It has not been a good few weeks for banking in Switzerland.
The country’s biggest player, UBS, saw its own Nick Leeson-style rogue trader – Kweku Adoboli – sentenced in London several days ago following his conviction for the biggest fraud in British history, which cost the bank some $2.3 billion.
With Adoboli starting a seven-year prison stint for, as the prosecution claimed, playing God with UBS’s money, executives at the bank will be grateful that the English jury did not buy his defence.
Far from acting alone, he told the London Crown Court, he had simply implemented behaviour learned from fellow UBS traders, as the bank’s hierarchy encouraged rule bending with the aim of racking up as much profit as possible.
Indeed, he ultimately maintained that senior bank executives knew what he was up to with his raft of fictitious deals.
While the guilty verdict exonerates bank bosses of complicity, senior figures in Zurich will still be squirming in their leather chairs because, right up until the police escorted Adoboli from the bank’s City of London offices, senior management had tipped the diplomat’s son as a star performer.

Tax scuffles

The Adoboli affair is highly embarrassing, but potentially far more serious is the ongoing scuffle UBS is having with the tax authorities of various European and American governments.
A fortnight or so ago, German investigators raided the bank’s local offices across the country in an attempt to unearth information on tax fraud. A spokesman for the German taxman told the local correspondent of Britain’s Guardian newspaper: ‘There is an investigation into several hundred domestic customers of the Swiss bank UBS on suspicion of tax evasion.’
According to the report, the bank has denied any wrongdoing. A spokesman told the newspaper: ‘UBS fully supports the concern for German clients to be tax compliant. In 2009, UBS undertook a thorough scrutiny of its cross-border business and adapted the rules where necessary. UBS takes disciplinary action against any employee who commits infractions against these rules, up to dismissal.’
If only it were just the Germans. In addition to the authorities in Berlin rattling the UBS cage, tax inspectors in Britain and the US are also sniffing around. At the beginning of this month, former UBS banker Christos Bagios pleaded guilty to running a scheme to help US citizens duck paying more than $1 million in tax. According to a report in the Financial Times, Bagios was charged with conspiring with five other Swiss bankers in setting up the illegal avoidance structures.

No questions asked

Of course, UBS is hardly the only bank in Switzerland – it is just the poster child for the current environment in which traditional and renowned concepts of banking secrecy are being swept away.
The days are long gone when finely dressed foreigners strolled into the dark rooms of Geneva banks to be met by a discreet gentleman in an equally well-tailored suit, and then to pass over an attaché case filled with notes with no questions asked.
‘The discussions with the US and some European countries on the disclosure of tax data has been a very hot topic,’ smiles Robert Furter wryly, aware of the massive dose of understatement employed.
Mr Furter is a banking specialist lawyer – and former managing partner – at Zurich-based law firm Pestalozzi. Swiss banking secrecy, he adds, actually died long ago.
‘Numbered accountants no longer exist,’ he says. ‘The banks always know who their customers are – it is about 20 years since we’ve had regulation covering that issue.’
The lawyer maintains that Switzerland has over recent years adopted a mantra of transparency regarding private banking. Bern held the line for some time on the delicate distinction between tax evasion and tax fraud, with the government taking the view that the simple act of not declaring monies – in other words, tax evasion – was not a criminal act for which it would provide information to foreign authorities. But recent international treaties and deals, not least with Germany and the US, have forced that approach to change.
‘The fundamental change in business strategy in Switzerland is that banking secrecy has gone,’ states Andreas Hünerwadel, a partner at Zurich law firm Wenger & Vieli.
‘And the whole concept of catering for untaxed money is going away. That is a tremendous change – and it means a tremendous shrinking of the whole private banking industry.’
That has resulted, adds Mr Hünerwadel, in the demise of many smaller local and foreign banks in Switzerland, and indeed even the bigger players are shrinking resources in that area. ‘A lot of people have been let go,’ he says. ‘There was a huge service industry attached to that business. There used to be tons of external asset managers – they will all go away as the tax planning and tax structuring business shrinks.’
Key to this spirit of transparency and openness is the still relatively young regulatory agency, the Financial Markets Supervisory Authority (Finma). Although the two-year-old body is not exactly new – it is the result of a merger of the existing banking and insurance regulators.

Beefed up regulator

What is new, say Swiss business lawyers, is the regulator’s beefed up and more robust approach. Whereas its predecessors arguably employed the type of discretion associated with old-school Switzerland, this new incarnation has had a testosterone injection.
‘Some have described the creation of Finma as a tsunami,’ says Homburger partner René Bösch. ‘It probably wasn’t that bad, but they have stepped up regulation and enforcement considerably in the fields of private and cross-border banking. Capital and liquidity has become a real issue for Swiss banks, so we have much more regulation on those fronts. And in relation to enforcement, the regulator is asking much nastier questions than the banks had been used to. They are also forcing internal investigations so the banks can learn from what they’ve done in the past.’
Swiss politicians have not finished with their increased zeal for regulation. Within the past few weeks, the country’s parliament adopted an amendment to legislation on collective investment schemes that will make it tougher to sell structured products, adding an increased requirement for pre-sale information and education to protect investors.
While this is potentially a hard pill for the Swiss financial services sector to swallow, local lawyers aren’t complaining – although out of deference to their banking clients, they aren’t exactly putting out the bunting. But Mr Bösch readily acknowledges that increased regulation has been good for the legal sector. ‘The regulator often instructs banks that they must have external advisors conducting internal investigations,’ he points out. That boom has resulted in Homburger devoting ‘a large amount of resource to those issues’, as the firm is currently running up to 10 internal investigations in the bank regulatory field.

Global image

To be fair, Mr Furter maintains that the banks themselves recognise that increased regulation was overdue and that ultimately it improves their global image. However, the big concern is cost. ‘That is the real issue for the banks and a legitimate fear,’ says Mr Furter. ‘And it is not only Swiss regulation that is costly, but US regulation – the Fair and Accurate Credit Transactions Act 2003, which affects all financial institutions in the world, requiring them to have operational procedures that are extremely constant – is also an important factor.’
Vischer partner Rolf Auf der Maur agrees that enhanced regulation is driving up costs as each bank has to employ specialists in the regulatory regimes of the various countries of their customers.
‘It is a difficult situation for the banks,’ he says. ‘They face a combination of higher costs and lower margins and are having to make strategic decisions on cost savings. For example, should they combine private and investment banking divisions?’
While banking and wider financial services regulation is keeping a large swathe of the Swiss business law profession occupied, other areas of work are also maintaining a fairly healthy glow in internationally difficult economic times.
‘We definitely can’t say Switzerland has remained completely unaffected by what is happening around us,’ says Christopher Boog, a partner at the law firm Schellenberg Wittmer, ‘although we like to think that is the case.’ But, he adds: ‘There was a lot less impact from the financial crisis and the eurozone crisis in Switzerland than there has been in other European countries or the US.’
Historically, Switzerland has been strong in the pharmaceutical and life sciences sectors, and both have navigated the global economy fairly well. Likewise, new technology businesses have been flourishing in the country, with US search engine giant Google reportedly employing more than 2,000 people in Zurich.
Vischer’s Mr Auf der Maur, himself a technology and telecommunications specialist, points to a combination of factors boosting that sector: ‘The relative strength of our data protection legislation, the availability of a highly skilled workforce and relatively flexible employment legislation, good infrastructure for data centres and a stable political environment’.

M&A doldrums

In common with just about every jurisdiction in the Western world, mergers and acquisition activity has been in the doldrums for some time. However, some deals are being done.
Pestalozzi managing partner Mr Kramer points to his firm’s involvement in two of the biggest recent Swiss deals – the initial public offering of commodities trader Glencore and Johnson & Johnson’s purchase of Solothurn-based medical device manufacturer Synthes. ‘With the small size of the Swiss market,’ he says, ‘a firm doesn’t need hundreds of transactions to be successful. One, two or three really big transactions – that helps every firm.’
Homburger’s Mr Bösch agrees that some M&A exists, although it pales in comparison with pre-crisis levels. ‘Perhaps 18 months ago, there were law firm business plans that anticipated that sector would by now have returned to its 2007 levels, but that hasn’t materialised.’
Mr Bösch maintains his firm’s corporate team is busy preparing deals, but no-one is counting any chickens. ‘All you need is someone senior at the International Monetary Fund to say things don’t look good and the next thing the chief executives involved in these prospective deals pull the plug. What seemed to be a good deal yesterday may not be a good deal today.’
Also in common with private practice across Europe and the US, Swiss lawyers are finding the corporate world to be increasingly competitive, with general counsel taking a harsh view on fee rates.
‘They are certainly looking to move to alternative billing structures – caps, etc,’ says Mr Kramer. ‘The market has become increasingly competitive – we have to pitch more for work than we did in the past.’
Vischer’s Mr Auf der Maur maintains hourly billing is still the dominant system in Switzerland – although he personally is not fond of it. He adds: ‘Increasingly Swiss law firms must offer blended rates and fee caps – and particularly for the structured finance sector we have to offer flat fees.’

Muscular franc

Contributing to the squeeze on fees in relation to foreign clients is the muscular Swiss franc. The currency continues to ride high relative to the ailing euro, UK sterling and the US dollar, as traders view the jurisdiction as a safe haven in rough international economic seas. That makes everything in Switzerland – from a cup of coffee and a croissant to top-level local legal advice – extremely expensive for clients from Frankfurt, London and New York.
Says Mr Auf der Maur: ‘We have more discussions about fee levels with international clients than we had. Sometimes we have to bill in euros and sometimes we have to compromise on the bill.’
Nonetheless, international clients are still instructing Swiss law firms as the local profession is widely viewed as being top drawer. But that hasn’t stopped the gossip mill churning out rumours that a major global player is going to plant a flag in Zurich.
Indeed, only a year and a half ago, Swiss business lawyers were convinced that London magic circle player Allen & Overy had not only taken out a lease on Zurich premises, but that it had also headhunted various local teams to put behind the desks. Freshfields was also mentioned, although not with the same degree of certainty.

Recurrent rumours

At the time, A&O was officially cagey. And in the end the rumours proved to be little more than hot air. Local partners – indeed, the same who had expressed such conviction that the magic circle would soon be challenging them in their own backyard – acknowledge that similar rumours do the rounds every five years or so.
But will it ever happen? Unlikely, says Pestalozzi’s Mr Kramer: ‘Ultimately, all the major Swiss law firms like their independence. And the clients don’t need to have the big law firms here – they get high-quality service from the local firms. That makes it harder for the big global firms to come here. And the Swiss market is not big enough from an economic perspective.’
Homburger’s Mr Bösch suggests that the global players themselves vacillate considerably in relation to Switzerland: ‘We had been told by some firms that it wasn’t a question of whether, but a question of when. We now understand from the same firms that it is no longer on their short- to mid-term agenda as these firms are now far more interested in Australasia. And the magic circle firms can easily serve their Swiss clients without being in Switzerland.’
But Mr Boog at Schellenberg Wittmer adopts the never-say-never position: ‘I don’t think it will happen in the next couple of years. Though I wouldn’t fully exclude it, depending how the market evolves.’