Wegelin Case Highlights Private Banking Changes

Wegelin Case Highlights Private Banking Changes

A new era of increased regulation and stringent tax rules is weighing on the Swiss private banking industry in the wake of Wegelin’s announced closure. This may well spur further mergers and acquisitions in the sector. Sarah Krouse and Mike Foster, from efinancialnews.com, report.

By Sarah Krouse and Mike Foster

Reuters

Wegelin & Co’s Friday announcement that it will close after admitting that it helped Americans avoid taxes by hiding assets in overseas accounts marks the latest blow to an industry reeling from a string of regulatory changes.

In the case of Wegelin, U.S. authorities said the bank helped clients hide $1.2 billion in assets. The firm pleaded guilty to a criminal conspiracy charge.

Philip Marcovici, a member of the board of wealth manager Kaiser Partner, said recent charges brought against private banks and wealth managers for helping foreigners hide assets abroad highlight fundamental industry changes that firms should have anticipated.

Ray Soudah, founder of independent M&A advisory firm Millennium Associates, said Wegelin’s closure illustrated a trend that will force mergers on Swiss private banks cutting their exposure to undeclared client assets in Europe and the U.S., where tax has not been paid.

Mr. Soudah said: “This will lead to a significant reduction in their revenue and force a reassessment of the high cost of front offices, which is totally unjustified.”

He said mergers would result, with some smaller firms forced to shut up shop altogether. But Mr. Soudah added that deals were unlikely to become commonplace for at least a year, given that no bank would want to risk taking over a significant amount of undeclared assets deposited with struggling rivals.

He said undeclared assets from clients based in Europe and the U.S. comprised as much as 50% of Swiss private bank deposits five years ago.

“We could be set to see this proportion fall to 10% as clients agree to be taxed, or banks part company with them,” Mr. Soudah said. Undeclared assets deposited by clients in other countries do not pose a problem at this stage, but could become so as other governments seize an opportunity to boost their tax receipts.

The U.S. Treasury Department is in the process of implementing the Foreign Account Tax Compliance Act, or Fatca, which requires greater transparency of accounts and investments held abroad by U.S. citizens. It establishes a new tax reporting framework for foreign financial institutions serving American clients.

Mr. Marcovici said: “Many at the management level were to some extent asleep at the wheel and deluded by profits coming in. They didn’t take action and as a result there will be closing of smaller banks. Mergers and acquisitions will continue, but in some cases you have to ask what is the value of some legacy businesses in the wealth management industry.”

[Click here for the full version of this article, from efinancialnews.com]