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Dawn of a new transparent era: investors on how to prepare for AEOI

We speak to independent asset managers to get the inside track on what the Automatic Exchange of Information bill means for their businesses.

In a global bid for transparency Switzerland, along with close to one hundred other countries, has signed the new international standard on the automatic exchange of information.

Home to banking secrecy, Switzerland passed the bill in December 2015, meaning data collection will begin in 2017 ready for information to be exchanged by 2018.

What do independent asset managers really think about the changes and what will the Swiss landscape look like once the dust settles?

Citywire Switzerland spoke to independent asset managers across the country to get their take on the incoming regulations.

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Alexandre Toussaint, APPLETREE Asset Management

Geneva

2017 will see the beginning of a new era for the Swiss financial centre, with the start of the Automatic Exchange of Information Act. We can expect consequences at three different levels.

At the reputational level, Switzerland will benefit. The country will effectively once again become a member of the global financial league alongside other major countries. This will put an end to the recent habit of some European leaders using Switzerland as a scapegoat for their internal budgetary problems.

At a business level, we might expect some benefits from the weakening of Switzerland’s former safe haven peers as they will all lose their biggest competitive advantage: banking secrecy.

However, this will not solve the Swiss wealth and asset manager’s biggest challenge: the lock over the European Union market.

At the operational level, the act will generate additional costs and complexity for all financial professionals. With the need for new IT systems, the burden of the new ‘common reporting standard’, and the administrative and legal consequences of supranational rules, you can be certain that the bill will grow over time.

In addition, the desire of Swiss authorities to be first in class when it comes to the new standards carries a risk of huge extra costs for Swiss firms, while there is no guarantee that other countries will effectively enforce the system.

This new era represents a huge opportunity for Switzerland providing it is able to offer three key things: stability, quality and innovation.

The last of these looks particularly challenging. Building up an international innovation cluster such as Basel for the pharmaceutical business requires a scarce resource: venture capital.

Are we ready?

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Morteza Firouz, Azure Wealth Switzerland

Geneva

The automatic exchange of information and the end of banking secrecy have been hot topics among Swiss bankers for several years, even before the troubles of UBS in the US in 2007.

Since the 2008 financial crisis, and with increased awareness of the public debt burden of Western countries, it has been clear that offshore financial centres don‘t have a future. Swiss banks have been preparing for this new regulatory environment, despite the uncertainty surrounding coming rules.

The automatic exchange of information is an integral part of this new environment; it has been well integrated by Swiss banks and their clients, which have had several years to prepare for being compliant.

This matter is therefore not an issue in itself for banks, as Switzerland is today at the vanguard of compliance and transparency.

New regulations have not prevented Swiss banks from attracting new assets and clients over the past few years, but they have resulted in enormous additional costs and played a part in the consolidation of the banking sector in Switzerland.

I think the real challenge for Swiss banks in the coming years will be coping with additional compliance costs and lower profit margins resulting from new transparency rules, rather than competition with other financial centres.

I'm confident the banking industry will face this challenge and remain an important part of the Swiss economy.

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Martin Straub, Envisage Wealth Management Services

Zurich

Automatic information exchange of client financial data under the US Foreign Account Tax Compliance Act (Facta) and the OECD’s Common Reporting Standard (CRS) is now a reality.

Information is already flowing under Facta and will start to flow under CRS in September 2017. These two unprecedented invasions of personal privacy now remove any remaining illusion of client confidentiality or privacy.

One might think this sounds the death knell for Switzerland’s financial sector, whose business model was basically hiding people’s money from prying, often kleptocratic governments and charging a premium for that service, commonly estimated at around 1.75% per annum on assets.

However, responding to shock therapy, Switzerland is rising to the challenge as so often in its 500-year history. After leading the way in regularising accounts, the industry is adapting, innovating and adjusting.

We see a vital industry further fragmenting – in a good way – into ever-smaller, more numerous, more nimble, highly focused specialists. Meanwhile, banks are driven by regulatory and compliance pressure to consolidate into pure ‘commodity service’ providers.

The main client needs remain the same: tax optimisation (saving, deferral, reduction), asset protection (major and growing), investment flexibility (invest in what you want), and inheritance and succession planning.

The game will be won through service quality. Switzerland’s strength lies in providing value to clients. Finding ways to protect clients wherever legally possible from governments intent on squeezing every drop, while at the same time giving governments what they want.

Providers who deliver on their promises and get service delivery right will profit enormously. Switzerland looks to be doing just that, reinventing part of itself yet again.

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Martin Huppi, Hérens Partners

Zollikon

Switzerland’s reputation has faced some serious challenges recently, with the financial industry being one of the hot spots.

Added to this, the Automatic Exchange of Information Act will come into force at the start of 2017. Was Switzerland’s past success based solely on bank-client confidentiality and tax evasion?

We are convinced there is much more to it than that.

Switzerland’s private banking industry has for some time been fully aware of the fact that undeclared money is no longer a viable business proposition, and instead sees three other elements that will be crucial going forward.

First, political stability and the accountability of the government is an asset that is becoming ever more important in a rather uncertain world.

Second, the excellent level of service Switzerland already offers will have to be maintained and continually improved as service quality will be one of the distinguishing factors amid intensifying competition from other financial service centres.

Tightening margins pose a threat here, and only those institutions that are able to deliver first-class services to clients with the utmost efficiency will survive.

The third element is sophisticated financial know-how and performance. Clients are much better informed these days, therefore the need for discerning, broad-based advice is key.

Competitors that are able to adapt their business models accordingly will be the winners of the consolidation that will take place over the coming years. The disappearance of bank-client confidentiality is an opportunity rather than a threat.

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