TEXT-Fitch:Retrocession fees potential risk for Swiss banks

Fri Nov 9, 2012 4:18am EST

Nov 09 - The repayment of retrocession fees to clients who have an asset management agreement with a bank, if applied retrospectively and to all banks in Switzerland, could lead to significant one-off provisions, Fitch Ratings says.

Without a long look-back period, client reimbursements should be manageable for the Swiss banks with large private banking operations. To offset some of the lost revenue, we expect the banks to adjust their management fee structures to maintain gross margins broadly similar to current levels, which is around 90bp-110bp of assets under management.

The introduction of retrocession fee repayments will improve transparency for private banking clients in Switzerland. The sector has increasingly focused on performance, servicing, and increased transparency.

Retrocessions are the fees received by a bank for distributing third-party products to clients. In a test case involving UBS AG , the Zurich High Court decided in January 2012 that banks should reimburse retrocession fees to clients with whom they have an asset management agreement, unless those fees had been received for genuine distribution services. The Swiss Supreme Court confirmed the ruling on 1 November 2012. Although the ramifications are not yet clear, this landmark case could set a precedence for all banks in Switzerland to repay retrocessions relating to discretionary mandates services, bringing the banks' standards in line with the rules for Swiss independent financial advisors' and many other jurisdictions.

The amount of fees to be reimbursed to claimants is still being determined by the Zurich High Court. At this stage, the magnitude of the impact is difficult to assess. We believe it is likely to vary considerably from bank to bank depending on the proportion of funds and other investment products affected.

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