Banking is becom-ing more complex and makes considerable demands onbank staff. Recruiting and retaining highly-qualifiedand effective staff is a very critical factor for growth.

In terms of regulation, a number of legislative im-provements have been introduced in Switzerland in

1 Private banking

8

SBA – Roadmap 20158 The share of value added accounted for by the banks in Switzerland is around 9.6% (financial sector as a whole

15%), that of private banking 5%.

• Switzerland is to remain the world market leaderin international asset management.


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recent times. These include, for example, easier inter-national administrative assistance in stock market supervision, ratification of the Hague Trusts Conven-tion, and plans for integrated financial market supervi-sion (FINMA), which should help further to improvethe international reputation of the financial centre.

The internationally-accepted protection of privacy(bank-client confidentiality) remains important for thesuccess of private banking. With the EU, the retentionof bank-client confidentiality has been assured for thelong term through three bilateral agreements (savingstax, fraud agreement and Schengen/Dublin). However,it is to be assumed that exchange of information in financial and tax matters will remain on the agenda atvarious international organizations. National provi-sions on the protection of privacy in financial matterscould be called into question as much as the principleof double criminality or the principle of speciality.

In some EU countries there remain regulatory hurdleswhich make cross-border market access for banks basedoutside the European Economic Area (EEA) much moredifficult. Globally, the trend towards international stand-ard-setting in the supervisory field by overarching bod-ies is increasing. In principle, that makes sense, buttheir authority is not always clear, and Switzerland’sposition on these bodies also often lacks clarity.

In terms of regulation, benchmarking with other coun-tries also needs to be better. This is not simply a matterof comparing regulations. Rather, Switzerland needs tolook more towards what is implemented in compar-able financial centres before striving for perfection itself.

MeasuresIn order to ensure the development and growth of private banking, the framework conditions needto be simple and flexible and provide a high levelof legal security. Pragmatism, i.e. a willingness to solve problems practically and unbureaucratically,has played a significant part in the current successof private banking. This attitude must be retainedand further fostered. To achieve this, the followingmeasures are necessary:

1.1 Improvement of the framework conditions forforeign trusts and foundations by amending civil and tax law.

1.2 Consistent stance with regard to the Swiss-EUsavings tax agreement with a view to continu-ing the co-existence model.

1.3 Elimination of turnover tax. This shouldpreferably be phased out, i.e. the tax should beeliminated gradually through successive an-nual reductions in the rate (as for measure 2.1).

1.4 Appropriate implementation of the 40+9 FATFrecommendations while maintaining bank-client confidentiality (no additional due dili-gence and monitoring obligations in tradingand with regard to commodity and trade finance, see measures 2.2 and 8.2).

1.5 Ensuring clear processes and procedures in administrative and legal assistance (preventionof “fishing expeditions” and indiscriminateblocking of accounts, see also measure 8.4).

1.6 Clear and internationally-competitive taxframework for hedge funds and private equityfund managers in Switzerland (as for measures5.1 and 6.1).

9 At mid-2007 the value of securities held in custody accounts (excluding cash and fiduciary deposits) in Switzer-land stood at CHF 5,400 billion.


Aspiration

Open, heavily fragmented market

The term “retail banking” refers, on the one hand, tomass-market banking services focusing on persons withnet assets of up to around CHF 250,000 as a clientgroup. The services offered include personal currentand savings accounts, simple structured investmentproducts, mortgages, consumer credit, debit and creditcards and payment transactions. On the other hand, re-tail banking also includes financial services provided tosmall and medium-sized firms, such as payment trans-actions and simple structured forms of financing. Withthe exception of those banks that focus exclusively onprivate banking, all banks operating in Switzerlandoffer all or some of these services. More so than in thecase of other financial products, in retail banking it isnot only the production of financial services but alsotheir distribution which is very important. In Switzer-land, banking density is very high and the market isheavily concentrated and competitive. From a regula-tory point of view, the market, unlike some EU mar-kets, is an open one.

The market for consumer credit is still relatively newin Switzerland and, in an otherwise saturated retailmarket, offers the greatest potential for growth. TheSwiss credit card market is saturated, profitable andsubject to increased competition from new providers.The leasing business is gaining in importance in vari-ous areas. Thus, in capital goods leasing, in particular,there is market potential. The leasing ratio in the years1999–2004 was an average of 9.7%, while the aver-age figure in the EU was almost 13%. The mortgagemarket posts growth rates in Switzerland which onaverage are above GDP growth. The Swiss market isthe sixth-largest in Europe. For demographic reasonsthere is likely to be increased demand for apartmentownership and reduced demand, in particular, forhouse ownership. Bank credit is a central element incorporate finance. In recent years, clients have becomemore professional and sophisticated in their require-ments. Competition in this market is mainly based onprice. With the credit rating system introduced in the1990s, the Swiss banks have a leading role in Europe.

Switzerland as a retail hub not a strategic optionRetail banking services are increasingly becoming“commodities”. They are following the classic path ofindustrial development, whereby prices fall as the mar-ket matures. Client processes have a high rate of recur-rence, and therefore standardization offers significantpotential for cost savings.

2 Retail banking

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• Provision of services for personal and corporateclients, which are of first-rate quality in inter-national terms and are competitively priced.


The monitoring of and adherence to laws result in highcompliance costs. This revolves mainly around moneylaundering, consumer credit, stock market and dataprotection laws. In tax terms, the main taxes are thoseon individuals and companies as well as, in particular,withholding taxes and turnover tax, which is ananachronism in international terms. Regulatory meas-ures abroad, such as MiFID, the introduction of a Single Euro Payments Area (SEPA) and more difficultmarket access for financial services from Switzerland inthird countries also have implications for retail bank-ing in Switzerland. From a location point of view, thereare risks because of the differing regulatory develop-ments between Switzerland and the EU. New barriersto market access may result. Without free market access, the creation of a hub in Switzerland for retailbanking services in Europe is not an attractive optionand thus does not represent a strategic priority.

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MeasuresThe focus of the measures below is on the marketperspective, i.e. competition and structures in theSwiss domestic market.

In comparison with other areas of the financial sector, there is no great need for action in terms of regulation and tax in retail banking. From amarket perspective, positive conclusions can bedrawn. The market for retail banking is open andliberal. The following measures remain necessaryin this area of business:

2.1 Elimination of turnover tax. This shouldpreferably be phased out, i.e. the tax should beeliminated gradually through successive an-nual reductions in the rate (as for measure 1.3).

2.2 Appropriate implementation of the 40+9 FATFrecommendations while maintaining bank-client confidentiality (no additional due dili-gence and monitoring obligations in tradingand with regard to commodity and trade finance) (as for measures 1.4 and 8.2).

2.3 Further development of the recently intro-duced measures and the complete revision ofVAT reform to counter the excessively for-malistic approach taken to VAT. Improvement of the “VAT climate” between tax payers andthe authorities in assessment and proceduralpractice.


Aspiration

Potential as a distribution location

The Swiss funds market is made up of distributionand production. However, currently Switzerland isonly well positioned as a distribution location.Though previously a major production location,Switzerland has continually lost ground to Luxem-bourg and Ireland. Assets managed by investmentfunds domiciled in Luxembourg are around CHF3,000 billion (and in Ireland the total is around CHF1,200 billion), while assets managed by investmentfunds domiciled in Switzerland total CHF 200 bil-lion. This “decline” can be partly ascribed to a lackof flexibility in the regulatory framework and the taxregime. In addition, lack of market access for Swissfunds in EU member states is a hindrance to Switzer-land’s growth as a production location. The new Col-lective Investment Schemes Act (KAG) is designed toprovide focused assistance to Switzerland as a pro-duction location in the future. Since, in this area in

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particular, international framework conditions tendto change quickly, there is further need for adjust-ment in regulatory conditions.

Collective investment schemes are required by varioussets of investors. Whereas, in the past, structured, trad-itional investment funds for a long time mainly at-tracted small savers, production innovations in the areaof alternative investments have since led to a consider-able increase in institutional funds business. Unlike inthe area of retail funds, there is considerable growthpotential here, as an attractive segment of investors canbe provided with special, tailor-made solutions. Withregard to jobs, the downstream value added chain isimportant. Over the lifetime of collective investmentschemes, various services such as fund administration,global custody and portfolio management need to beprovided.

Passive instruments such as exchange-traded funds(ETFs) have very low margins but are growing sharplyoverall and are becoming more and more popular. Onthe other hand, actively managed funds invested in trad-itional asset classes still make up a very large part of themarket but are showing little growth now. Because ofscale effects, retail products like these are produced atleast expense in the major hubs of Luxembourg andDublin. Another attractive growth segment is that of alternative instruments, which usually produce higherreturns than traditional products. Though they are

3 Investment funds

• To establish Switzerland as one of the top threeproduction locations for investment funds inEurope.

• Provision of products to cover a broad invest-ment spectrum for private and retail clients.


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cost-intensive because of the research and portfoliomanagement work involved, they nonetheless still enjoy high margins.

Unfavourable framework conditions in all areasTwo main factors will determine the future positioningof Switzerland as a fund location. The lack of EU market access is likely to have a negative impact on the future growth of Switzerland as a production location.Nonetheless, a services agreement with the EU on thebasis of EU laws is not sought since the disadvantagesoutweigh the advantages currently, yet mutual product licensing on the basis of reciprocity should be lookedinto. In contrast, prospering asset management businesswill have a positive effect on Switzerland as a distribu-tion location.

In comparison to the fund locations of Luxembourgand Dublin, Switzerland has significant regulatory, institutional and tax disadvantages.

Thus, for instance, in terms of regulation, the detaileddesign of the Swiss SICAV involved some stiffer require-ments or requirements alien to actual practice, whencompared with Luxembourg’s regulations. Things aresimilar in the definition and handling of qualified investors. In institutional terms, insufficient staff resources at the supervisory authority are a negativefactor. And the tendency towards an excessively for-malistic approach, a lack of pragmatism and inconsis-tency in approval decisions will help little in promot-ing future growth. This means that investor protectionpractices and higher Swiss standards will hinder newareas of business being tapped successfully.

The unfavourable tax framework (stamp duty) whichcaused the migration of the Swiss funds business toLuxembourg in the mid-1980s has now been ameli-orated somewhat. The main tax problem, however, isthat earnings from Swiss investment funds continue tobe subject to 35% withholding tax, disadvantagingSwiss funds as against foreign ones.

MeasuresIn the investment funds area, the measures are focused on improving growth potential in the domestic market. An aggressive positioning ofSwitzerland as an international production hub isa major challenge for the medium term in view ofthe uncompetitive regulatory, institutional and taxframework. It is unlikely that we will see a re-patriation of the areas of business that have mi-grated to Luxembourg or Dublin. But we can learnfrom past errors. The following are the main meas-ures:

3.1 In the case of collective investment schemesopen only to qualified investors, investmentrules are to be made more flexible in order toallow as much freedom as possible in designing investment strategies in line with thesize and the risk capacity and profile of thequalified investor.

3.2 Creation of improved framework conditionsfor collective investment schemes in terms ofwithholding tax (as for measures 5.4 and 6.5).

3.3 Strengthening of staff resources at the super-visory authority from a quantitative and quali-tative point of view, especially for investmentfunds and private equity. Of importance, forinstance, is focused knowledge transfer (e.g.through secondments in the financial industryor training in certain subjects by experts fromfinancial service providers). In addition, directconsultative discussions with the approval au-thority should be established (as for measure6.3).

3.4 Registration of hedge funds should be madeeasier. Following the Luxembourg model, theintroduction of a “shelf-registration” pro-cedure would be a worthwhile aim, permittinghedge fund administrators with prior author-ization to set up new funds structured alongpredefined lines within a short space of time(as for measure 5.3).


Aspiration

Three-pillar system an export hit

Since 1985, the Swiss pension system has been legallybased on three pillars: state provision on a pay-as-you-go basis (federal old age and survivors’ insurance), occupational provision on a fully-funded basis, and private voluntary pension plans. Switzerland’s three-pil-lar approach is regarded as a model system interna-tionally. The main strengths are the high level of capi-tal cover at over 110% of GDP and the broad coverage.The target pension level from pillars 1 and 2 is around60% of final salary.

The EU pension fund sector is growing rapidly. In thenext ten years, average annual growth of assets undermanagement can be expected to be almost 7%. Assetswill double by 2015 to almost EUR 9,000 billion. Thisgrowth offers new business opportunities for the financial services industry, particularly with the ongo-ing improvement in the regulatory framework. The (potential) business opportunities (fee pool) from Euro-

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pean pension funds are likely to increase by 7% a yearto over EUR 24 billion by 2015. The estimated fee poolfor the Swiss pension fund sector was EUR 1 billion in2005, or around 8% of the European market.

Growth opportunities in the extra-mandatory segmentDespite its strengths, the Swiss three-pillar system alsohas some weaknesses. Parameters fixed by the author-ities hinder efficient asset allocation, and cantonal super-vision is no longer in line with modern governance prin-ciples. Furthermore, the pension fund market is toofragmented for Switzerland’s small size, with over 8,000 pension schemes. Finally, lack of competition leadsto inefficiencies in service provision. Ageing populationsand insufficient cover are leading to improved regula-tory frameworks for private pension plans in Europeancountries. The trend is towards liberalization, with aview to extending the investment and risk managementoptions of pension funds and strengthening supervision.A cross-border market will slowly be established. Ire-land and Luxembourg have already introduced meas-ures to benefit from this. In a similar way to the marketfor investment funds, the European pension fund mar-ket is likely to see the emergence of “centres of excel-lence” with favourable regulatory frameworks. The pro-vision of integrated management services, i.e. of servicescovering the entire value added chain, is the way for-ward for the future. However, “centres of excellence”for pension management will only emerge where this de-

4 Pensions business

• To win market share across Europe in the extra-mandatory segment.

• Swiss clients should receive the best possible access to a broad range of investment products.


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mand can be satisfied. Switzerland is running the riskof being excluded from Europe’s growing cross-borderretirement provision business and the advantages thisbrings with it as a result of lack of market access or uncompetitive regulations.

Necessary adjustments in occupational retirement pro-vision in Switzerland should always be approachedwith a view to improving the country’s competitive pos-ition in the future cross-Europe pension fund business.Two main legal differences between the EU andSwitzerland will have a negative impact. Firstly, the EUrelies much more on the precautionary principle, whichreplaces quantitative restrictions on asset allocation.Secondly, the EU is introducing the principle of originin relation to the mutual recognition of supervision inall member states. This system is not compatible withthe decentralized Swiss system, in which supervisionlies with the cantons. The standardization of regulatoryframeworks (in all cantons and the entire insurance andpension fund sector) for the whole of Pillar 2 provisionshould therefore be implemented as swiftly as possiblein order to enable product recognition.

Full access to the growing European pension fund mar-ket for Swiss financial service providers is not realistic.Nonetheless, the regulatory framework for pension fundsshould be improved and adapted to European standards.The less regulated extra-mandatory segment in particu-lar continues to offer international growth prospects.

MeasuresWe propose some changes and improvementswhich will strengthen the Swiss pension system andmay help to close the gap vis-à-vis the changingregulatory frameworks for pension funds in Eur-ope. The following measures are necessary:

4.1 Moving away from parameters fixed by theauthorities for asset allocation and shifting towards use of the precautionary principle.Greater flexibility in investment rules throughadjustment of requirements depending on sizeand risk capacity of pension funds.

4.2 Tapping of new business opportunities forpension fund pooling from Switzerland for recipients in Europe and other countries. Inparticular, an optimal tax framework needs tobe ensured for this.

4.3 Distinction between mandatory and extra-mandatory segment of Pillar 2. Removing thecapital guarantee for vested benefits wouldprovide a genuine choice and would representthe first step towards freedom of choice formandatory pension scheme provision.


Aspiration

Enormous growth potential

Hedge funds (collective investment structures that havegenerally flexible investment strategies characterized bya low correlation with traditional investment productsand an active and complex investment approach) haveexperienced dynamic growth in recent years. There is a structural distinction between single hedge funds(SHFs), i.e. investment vehicles which invest directly inthe market, and funds of funds (FoFs), which invest indifferent single hedge funds. The global volume forhedge funds is estimated at USD 1,600 billion. Volumesin hedge fund investments in Switzerland are likely to be around USD 100 billion. Of this, more than 90%is invested in FoFs, managed by around 100 differentcompanies. Overall in Switzerland, more than 2,000people are employed directly and indirectly in this sec-tor. Initial clusters have formed in the regions Geneva/Lausanne, Zurich/Zug/Pfäffikon and around Lugano.

The global hedge funds market is set to grow to USD2,400 billion by 2009. The market is driven by the

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desire for risk diversification on the part of broadclasses of investors and increased interest from insti-tutional investors. Europe’s relative share of 27% in2006 will increase to 35% in 2009. As a location,Switzerland has benefited very little from this promis-ing area of business. Only around 150 funds are domi-ciled in Switzerland, in contrast to more than 7,000 inthe Cayman Islands. And while management compa-nies based in Switzerland manage around USD 8 bil-lion in assets in SHFs, the figure in the UK is aroundUSD 270 billion. The siting of the administration andmanagement of funds are particularly attractive forSwitzerland.

Optimal starting position endangered by tax mistakesIncreased siting of hedge funds and their managers inSwitzerland will generate new, highly skilled jobs withcorresponding tax receipts, and will create work forother sectors (e.g. legal advisors, auditors, analysts, accountants and due diligence, IP and IT specialists). As a location, Switzerland would be predestined for asignificant market share because of the high level of assets under management, the professionalism of theservice providers working in related areas and thecountry’s high standard of living. With regard to theregulatory framework for management companies,Switzerland has a liberal regime. And the costs forqualified staff and services in Switzerland, in compar-ison to other hedge fund domiciles such as the Cay-

5 Hedge funds

• Establishment of Switzerland as one of the topthree locations for the production and distribu-tion of hedge funds in Europe.


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man Islands or/and centres for management compa-nies such as London and New York, are absolutelycompetitive.

Despite these positive factors in favour of the Swiss financial centre, Switzerland is relatively insignificantas a hedge fund domicile or location for SHF managers.The regulatory, institutional and tax framework worksagainst the siting of SHFs in particular. With regard toinstitutional factors, for instance, approval processesare quite long in international terms, while at advisorlevel the lower numbers of well-trained staff at Swissbanking locations in comparison with London or theNew York conurbation is a factor. The labour marketfor highly-qualified staff from non-EU countries there-fore needs to be liberalised further if the hedge fundsarea of business is to meet its full potential. Taxation offund managers is also a major hindrance. If this issuecannot be resolved in suitable fashion, the increase inattractiveness envisaged as a result of the Collective In-vestment Schemes Act (legal form of limited partner-ship for collective investment schemes) will remainnothing but a theory.

MeasuresThe distribution of hedge funds can make thebiggest contribution overall to Switzerland’s valueadded chain. In this regard, Switzerland is well pos-itioned and will do well to ensure that frameworkconditions remain attractive. Particular catch-uppotential and positive spill-over effects are avail-able in fund domiciling and the siting of manage-ment companies. The following bundles of meas-ures are thus focused on measures for the siting ofhedge funds and ways of making Switzerland a more attractive location for hedge fund advisors.The following measures are necessary:

5.1 Clear and internationally competitive taxframework for hedge funds and private equityfund managers in Switzerland (as for measures1.6 and 6.1).

5.2 For hedge funds in particular, it is importantthat the official bodies ensure a collaborativeand consistent approach in their interactionwith new and existing market players.

5.3 Registration of hedge funds should be madeeasier. Following the Luxembourg model, theintroduction of a “shelf-registration” proced-ure would be a worthwhile aim, permittinghedge fund administrators with prior author-ization to set up new funds structured alongpredefined lines in a short space of time (as formeasure 3.4).



Aspiration

Major growth

Private equity is a form of financing in which unlistedcompanies are provided with equity and/or managementresources at a decisive stage of their development. Thiscapital is used to develop new products, to tap new mar-kets or to make acquisitions. Equity financing usually in-volves the equity provider bearing a full share of the risk.To reduce this risk, the equity provider is granted vari-ous controlling and co-decision-making rights at thecompany. The aim of the investment is subsequently tosell the holding at a profit or to float it (IPO). If the in-vestment takes place at a very early stage of develop-ment, it is termed venture capital. Private equity can alsoinvolve listed companies “going private”. The globalvolume of the private equity market is estimated ataround USD 2,500 billion. The number of private equity funds globally is probably over 8,000. The privateequity market is dominated by the US, with a share of41%. However, Europe has gained swiftly in importancein recent years, with a share in the world market ofaround 39% in 2005. The private equity market inSwitzerland, on the other hand, plays an absolutely

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marginal role in comparison with the European markets.From an investor’s point of view, the advantages of pri-vate equity investments lie in an attractive medium-to-long-term risk-return profile and the relatively lowcorrelation with the equity markets. On the other hand,investments in private equity usually involve a relative-ly large investment amount, specialized knowledge or professional advice, and a medium-to-long-term investment horizon.

In Switzerland, direct investments on the private equitymarket continue to play a very important role, withcompanies undertaking almost two-thirds of all privateequity investments. However, Swiss pension funds havesteadily increased the amounts they put into alternativeinvestments in recent years.

Supervisory practice and taxes are decisive for futuresuccessLow corporate taxes and income taxes should have a posi-tive effect on Switzerland as a location. Negative factorsinclude the poor tax incentives given for R&D investments.

The strengths of Switzerland’s financial service providersin the area of alternative investments lie in the analysis,selection and combination of existing products withinthe framework of structuring funds of funds (FoFs).

6 Private equity

• Doubling of market volume in Switzerland inthe next five years.


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The high standard of living and the attractiveness of the Swiss financial centre for highly-qualified staffmake Switzerland an attractive location for the sitingof management companies, although the conditions foremploying highly-qualified staff from non-EU countriesshould be made more flexible. Another important factor in success is the flourishing asset managementbusiness with a heavy concentration of assets.

At a regulatory level, however, Switzerland has somesignificant disadvantages. The minimum of five limitedpartners stipulated for management companies is toohigh in comparison with other countries. Another major problem is a lack of legal security in the way thelegal framework is handled by the supervisory author-ity. The practice of the supervisory authority will de-termine to a significant extent how competitive thenewer forms of investment established in the collectiveinvestment schemes act will be as against tried-and-tested foreign structures.

In institutional terms, the main issues are the overlylong approval procedures and a tendency to take anexcessively formalistic approach. Finally, the legislativeprocess is too time-consuming in comparison with othercentres and there is often no consistent thinking be-tween the supervisory authority, administrative bodies,auditors, lawyers and the financial industry.

With regard to the tax framework, the issue of taxationof “carried interest” for fund managers is of great importance.

MeasuresFor the major asset pool of affluent clients, the provision of innovative products is exceedingly important. As well as hedge funds, private equityalso plays a significant role. The following meas-ures are necessary:

6.1 Clear and internationally competitive taxframework for hedge funds and private equityfund managers in Switzerland (as for measures1.6 and 5.1).

6.2 Ensuring pragmatic (approval) practice forprivate equity by commercial register officesand the Swiss Federal Banking Commission.

6.3 Strengthening of staff resources at the super-visory authority from a quantitative and quali-tative point of view, especially for investmentfunds and private equity. Of importance, forinstance, is focused knowledge transfer (e.g.through secondments in the financial industryor training in certain subjects by experts fromfinancial service providers). In addition, directconsultative discussions with the approval au-thority should be established (as for measure3.3).

6.4 Legal security in distinguishing between retailinvestors and qualified investors.



Aspiration

Major competition between financial centres

In the capital market area of business, the analysis fo-cuses on issuing and trading. The capitalization of alloutstanding domestic corporate bonds in Switzerland isless than 40% of GDP. This is well below the figure ofaround 120% in the US, but also below the values inGermany, the UK and Japan. With regard to financialintermediaries, the market is undergoing a period ofconsolidation, manifested by the fall in the number ofdomestic investment banks active in this area in recentyears. The liberalization of international capital move-ments is bringing increased competition between indi-vidual capital markets. This means that medium-sizedSwiss companies can also obtain capital outside the do-mestic market. Furthermore, the convergence of legal

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frameworks is accelerating the development of a pan-European capital market and brings with it the risk thatthe Swiss capital market will lose some of its import-ance. The Swiss franc bond market is becoming lessimportant in an international context. In the equitymarket, the volume of IPOs is heavily dependent on themarket environment. After a sharp rise at the end of the1990s and a reduction from mid-2001, the market hasgrown again since 2004. The Swiss franc is the world’sfifth-biggest convertible currency.

Stumbling blocks: stamp duty on new issues, doubletaxation, indirect partial liquidationThe optimal financing and capital structure for com-panies is determined to a significant extent by the fiscalframework. Taxes are therefore an important element inexplaining the behaviour of companies on the capitalmarket. Stamp duty on new issues and withholding taxcontinue to disadvantage investors and issuers. The nega-tive effect is most conspicuous in the divergent devel-opment of issuing volumes in the foreign and domesticsegment of Switzerland’s bond market. The record vol-umes issued on the Swiss franc capital market in 2005and 2006 show that the booming foreign segment hasmore than made up for the fall in the domestic segment.These record volumes also signal that the Swiss bondmarket remains attractive for issuers (when leaving outof account the stamp duty on new issues).

7 Swiss capital market

• The Swiss capital market should be an attract-ive niche provider for the issuing and trading ofcorporate capital.

• Positioning as a world-leading location for theissuing and trading of innovative investmentproducts in all currencies.

• Retention of the Swiss franc’s position as an attractive issuing currency and diversificationoption for international issuers.


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As the only western industrialized nation to do so,Switzerland still partly retains largely unmitigateddouble taxation of joint stock companies. For Swisscompanies this makes equity financing more expensivein comparison with internal financing from accumulat-ed earnings or financing through bank loans. This isparticularly disadvantageous for new companies with-out access to the international capital markets. Thelatent danger of taxation of capital gains as a result ofindirect partial liquidation, which made financiallysensible succession arrangements more difficult in par-ticular, was fortunately eased in the corporate taxreform of January 2007.

MeasuresThese facts and trends underline the importance ofmeasures aimed at ensuring the competitiveness ofthe Swiss capital market. We also need to look intothe extent to which niches can be expanded andfurther developed. The attractiveness of a capitalmarket is determined by a range of factors. But adirect influence can be had only on taxes, theamount of regulation and the financial market infrastructure. The measures derived therefore con-centrate on these, as outlined below:

7.1 Abolition of the stamp duty on new issues.

7.2 Ensuring Swiss regulation is in line with inter-national standards in order to safeguardSwitzerland’s international reputation.


Aspiration

Switzerland is still well positioned . . .

Commodity trade finance (CTF) involves short-timeloans made to globally-active trading companies(“traders”) for specific purposes. They are usuallygranted to finance a specific business transaction andallow the trader to pay the purchase price of mer-chandise acquired for export (this is mainly raw mater-ials and/or semi-finished products, such as crude oil,metals or agricultural products, in large amounts)directly on delivery by the trader’s supplier, and to paythe logistics costs (freight, insurance premiums, stor-age costs, currency and price hedging costs, etc.)directly connected to the transaction. As a general rule,the purchase price for the merchandise is due for pay-ment to the supplier before the proceeds from the salethereof can be collected. The role of the banks is main-ly to bridge the trader’s financing gap and to handlethe flow of payments and goods through use of suit-able instruments (e.g. documentary credits, documen-tary collections, standby letters of credit, bank guar-antees, etc.).

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Commodity trade finance is almost without exceptiona cross-border business. The purchase markets aremostly in developing and emerging countries with sig-nificant raw materials. The traders are not in generaltied to a specific location and can therefore choose thelocation which is most favourable for them (whetherfrom a legal, regulatory, tax-related, political or otherperspective).

CTF currently offers good business opportunities forthe Swiss financial centre (especially in Geneva andZug). This area of business has grown steadily in recentyears and is profitable for the traders and for the banksand service providers.

. . . but not without downside risksDespite currently favourable location and frameworkconditions for Switzerland, downside risks exist andthere is also room for further optimization:

The credit risk for the banks which provide commod-ity trade finance has always been seen as the most im-portant risk in their business. Accordingly, the changesresulting from Basel II have undeniable implications forcommodity and trade financing. National features ofthe implementation of Basel II may lead to significantdistortions in the capital-backing costs of domesticbanks in comparison with foreign competitors.

8 Commodity trade finance

• To extend Switzerland’s position as a leading financial centre for structured commodity tradefinance.


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Finally, payments from the bank to payees in docu-mentary credits and bank guarantees can be preventedby temporary decrees. Court practice differs greatlyfrom canton to canton. Often a major loss of trust anda loss of international standing are the result.

An important aspect for commodity trade finance dealtwith from Switzerland is the taxation rules which applyat cantonal level for holding companies, domiciliarycompanies and conglomerates. These regimes have recently been subject to criticism from the EuropeanCommission. The retention of competitive taxationregimes for CTF holding companies, domiciliary com-panies or conglomerates is therefore important fromthe point of view of the financial industry.

Furthermore, trading companies are only subject to theprovisions of Swiss money laundering law insofar asthe trading is carried out for the account of thirdparties and the transactions take place over the stockmarket. Traditional commodities trading, i.e. buyingand selling for one’s own account, does not form partof the legislation. Commodities trading with deriva-tives, on the other hand, is monitored above a certaintransaction amount. Commodities traders are subjectto little regulation in other countries. Trading housesin London and New York are not subject to the provi-sions of national money laundering legislation.

International legal assistance in criminal matters and do-mestic proceedings can lead to an avalanche of indis-criminate blocking of accounts, paralyzing the businessactivities of a trading company and finally causing it todefault. It is often the case that trading companies basedin Switzerland are prevented by such measures from pay-ing their suppliers, salaries, rent, taxes, etc., and cannoteven be informed by the bank about the account blockand the reasons for it.

Measures8.1 The Basel Accord (Basel II) should be inter-

preted and applied in Switzerland such thatfreedom of choice as to the most suitable ap-proach is maintained. In addition, the “Swissfinish” should not add further to equity costsin comparison with foreign competitors.

8.2 Appropriate implementation of the 40+9 FATFrecommendations while maintaining bank-client confidentiality (no additional due dili-gence and monitoring obligations in tradingand with regard to commodity and trade finance, see measures 1.4 and 2.2).

8.3 Competitive taxation regime for CTF holdingcompanies, domiciliary companies and con-glomerates.

8.4 Ensuring clear processes and procedures in ad-ministrative and legal assistance (prevention offishing expeditions and indiscriminate block-ing of accounts, see also measure 1.5).


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The Swiss Bankers Association is the leading organisa-tion of the Swiss financial centre and

• represents the interests of the banks and securitiesdealers vis-à-vis the authorities in Switzerland andabroad;

• promotes Switzerland’s image as a financial centrethroughout the world;

• fosters open dialogue with a critical public inSwitzerland and worldwide;

• develops the system of self-regulation in consult-ation with regulatory bodies;

• supports the training of junior staff and establishedexecutives in the banking industry;

• facilitates the exchange of information and know-ledge between banks and bank employees;

• coordinates joint projects undertaken by the Swissbanks.

The Swiss Bankers Association was founded in 1912 inBasel and today has a membership of 363 institutionsand approximately 11,300 individual members. The Association’s Office employs a staff of 54. A total of 12 commissions deal with key issues affecting the industry. Serving on these commissions are representa-tives of various banking groups as well as specialistsfrom the SBA. The SBA’s main objective is to safeguardand promote an optimal environment for the Swiss financial services industry at home and abroad.

The Swiss Bankers Association


Impressum

Publisher: Swiss Bankers Association, BaselTypesetting and printing: Kreis Druck AGThis brochure is available in German, English, French and Italian.


Swiss Bankers AssociationAeschenplatz 7PO Box 4182CH-4002 Basel

[email protected]

T +41 61 295 93 93F +41 61 272 53 82


Download - September 2007 Swiss Banking â€“ Roadmap 2015

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