Automatic Exchange of Information (AEoI), the system that came into force in Switzerland on 1 January 2017 for clients from European Union countries, merely represents the end of a process that began in 2005 with the European directive on the taxation of savings.
The implementation of AEoI has had two major consequences. Firstly, it has increased costs because of the huge sums that banks have had to spend to be ready by 1 January. Secondly, it has led to a change in working methods, taking into account the exchange of data and banks' responsibilities regarding the documentation of their clients' tax residence. The new situation is also shaking up the market: competition between domestic and international banks is becoming tougher because clients are more likely to compare prices and the services on offer. As a result, banks in Switzerland are seeing their competitiveness come under threat, especially since a level playing field, which everyone claims to want, is not currently guaranteed.
According to the EY Bank Barometer 2017 published in January, 74% of Swiss private banks taking part in the survey did not see any significant outflow of money from foreign clients in 2016, despite the imminent application of AEoI. In 2015, the percentage was lower at 53%. According to the survey, although banks regard tax regularisation issues as largely behind them, they are still having a significant cost impact, totalling between CHF 300 million and CHF 500 million according to the Swiss Bankers Association. In Switzerland, the adjustments that banks need to make to separate out, produce and store data, and to develop formats compliant with the standards defined by the OECD and USA, require considerable investments in technology, the cost of which must be covered somehow. In addition to "recurring costs", particularly those arising from the large numbers of tax reporting documents that must be produced because of clients' varying countries of origin, there is the cost of training relationship managers. These managers must now handle taxed assets in a way that complies with the requirements of each client's country of origin.
The new environment is also making it more important to offer a service tailored to each client's country of tax residence, since banks must now take into account the client's tax context and offer a management approach customised to each jurisdiction. What is presented as a simple formality is actually extremely complex, and it is interesting to note that Switzerland is one of the few countries in the world that has to produce tax reporting documents for several jurisdictions, whereas no domestic bank in any other country is capable of producing more than one! However, Swiss financial institutions are now accustomed to the situation and must, to meet AEoI obligations, establish the client's actual tax domicile, with which the bank must exchange information. That task, which may appear simple, is subject to strict rules and is also very complicated for the "traditional" clients of international private banks (multinational families, joint accounts etc.). It is therefore unsurprising that specialist consultants and providers are offering new outsourcing solutions in these areas, in order to share the production costs arising from all the fiscal obligations that banks have in respect of their clients or tax authorities in clients' countries of origin.
It should also be emphasised that, although exchange of information – under FATCA and AEoI with all first-phase EU countries – is now underway, it has been introduced against a background of competition between countries that does not favour Switzerland. Certain countries have not made the same commitments as Switzerland and so are not exchanging data in a reciprocal way. As a result, they are enjoying an inflow of money that "distorts competition" in the words of a recent SBA publication. Reciprocity issues must therefore be dealt with as a matter of urgency by all countries concerned so that they are all on an equal footing, but also to avoid distorting competition. As well as this new form of rivalry, there is that between domestic and international bankers. While the role of domestic private bankers has always revolved largely around tax issues, that of international private bankers has until now depended mainly on quality of management, wealth services and innovation. The two businesses will now converge because they will offer similar tax-related services, forcing international banks to hone their offering and constantly refresh their approach. Factoring in tax matters must become an automatic reflex, for both client and banker, and that is sure to make international private bankers more competitive.
Finally, AEoI marks the end of a long compliance process for clients of banks in Switzerland. The process has also involved the introduction of strict rules regarding cross-border activities, and will continue with the implementation of suitability and transparency rules as part of Switzerland's Financial Services Act. It is a real assault course and, at the end of it, our industry's practices, relationship with its clients and earnings power will have undergone huge change. The irony of this whole episode is that Automatic Exchange of Information – the culmination of 15 years of work to harmonise rules between countries, open up access to data and globalise our industry – is happening just as politicians in some countries are questioning excess regulation and considering more inward-looking policies. The political globalisation that led to this wave of transparency could now be called into question by the rise of protectionism that we are seeing in several countries.
CEO Private Banking