Times are changing for the banking paradise that served as a safe-haven for private clients throughout its history. All the while, international and domestic firms compete for recognition in international commercial arbitration.
Known to have a prosperous and modern market economy with a low rate of unemployment and a per capita GDP among the highest in the world, one would be surprised to learn that change is in the air for Switzerland’s financial paradise. Recognition of its banks and international clientele has made Switzerland an attractive location for international law firms seeking to counsel international corporations. With its major legal hubs in Zurich and Geneva, firms have split between these two cities, and each city is specialized in different sectors. Zurich is home to the principal stock exchange and the leading banks as well as capital market lawyers, while Geneva functions as the country’s largest city known for international organizations and the large presence of international arbitration lawyers. Combined with a desire to establish and grow in Switzerland, international law firms continue to compete against very well-established domestic firms like Homburger and Bär & Karrer. To add to that, as international pressure builds to disclose information about private clients’ accounts, changes related to tax transparency will affect the inflow of assets, in turn affecting lawyers and the longstanding relationships they have with Swiss banks.
GDP (2014): $685.43 Billion
Inflation 2015: -0,1%
Population: 8 million
Life Expectancy: 83 years
Unemployment rate (June 2015): 3.1% (2010: 4.1%)
The End of Bank Secrecy 2018
For a country like Switzerland, which is known to be one of the most developed banking centers around the world, the end of banking secrecy will be like taking the road less traveled. In 2013 the Swiss parliament approved a law known as FATCA, which requires Swiss banks to cooperate with the United States tax authorities, while this year the EU has signed a deal with Switzerland signifying that from the year 2018 no EU resident will be allowed to hide undeclared income. In a recent statement made by Pestalozzi partner in arbitration and litigation, Michael Kramer, on The Lawyer, “The US Program for Swiss Banks and the tax dispute with the US provided a tremendous amount of work which has been handled by specialist teams consisting of members of our banking department and our litigation department.” As a result, this transparency has increased the workflow of litigation and tax lawyers, with increased advice to law firms coming from auditors and forensic accountants.
Already this year, banks have experienced challenges with a rising rate of outflow activity on assets and low return on equity. Some Swiss bank holders are choosing to either re-patriate or move their assets elsewhere. According to a study conducted by KPMG and the University of St. Gallen in 2013, 59 out of the 94 banks that were analyzed reported that they either stabilized their poor performance levels or they continued to decline. In terms of International Market volume (IMV), Hong Kong ranked highest with an increase of 47% from the years 2012-2014 while Switzerland increased only by 2% of their IMV (source: Deloitte Wealth Management Ranking of 2015). Banking lawyers are forecasting that the decline in the performance of Swiss banks will compel a number of them to change their business strategies, and increase their M&A activity via ‘asset deals’ similar to the recent acquisition of Lloyds International Private Banking by Union Bancaire Privée (UBP) in 2013.
Beginning in the 1980s many international firms began to establish themselves in Switzerland. Today, the main areas of practice in the firms are arbitration, international trade and private-client business, investment management and tax. This year the US based firm, Baker & McKenzie acted as counsel to the steel distributor Schmolz + Bickenbach when it was acquired for €88.6 million dollars by the French company Jaquet Metal Service. Nevertheless, the presence of international firms in Switzerland has been a difficult destination for them as it is the Swiss firms that influence how they operate and grow. Consequently; Winston & Strawn announced that it will be closing their 22-year old office in Geneva to focus more on consolidating their resources into arbitration work in London and Paris. Although Swiss firms do work closely with a number of British, American and German firms, it is difficult for an international firm to grow bigger than its local counterparts. Daniel Daeniker, managing partner for Homburger added that “in addition to receiving continuous training to broaden their expertise, Swiss lawyers also have the advantage of being fluent in several languages.”
Local law firms in Switzerland however are increasingly feeling competition from international firms as they advise their clients to avoid legal counsel from Swiss firms for cross-border transactions. Claiming Swiss firms tend to have little presence in the international market, they recommend that contracts be governed by British or American law firms instead. This essentially leaves Swiss lawyers outside of the loop for international commercial arbitration, although Schellenber Wittmer was successful in its Geneva/Zurich merger and has a very good reputation in this sector.
Arbitration and Litigation
Whether litigation or arbitration, most lawyers in Switzerland who practice in these areas are familiar with and have experience in both. In Geneva however, the specialty is arbitration as the setting and neutrality make it an attractive jurisdiction. There are several factors among others that put Geneva ahead of any other destinations (including Zurich): the presence of many international institutions and organizations, the freedom to retain counsel of your choice, the compatibility of its rules on arbitration with other institutions (i.e. LCIA, the ICC, the ICDR, UNCITRAL) and the power of arbitral tribunals to issue measures of protection. Aside from Schellenber Wittmer, Geneva is home to Bär & Karrer, Lalive, and Python & Peter, all of whom have outstanding reputations for arbitration and dispute resolution.
According to the Swiss Chambers’ Arbitration Institution, this year, 104 cases were submitted for arbitration procedures, of which, 23% were from Switzerland while 51% originated from Western Europe indicating the popularity of choosing Switzerland as a main location for arbitration in dispute resolution. However of those cases, 71% of the arbitrators were nationals of Switzerland and only a minority were from International countries, which goes to show the competition that international lawyers and/or law firms must face against Swiss lawyers and firms of longstanding reputation.
New Immigration Quotas
One last factor important to mention when analyzing the Swiss legal market is Switzerland’s introduction of strict immigration quotas in a referendum of February 2014, which limited the number of EU immigrants entering the country to 0.2% of the population. Lawyers are quite aware that this new regulation will have adverse effects on the country’s interests in trading with EU states, as the immigration quota aggravated the EU, Switzerland’s main trading partner. The EU contended that free trade cannot exist without free movement. As a result of this quota, corporate immigration lawyers have noted a growth in the volume of work as the number of applications for naturalization and work permits have grown. While the international pressure has grown on Switzerland to open up about their banking policies, the country has also began trying to maintain their bit of regulation by tightening their domestic policies on citizens and foreigners.