What are the biggest legal challenges facing Swiss independent wealth managers?
The Finma application process is seen as burdensome, which has reduced the optimism of many wealth managers. We see clients leaving Switzerland and setting up their headquarters in jurisdictions such as the UK that are seen as more commercial.
What’s good and what’s bad about the new regulations?
Switzerland needed to catch up with the EU, and its general alignment with AIFMD in Europe does help create a clearer European market for investors.
However, it seems that some activities such as fund distribution are now even more regulated than in Europe, which in the end is not beneficial for the Swiss economy. It is apparent that there is clarity under the new rules and that the Swiss system is more onerous, even in terms of disclosures for example, than elsewhere.
Overall, what impact will the changes have on the community?
It is estimated that more than 1,000 small Swiss fund houses and wealth managers could be forced to close or merge as a result of the tighter regulations. This affects mainly the smaller boutiques, which have five or fewer staff.
However, the main effect is that hedge funds will not be opened up by entrepreneurs in Switzerland any more. With the emergence of the AIFM platform many managers may feel the future is in an EU state.
Others will amalgamate with local platform equivalents, which is fine, and may provide a better risk-management solution overall.
It will, nevertheless, stifle the industry at a point in time when it should be growing – as it is in the EU now that there is more clarity on the AIFMD.
Will firms leave Switzerland?
It’s a reality, and we have noticed some Swiss firms, mainly distributors, are relocating in London.
We are also in active discussions with Swiss managers about centralising in New York or London. Some of the scaremongering of the past in relation to firms moving was linked to the press over-hyping the tax benefits of being in Switzerland. We never believed this was a risk for London.
Today the circumstances are different. There is a clear economic impact on the industry – if small and nimble asset managers can move they will. This will hurt the job market and the real estate market.
Switzerland was a haven for tax and regulations; if it loses both there is a real risk that some of the industry will move. People are concerned about what is good for business. This is not a question of paying less tax on profits, this is a question of being able to generate profits.
How will the new rules affect the investments independent asset managers can offer?
Funds will need to register to be offered in Switzerland. They have started doing that well enough. However, the new rules on prospectus disclosures is another hurdle that may put some off. So the new environment is not great.
The disclosures on fees for distribution in prospectuses handed out in Switzerland may limit the number of fund managers wishing to distribute in Switzerland. This may reduce choice.
It is likely that some Switzerland-based asset management groups may seek to find ways to access managers that are not offered in Switzerland, probably through feeders or other types of fund-of-fund vehicles.
What consequences will this have for end clients?
The increased barriers to entry which are caused by tighter regulations, coupled with the closure or merger of many smaller wealth management groups, will automatically result in reducing the diversity of product offerings available to investors.
More regulation, however, usually creates a safer environment for investors, and we hope this will be the case in Switzerland, and that it will compensate for the reduced offering.
Interestingly, and despite the rule covering appointing a local legal representative and a paying agent that came into force in 2015, most non-Swiss fund managers chose to pursue their activity in Switzerland and comply with the rule.
In comparison, non-EU managers were much more reluctant to comply with AIFMD rules on Non-Principal Private Residence even if, in some EU countries, these are less onerous than in Switzerland.
Will lawyers and accountants really lower their prices?
The market for service providers will settle down once the regulations become clearer and become part of everyone’s daily life. We are still paying for the learning curve of all the actors of the industry, no matter what everybody says. But once the application of regulations becomes a type of commodity the pricing will go down.
The fact that this market is very fragmented, with a lot of big and small players offering the same service, and the fact that wealth managers will know better what they need, will lead to a more demanding client base.
Some firms like ours have already adapted to that, and we recognise that technology can help a lot as much of the documentation can be standardised and systematised.
The systemisation of processes can lead to significant cost reductions. No one expects a compliance manual to be customised. They expect a lot of it to be standard, and for the special areas to benefit from the know-how of more experienced pragmatic advisors.
Service providers such as accountants and law firms will have either to streamline their production, mainly using IT, or be more specialised in higher-value businesses such as fund platforms that effectively combine the advice into a solution.
Laven Partners is a consultancy with offices in London, Luxembourg, Geneva, Singapore, New York and Barbados, offering solutions in global regulatory compliance, operational and investment due diligence and operations consulting.