Thursday 5 December 2013

Wealth management for all seasons?

Singapore may overtake Switzerland as the world's top wealth management centre. The competition is between a state-driven versus an industry-driven financial sector governance model.
By Woo Jun Jie & Yvonne Guo, Published The Straits Times, The Straits Times, 3 Dec 2013

ACCORDING to World Economic Forum rankings, Switzerland is the most competitive economy in the world, while Singapore is a close second.

This mirrors Deloitte's Wealth Management Centre Ranking, which ranks Switzerland as the most competitive wealth management centre in the world, with Singapore taking second place.

With Asian financial centres such as Singapore and Hong Kong fast catching up with established wealth management centres such as Switzerland and London, analysts are quick to point out that this reflects a shift in the balance of global economic power from West to East. However, this overly simplistic view obfuscates the real story behind Asia's rising wealth management centres.

Competing models

SINGAPORE'S possible displacement of Switzerland as the world's top wealth management centre reflects much more than the rise of Asian wealth or the decline of Western economies.

It is a competition between two distinct models of financial sector governance, typified by the cases of Singapore and Switzerland.

Relative to Switzerland's, Singapore's wealth management industry is a recent phenomenon.

The development of the wealth management industry has also been more state-driven in Singapore. Wealth management was first identified in the Singapore Government's national development plans as a potential growth industry in the late 1980s. The Government has since introduced a slew of grants, concessions and tax incentives to attract fund managers to Singapore.

The Monetary Authority of Singapore (MAS) also allowed some of its funds to be managed by private sector fund managers. Wealth management has since been recognised by the Singapore Government's Economic Review Committee as one of the four "strategic thrusts" driving Singapore's development as an international financial centre.

In contrast, Switzerland's development as a wealth management centre was more organic and involved much less state intervention. Swiss banking dates back to the time of Calvin and the Protestant Reformation. In the 16th century, Jean Calvin created a favourable environment for Protestant refugees by liberalising rules on usury, thus consolidating Geneva's role as a banking hub.

The Swiss experience

SWITZERLAND'S location as a trading hub in the heart of Europe meant that trading firms in Swiss city-states had to develop their own expertise in finance. Many private banking houses in St Gallen, Basel, Zurich and Geneva originated from larger trading firms or were established from a particular industry, such as the textile industry in St Gallen. The growth of the Swiss banking industry was further stimulated by the immigration of refugees from neighbouring states, a number of whom were financial specialists.

In 1713, banks were banned from revealing client information by the Great Council of Geneva, laying the bedrock of banking secrecy in Switzerland. In 1815, Swiss neutrality was given a legal foundation during the Congress of Vienna, a principle that ensured its survival, and indeed continued prosperity, during the turbulent centuries that followed. This was followed by an amendment to the Swiss Banking Law of 1934, which codified banking secrecy for the first time in history and led dozens of other countries such as Luxembourg and Austria to adopt similar laws of banking secrecy, a trend which the United States was powerless to resist. Eventually, the US also jumped on the bandwagon, creating its own international banking facilities.

Economists such as Kenneth Rogoff and Carmen Reinhart have pointed out the "countercyclical" nature of Swiss banking: Periods of rampant inflation and defaults were correlated with significant growth in the Swiss banking industry as money sought a safe haven in times of crisis. Thus Switzerland, as a safe and stable wealth management centre with a strong currency, not only survived, but indeed thrived, throughout the Great Depression, the two world wars, the Cold War, and the end of the Bretton Woods regime.

Scandals and pressures

LIKE other offshore financial centres, Swiss private banking has also suffered from its share of scandals: Swiss private banks provided a safe refuge for Nazi gold during World War II and tried to conceal the assets of Holocaust victims after their deaths. Dictators opened secret bank accounts in Switzerland to hide looted assets. Swiss banks have been accused of facilitating money laundering, as well as tax evasion by wealthy foreigners desiring to conceal their assets from their home governments.

The recent clampdown on tax evasion by the US and European governments means that the future of Swiss banks whose business models have been linked to such activities is an uncertain one.

This may have significant impact on other small offshore financial centres, given that the United States' and European Union's moves represent norms of automatic exchange of information, which are in conflict with Swiss norms of banking secrecy.

In September, the Financial Times estimated that as many as 7,000 Swiss private banking jobs could be lost if such a regulation went ahead. A joint KPMG-University of St Gallen study published in August also estimated that a quarter of Switzerland's 103 private banks could go bust within the next three years.

Similarly, Singapore has faced pressures over tax evasion and banking secrecy issues, having been placed briefly on the Organisation for Economic Cooperation and Development's (OECD) "grey list" of tax havens in 2009. However, Singapore swiftly managed these pressures and removed itself from the "grey list" by signing information exchange agreements with various countries and implementing a raft of measures that facilitate information exchanges and make money laundering a criminal offence.

In contrast, Switzerland's response has been less cogent. Its preference for "anonymous withholding" in bilateral tax treaties has been challenged by the US-led demand for "automatic exchange of information".

Moreover, the Swiss system of direct democracy implies that new international regulations, such as the Foreign Account Tax Compliance Act (FATCA), can only take effect with parliamentary and citizen support. In contrast, Singapore faced minimal domestic resistance in adopting FATCA compliance.

Nonetheless, Switzerland's excellent infrastructure, high competitiveness and political and economic stability continue to allow it to play a stabilising role in the global economy.

Different responses

DESPITE facing similar pressures over tax evasion and banking secrecy, Singapore's and Switzerland's unique approaches to financial development have influenced their respective responses.

Compared with Singapore, Switzerland lacks a long-term strategy directed by a powerful central authority. In Switzerland, there is no true equivalent of the MAS. Its counterpart, the FINMA, is a relatively new institution with limited power. The onus, then, is on Swiss banks to make the most out of a challenging situation.

Thus, it is perhaps unsurprising that a number of Swiss banks - notably its biggest players, Credit Suisse and UBS - have a strong presence in Singapore and their fortunes have been inextricably intertwined with those of both countries.

Singapore and Switzerland as wealth management centres represent two distinctly different models of financial sector development. Singapore's state-driven approach has resulted in the rapid development of the city-state as a leading wealth management centre and its rapid ascent on global rankings. In contrast, Switzerland's industry-driven approach has imbued its wealth management industry with resilience and staying power.

Will the traditional industry-driven approach that has underpinned the rise of Western financial centres withstand the test of time? Or will younger state-driven Asian financial centres such as Singapore and Shanghai prove more effective in achieving greater success in a shorter span of time? A close observation of the development of Singapore and Switzerland as offshore financial centres may provide some preliminary answers to these questions. Suffice it to say, policymakers have much to learn from the continued development of both Singapore and Switzerland as wealth management centres.

The authors are PhD candidates at the Lee Kuan Yew School of Public Policy, National University of Singapore.

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