ZURICH Swiss asset managers may have to repay a chunk of at least 7 billion Swiss francs ($7.4 billion) earned in commissions and other kickbacks after a top court ordered UBS to return management fees which had not been agreed with a client.
The Swiss Supreme Court's ruling last month paves the way for clients to reclaim commission payments charged without their permission, and is another blow to the country's asset managers, which in the past could charge high fees in return for secrecy.
Revelations in U.S. courts of Swiss bankers helping U.S. clients to dodge taxes, German criminal investigations and the discovery of dictators' loot stashed in Swiss accounts have already eroded the secrecy premium once paid by customers of the country's $2 trillion offshore industry.
Ratings agency Fitch said the landmark case could set a precedent for all banks in Switzerland to repay finders fees and kickbacks.
Fitch added that banks may increase their management fees to make up for the shortfall in revenues.
Data from the Swiss National Bank and the University of Zurich show commission payments and other inducements - known as 'retrocessions' - made up 36 percent of the 3.6 billion francs in revenues raked in by Swiss asset managers in 2008.
Over the past five years the amount of retrocessions taken in by the country's 2,500 independent asset managers totals around 7 billion francs, according to Reuters calculations.
Asset management is a costly affair in Switzerland, where clients had previously been willing to accept higher charges than those charged elsewhere in return for prized Swiss secrecy, said one asset manager who asked not to be named.
"There is virtually no financial product, service or commission rate in Switzerland that cannot be acquired at a lower cost elsewhere by the client that has the freedom and ability to look for it," he said.
"In an environment of low investment returns, these fees cannot be hidden or disguised as in the past."
Martin Straub of Zurich-based Envisage Wealth Management calculates that for a 1-million-Swiss franc portfolio returning 6 percent annually, an industry average 0.4 percent retrocession rate would cost the client 250,000 francs over 20 years.
IN A SWEAT
Vito Roberto, a professor of law at the University of St. Gallen, said the ruling would have a profound effect on smaller asset managers who have not agreed fee waivers with clients.
These managers may have to return commissions received in the last five years - a substantial part of their revenue - Roberto said, adding that it will also be challenging and costly for them to calculate the payment due to each clients.
Roberto said the ruling will have limited impact on larger banks, as it affects only a fraction of their revenue.
UBS said the judgment would require further analysis, and added that it has informed clients since 2009 of the range of distribution fees received from product providers in their annual statement of assets.
A key concern for the supreme court was a potential conflict of interests when institutional asset managers such as banks bought in-house products for client portfolios, triggering other charges beyond asset management fees, such as distribution fees, that accrued to the institution itself.
In such cases institutions could be tempted to choose the products that generate higher fees over those most suited to the client. The ruling means customers must now be informed of these fees, which must be repaid unless the client agrees to waive them.
Credit Suisse said it was assessing the possible effects of the judgment but declined to comment further.
Vontobel said the decision was unlikely to affect it, since it had fully transparent client agreements in place.
"The basic problem with retrocessions is that they were for a long time not disclosed and not transparent. Some may well be justified due to the costs of analysis, selection, marketing and distribution of funds," Envisage's Straub said.
"When all is transparent, value added services tend to remain and these can then be correctly compensated. Raising disclosure and transparency will likely make many (other) types of retrocession simply go away of their own accord." ($1 = 0.9489 Swiss francs) (Reporting by Martin de Sa'Pinto; Editing by Louise Heavens)