The concept of “regulatory arbitrage” – gathering much pace during the last decade – has become one of the premier philosophies driving realignment between European and Asian financial centres, striving to attract the biggest share of business from fund houses and wealth managers.
When looking at which centres will win asset flows and new set-ups of investment hubs, there are a large number of inter-related factors to consider. These include reputation, regulation, perception, transparency, quality of life and taxation.
Further fuelling the debate have been attacks – some say politically motivated – on Switzerland, the Caribbean and other “offshore” centres by US authorities and their associates in the G20 and OECD, keen to increase their tax take in a post-crisis, deficit-burdened environment.
This US and European pressure – including the heavy-handed draft Alternative Investment Fund Managers Directive (AIFMD) – appears to be encouraging the migration of much investment business to European centres, although this can sometimes be the first stage of a move further East.
London too is suffering some defections by hedge funds, particularly to Switzerland, from groups trying to escape the expected AIFMD regime. And Switzerland, under threat from Singapore and other heavyweight competitors in the private banking and funds sphere, is fighting tooth and nail to keep its share of business and attract London’s malcontents.
“We only want business today if it is clean,” says Ray Soudah, founder of Zurich’s best known M&A consultancy, Millenium Associates, commenting on the post-secrecy Swiss landscape. His belief is boutique banks, which previously thrived on tax and secrecy-led solutions, will fade away or be swallowed up by bigger players, which will re-shape the wealth management landscape.
“The smaller Swiss players will be wiped out. There are no niches left for them and the time for re-invention is over,” says Mr Soudah.
His colleagues in the closely-knit Swiss business circle, keenly aware of a threat from the East, are working proactively to attract new business, even if it means hunting on their rivals’ doorsteps. A government led initiative, the Swiss Business Hub, has overseen the opening of three offices in China, one in Singapore and the latest addition in South Korea.
Each country is judged according to 13 criteria, including GDP, bilateral trade with Switzerland and appeal to Swiss exporters. South Africa, for instance, has been downgraded, whereas most Asian locations are in the ascendancy, with wealth management identified as the key area for growth.
But there is difference of opinion as to whether the Swiss strategy will prove successful. “The US and Asia are both looking at Switzerland. The US doesn’t like it one bit, and they will do something about it,” says the former boss of a leading Swiss asset management group.
“But the Asians are a lot more tolerant and relaxed. They are quite happy for Switzerland to carry on doing what Switzerland has always done. They don’t see it as a threat.”
Room to grow
Smaller banks think they can still grow and their country can yet absorb assets and staff numbers to keep Switzerland at the centre of the wealth management world. “Switzerland has made it clear that the country is ready to welcome a move from asset managers from other European locations,” says Serge Ledermann, chief investment officer at Banque Heritage in Geneva.
“The country has the capacity to absorb this in terms of infrastructure, labour force and real estate. It’s no secret that the authorities want to develop the legal and tax framework so that it will be no problem for hedge funds to relocate to Switzerland.”
He believes ongoing consolidation among institutions in both Zurich and Geneva will create space for new actors to enter the country. At the same time, possible restrictions on remuneration of top staff in listed companies, may drive talent to smaller private banks, reckons Mr Ledermann.
However, some Zurich power-brokers have a less positive prognosis. “All countries in the world are short of money and need more tax take,” says a former board member of a major Zurich private bank. “Naturally, those countries with the largest deficits are attacking Switzerland. But our problem is that Switzerland was never designed to have a central government. We are left with part-time government members, not qualified for political tasks, who have been forced to defend the country from sustained attack from global heavyweights. What we are seeing today is the UK and Germany putting up taxes and increasing regulation. So hedge fund groups and other funds will move to Switzerland, but are the Swiss able to keep them there? Probably not. Many will move from Switzerland to Singapore. The cleverer ones will move to Singapore straight away.”
