The Swiss Financial Centre in an Increasingly Protectionist World

«I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff. That Act intensified nationalism all over the world.»

Such were apparently the words of Thomas Lamont – a successful banker at J.P. Morgan and an extremely influential (unofficial) mentor to various US administrations – back in 1930. As we know, President Hoover paid no heed and protectionist battles in the area of trade in goods played out accordingly.

Despite slogans such as «America First», we have not (yet?) seen any genuine renaissance of protectionism in connection with the trade in goods. But things look rather different in the financial sphere. The regulatory constructs of the EU, such as MiFID, MIFIR, AIFMD, UCITS, EMIR, not to mention the many other acronyms, as well as the 1,000+ pages of the Dodd-Frank Act in the US, actually do have a protectionist impact. Cross-border services have to adhere to the local regulations that apply in a client’s country of domicile. And it is not just clients’ countries of domicile that want things this way : Back in 2007, Switzerland also committed to this practice in the revised Lugano Convention of 30 October 2007. According to this agreement, Swiss financial institutions must comply with the corresponding national law that applies in the client’s place of domicile. This combined wave of regulation, which has emerged in the aftermath of the financial crisis, is making the cross-border provision of financial services significantly more challenging.

We need to remind ourselves that the status of «splendid isolation» is becoming increasingly difficult for Switzerland as a financial centre. (Wikimedia Commons)

Unfortunately, this trend now appears to be going even further. Specifically, existing regulations can be interpreted in a more draconian way. For example, only this summer the European Securities and Markets Authority (ESMA) called upon national financial supervisory authorities to scrutinize more closely the way in which asset management tasks are delegated to third countries. The immediate cause of this development ? Financial institutions in the United Kingdom are looking to establish a presence in the EU, with a view to then delegating parts of their financial services – such as the asset management of funds, for example – back to the UK. UCITS and AIFMD permit this under certain circumstances. By contrast, «letterbox entities», i.e. companies based in the EU that do not pursue any material activities themselves but instead delegate their entire operational activities to one or other third countries, are prohibited. As things stand there is considerable scope for interpretation here, which national financial watchdogs are likely to restrict going forward.

Nor is it only in the UK where this greater regulatory zeal is being felt : EU countries such as Luxembourg, which unlike the UK, has absolutely no intention of leaving the EU, is also concerned about the likely consequences. Fears of this kind were recently expressed in the daily newspaper Luxemburger Wort. Against this backdrop of ever-higher hurdles along the boundaries of trading blocks, it is going to be increasingly difficult for financial institutions to draw on the benefits of labour division when offering their services.

Increasingly impermeable borders of this kind will be to the detriment of more than just investors and savers around the world. If concerns are being raised even in Luxembourg, the world is likely to become more challenging still for an international financial centre outside of the EU – such as Switzerland. A compounding factor in this context is the fact that Switzerland has made virtually no progress in its efforts to achieve easier market access over the last few years. At a bilateral level, a significant market access agreement has been concluded only with Germany. With Italy and France, its key neighbours to the south and west, Switzerland continues to go round in circles. Even less has been achieved in Switzerland’s negotiations with the EU. Developments here are effectively on ice due to the lack of progress in negotiations over an institutional framework agreement.

The Swiss banks will always be able to adapt. They can accept certain losses as they transfer business operations to the EU. But that is not possible for the Swiss financial centre. We need to remind ourselves that the status of “splendid isolation” is becoming increasingly difficult for Switzerland as a financial centre.

Against this background, the need to unblock negotiations with what remains the Swiss financial centre’s most significant market is increasingly becoming a matter of urgency. An initial step in this regard could be Federal Councillor Cassis’ “reset” of the institutional framework agreement. An umbrella agreement that gives both Switzerland and the EU legal certainty in all existing bilateral agreements could also brighten the outlook for agreements in the financial sphere.

This text has been published on the website of Switzerland’s financial fair «Finanz ’18» which will take place on 31 January and 1 February 2018 in Zurich.