The economic outlook in many developed jurisdictions remains bleak – tax revenue is on the slide, debt service costs are up and the need to spend continues to grow as populations age.
As a result, various prominent tax authorities are attempting to fill gaping holes in treasury coffers by closing off-shore tax loopholes and pursuing citizens to corners of the world where, until recently, they would never have bothered to look. With that cocktail swirling round in the mixer, developments in the wealth management sector have been evolving almost daily.
Ironically, this deluge of regulation is driven in part by the need for governments to increase revenues following a ‘bust’ caused to some extent by complex financial transactions. This is turning a sector that – while often opaque – was generally viewed as simple in operation, into something far more complex and reliant on ever-more sophisticated approaches.
These changes impact directly on high net-worth individuals and their specialist lawyers – most obviously in four areas: legacy issues, revenue, regulation and transparency.

Kristallnacht origins

Legacy issues relate to problems that have plagued the industry for the past 50 years. The concept of ‘statutory bank secrecy’ is not even 80 years old and was only codified into law as a result of the 1938 Kristallnacht pogrom perpetrated by the Nazis in Germany.
Its original purpose was to protect those suffering from persecution in Europe. It is now almost 70 years since the end of the Second World War and a little more than 20 years since the end of the subsequent Cold War.
Over the intervening years, the original reason people kept their financial affairs secret has been replaced by a practice of not paying taxes. This is a significant issue because theoretically the EU could throw 40 to 50 per cent of its citizens in jail.
Countries and financial institutions continue to struggle to solve this issue. For example, Switzerland recently agreed withholding tax agreements with Germany, the UK and Austria (with others to come). Lichtenstein imposed a variant on that approach, but both methods represent an attempt to resolve the past historical legacy issues associated with undeclared money and to create a uniform basis for all taxpayers in a given country. While countries such as Switzerland and Liechtenstein have been good about taking this approach, others have been less interested.

Unearthing revenue

Countries need revenue and attempt to unearth it any way they can. Approaches vary, including finding new and unique tax systems, such as the recently adopted French approach to trusts. Alternatively, governments can simply increase tax rates and impose austerity measures. The US is at the forefront of attempts to generate revenue not by changing its tax laws, but by greater and more significant extra-territorial enforcement of them, particularly offshore.
As the need for revenue increases, and as the sources to generate it decrease, tax authorities become more creative. This results in aggressive enforcement actions, such as those currently seen imposed on US and German individuals, as well as increased government action that targets banks specifically.
But a core tactic for governments is the imposition of more complicated and sophisticated tax laws such as those established in the UK and France. In fact, the French even threatened taxation based on citizenship in the course of the recent presidential election.
Elsewhere, in the regulatory field, no country or securities regulator wants to be responsible for another Madoff-style scandal. Regulators are scared of their banks failing and of a major fraud being perpetuated on their watch.
Consequently, there has been an unprecedented global increase in regulatory requirements, both in actual law and in practice, as to how they oversee financial services and how clients must behave.
It can be argued that this is more about governments being seen to be doing something than a desire to help citizens. In fact, many of these rules arguably do not help individuals at all, but create a harder, more complex system for everyone. For example, both the US Dodd-Frank Act and Switzerland’s ‘too big to fail’ legislation are potentially more about regulators protecting regulators than about protecting the interests of the companies they regulate.

Transparency

There is a perception among many that the financial crisis was caused by institutions lacking operational transparency. Governments are increasingly forcing such transparency on markets and financial institutions, which is not necessarily resulting in stronger institutions, but is creating more transparency by numbers. It could be said that this is a good thing, but it can also be perceived as an unnecessary regulatory burden.
For practitioners, these wide-ranging developments have triggered a different way of working. No longer can specialist lawyers look only at their home country’s rules. Practitioners need to approach their clients’ issues from a global perspective and seek input from the many different jurisdictions in which a client operates.
Specialist lawyers now need to practise defensive law. Often, clients are not looking for the correct advice, but rather for advice that they can produce stating that what they are doing is permissible. This approach comes at the expense of clients not telling their lawyers the entire situation – and that can lead to having two lawyers in the room to ensure what was said can be relied upon.
It also may involve longer and more documented memoranda and more sophisticated advice. That means the cost of advice goes up at a time when clients can least afford it.

Marnin Michaels is partner and Marie-Thérèse Yates an associate at the Zurich office of global law firm Baker & McKenzie