Regulatory changes mean Swiss banks are going to have to compete on equal terms in the global marketplace.
The US legislators have gone to great lengths to close tax loopholes. Under FATCA's Expanded Affiliated Group concept, a system of collective responsibility grouping together banks with all the subsidiaries and affiliates in which they hold a 50% share, the stakes have been raised significantly as the whole group will be deemed non-compliant if a single one of the group fails to meet fully all requirements.
Undoubtedly, the most extreme rule is the Passthru Payment concept, which targets ‘recalcitrant' bank clients - those who have refused "invitations" to declare their income and who do not allow their Swiss banks to pass on their details to the IRS.
Under this mechanism, even non-US bank clients with no US exposure, but who refuse to co-operate, can be made liable, if the bank itself has some exposure to the US market, for example with ordinary T-Bills.
The ultimate aim of the US authorities is to have FATCA embedded into national law of all countries around the world. Such an ambition will first have to get past the local democratic process. In Switzerland, such legislation can be introduced only after it passes a referendum. In Germany, too, the democratic principle is unlikely to look favourably on foreign legislation being passed into national law. Doubt remains over whether an FFI can disclose data or withhold a 30% US tax without the consent of the account holder.
So far-reaching is the legislation that Swiss financial institutions are also likely to review the outsourcing of fund management to third-party providers as a potential source of compliance risk. A partner at a Lugano-based wealth manager said that he no longer used US fund managers, describing the process of dealing with them as too ‘difficult'.
Hans-Joachim Jaeger, a Swiss tax expert and partner at Ernst & Young, said: "Banks will be reluctant to have external asset managers because they will be liable anyway. This does not mean necessarily that all banks will take asset management in-house, but that they are likely to make changes [to their current arrangements]."