ZURICH (Reuters) - Rich bank customers are showing a growing interest in Anglo-Saxon trusts as a way to structure their wealth, but Swiss private banks are reluctant to up their offer as international pressure on tax disclosure builds.
Trusts, a legal concept born in 13th-century England to safeguard the assets of knights leaving for the Crusades, make up an estimated $5-trillion global market and are viewed by lawyers and accountants as a growth area for the heavily pressed Swiss offshore banking industry.
Switzerland, the world’s leading offshore center, came under attack during the credit crisis by cash-strapped nations seeking to recoup tax revenues and its banks are seeking a new business model while traditional bank secrecy is eroding.
Several Swiss private bankers told Reuters they had noticed an increase in demand by wealthy customers for trusts, which are appealing to clients from emerging markets such as Latin America or Russia as they offer protection from expropriation, forced inheritance laws or expensive divorce settlements.
Trusts — seen by some experts as only worthwile for clients with at least $2 million in assets — can also help reduce a client’s tax burden as the assets are passed on to a third party in a low-tax jurisdiction.
But many Swiss private bankers remain wary of trusts as such structures could attract more unwelcome attention from foreign tax authorities, and there is an intrinsic conflict of interest for trustees between their loyalty to the client and to the bank that employs them.
“The market has seen an increase in demand,” said David Zollinger, who heads the New Markets division at Switzerland’s oldest private bank Wegellin.
“(But) my perception is that Swiss private banks are gradually curbing their offer in this field. There is not only a conflict of interest and anyway these days banks that provide structures to clients run the risk to be considered an auxiliary to whatever offence the client may have committed abroad.”
Nevertheless, demand is strengthening in many regions including Asia, where wealth is being passed on by self-made billionaires to the next generation.
To the private banks, trusts they can also offer a source of stability as the assets are normally held long-term.
“Once in the trust, the assets are looked after for the benefit of the family and therefore tend to be very sticky assets,” said Nick Warr, a partner at law firm Taylor Wessing.
All major Swiss private banks, including UBS and Credit Suisse, offer trust services.
Although the Swiss have no trust legislation per se, Switzerland recognizes foreign law with regards to trust and is home to scores of legal and financial professionals active in this business, mainly on behalf of non-Swiss-based customers.
Trusts run from Switzerland received a boost in 2007 when the country’s government ratified an international convention on recognition of trusts, fuelling speculation they could become increasingly important for the Swiss banking industry.
About 10 percent of the world’s 15,000 trustees are based in Switzerland, Zollinger said, and another trust expert put at between 900 and 1,600 the number of fiduciary companies based in this Alpine country.
But up to 70 percent of the foreign assets in Switzerland are already held in structures and trusts, said the industry expert.
Trusts are also expensive to set up and can be complex, requiring the services of lawyers and accountants and thus limiting their usefulness to all but a wealthy elite.
Mireille Gavard, head of estate planning at Royal Bank of Canada’s Swiss unit said trusts are not viable for less than $2 million. If the structure involves more than just financial assets, the threshold rises higher, she said.
A senior Swiss private banker said trusts below $5 million made no sense.
Analysts also question the compatibility of trusts, a feature of English common law, with the Swiss civil law system.
“I would be very much against any legislation establishing a Swiss trust. We already recognize foreign trusts in Switzerland and so far it has worked well,” said Stephanie Jarrett, who heads the Geneva Wealth Management Practice Group at law firm Baker & McKenzie.
“If we bring in new legislation the risk is to end up with something that is a cross between a trust and a foundation.”
Furthermore, the concept of transferring ownership of assets to someone else has led to confusion among clients.
“The main issue is making (clients) comfortable with the underlying idea of a trust in which the assets can no longer be directly controlled by the settlor,” said Innokenty Alekseev, a in charge of the Russia and CIS region at Crossbridge Capital.
Switzerland’s private banks will continue to offer trust services, but don’t expect this to be the way forward.
“Trusts need to be one of the services you have to offer, but I would not subscribe to the view that this is a big growth area in Switzerland,” said the senior Swiss private banker.
Editing by Sitaraman Shankar