Broschuere Finanzmarktstrategie

Swiss Financial Market Policy

After the financial crisis

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Art.-No 600.004.eng

© FDF Communications

Bern, July 2010 / 860247986

Cette publication existe également en français.

La presente pubblicazione è disponibile anche in lingua italiana.

Diese Broschüre ist auch in Deutsch erhältlich.

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Contents

5 Introduction

6 Swiss financial centre: Strengths and weaknesses

10 Strategic guideline 1: Strengthen competitiveness

11 Strategic guideline 2: Secure market access

12 Strategic guideline 3: Improve crisis resistance

13 Strategic guideline 4: Secure integrity and reputation

14 In focus: Protecting privacy in the financial sector

16 In focus: International collaboration

17 In focus: Final withholding tax and EU taxation of savings income

18 In focus: Engagement in international bodies

19 Outlook: What are the next steps?

Introduction

The financial and economic crisis has shaken the inter-national financial system. Major upheavals occurred worldwide. New problems surfaced, and existing prob-lems got worse. Responses to these challenges are needed. Switzerland‘s new financial market strategy provides them.

In recent months, the crisis has uncovered serious weaknesses in the international financial system and we must draw the right conclusions from this. Certain parts of the banking system are indispensable for the systemic stability of the national economy. Regulation must gain more traction where it used to be ineffec-tive so that the financial system as a whole is more ro-bust and able to withstand crises.

Against this background, the Federal Department of Finance has joined together with the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank to set out goals of financial market policy. In December 2009, the Federal Council adopted the report entitled “Strategic Guidelines for Switzerland‘s Financial Market Policy”. This report can be found at www.efd.admin.ch/financialmarket.

The new financial market policy of the federal govern-ment is deliberately not a sectoral policy. It measures itself by the national interest and the overall economy. It points out paths allowing the Swiss financial centre to secure and expand its already strong position. This requires that all players are willing to face the changes and continue to stand for the basic values that have made the Swiss financial centre strong. Both internally and externally, the goal must be to identify the scope of action, to act prudently, and to negotiate.

4

5

Swiss financial centre:Strengths and weaknesses

The financial sector is a cornerstone of the Swiss national economy. Its share in added value has risen steadily since 1990. Growth has primarily been in the banking sector, which generates disproportionately high added value. Switzerland‘s internationally strong position in asset management continues to distinguish the Swiss financial centre.

StrengthsThe Swiss financial centre has numerous advantages. These include the high political stability of Switzer-land, legal certainty, the protection of property, and the reliability of government bodies. Other important factors are the strength of the Swiss franc, its unre-stricted convertibility, the high savings rate of private households, low interest rates, the high quality of Swiss educational institutions, the high education level of the population, the flexible labour market, competi-tive taxation of legal and natural persons, and the generally high quality of life in Switzerland, which makes the country an attractive place to live and work.

The low risk of losing one‘s assets to expropriation in Switzerland continues to play a major role in cross-border asset management – in conjunction with the high protection of privacy – making our country a safe haven for cross-border assets.

Not least of all due to the major importance of the Swiss financial centre, the Swiss Financial Market Su-pervisory Authority and the Swiss National Bank have long had modern structures and specialists at their disposal to fulfil their responsibilities. The Swiss finan-cial centre continues to offer the best prerequisites for maintaining its status as one of the leading locations.

6

7

WeaknessesThe Swiss financial centre also has its weaknesses. The small home market entails that Swiss banks practically can only grow in foreign markets and in cross-border asset management. The latter in particular exposes the financial centre and makes it vulnerable. Another risk is that access to foreign markets could be made more difficult for Swiss financial institutions. Without market access abroad, however, added value in the banking sector cannot be maintained at current levels.

Switzerland has two major banks of global impor-tance. De facto, this leads to a national economic con-centration risk. Also for the financial system itself, this constellation can become dangerous at any time. The “too big to fail“ problem therefore demands a high level of sensitivity to the associated risks in Switzerland, forcing it to adopt effective measures to limit risk.

Switzerland will in future adopt more international standards relating to regulation and supervision. Only in that way can it achieve international recognition of the equivalence of its regulation and supervision. This, however, reduces the leeway for competitive advan-tages, which constitutes a risk for the financial sector.

The traditional strengths of the Swiss financial centre will in future play a smaller role than they do today. All the more important will be a good fiscal frame-work, innovation, and the qualifications of employees. For the Swiss financial centre to maintain its interna-tional importance, targeted improvements of market access abroad and new competitive factors are neces-sary. Self-imposed competitive disadvantages that only affect the Swiss financial centre must be eliminated.

Swiss financial centre:

A stable Switzerland with a robust financial centre

Added value and state intervention: there is virtually no country in

which the financial sector accounts for such a high share of the gross

domestic product (GDP) as Switzerland does. In spite of this exposure

to risk, during the financial crisis the Swiss financial centre was able to

manage with considerably less government assistance than the financial

centres of comparable countries.

Swit

zerl

and

Fran

ce

Ger

man

y

Japa

n

Spai

n

Belg

ium

Added value financial sectorin % GDP

14

12

10

8

6

4

2

0

8

9

Strengths and weaknesses

Government assist-ance allocated

in % GDP

100

90

80

70

60

50

40

30

20

10

0

Sources: IMF, OECD

Added value financial sector

Amount of government assistance allocated (June 2009)

283 %

Aus

tria

Net

herla

nds

Swed

en

UK

USA

Irela

nd

Strategic guideline 1

Strengthen competitiveness

The financial centre makes a disproportionate contri-bution to Switzerland‘s prosperity. For this reason, it is important for the financial centre to remain com-petitive in the international environment. Strength-ening competitiveness is therefore the first strategic guideline for Swiss financial market policy.

To strengthen competitiveness, financial service pro-viders offer high-quality, innovative services. This is primarily their own challenge. They must adjust flexi-bly to ongoing changes and help shape them.

Secondarily, however, the State must also act. It must create the necessary framework and stand up for Swiss interests within international institutions. For the financial sector to thrive, the federal government must be guided by internationally recognised stan-dards while at the same time creating competitive ad-vantages. A solid financial policy creates scope for government action. The federal government must also keep the labour markets open and ensure an education system of the highest quality. Not least of all, the financial market infrastructure must sustain its high performance and remain independent. Busi-nesses have a wide range of financing options at their disposal. The protection of financial privacy con-tinues to apply, and the tax environment for the entire national economy remains attractive as well.

ImplementationStrengthening competitiveness is a horizontal responsibility that fundamentally affects all areas of policy and that is important far beyond financial market policy.

Strategic guideline 2

Secure market access

Internationality and openness will continue to distin-guish the financial centre. The second strategic guide-line of financial market policy has an internal and an external component: foreign financial service providers continue to receive full access to the Swiss financial market as before. In return, Switzerland expects its financial service providers to be granted equally free access to foreign markets. This is currently not the case everywhere. Good market access conditions abroad are highly relevant to Switzerland, since Swiss banks will henceforth engage in more business- on-site.

As a consequence of the financial market and eco-nomic crisis, various countries have restricted cross-border movements in capital and services. This has made the situation more difficult for Swiss banks, in-surers, asset managers, and fund providers in indivi-dual business areas. It is therefore important for Swiss foreign economic policy to secure and expand market access for domestic financial service providers.

ImplementationBarriers to market access can be eliminated in a targeted manner with liberalisation agreements. Additionally, already existing market access can be secured under international law.

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11

Strategic guideline 3

Improve crisis resistance

Only a financial sector that has long-term stability can create prosperity and permanently contribute to ad-ded value and employment. Large financial institutions contribute substantially to the international importance of the financial sector. The third strategic guideline of Swiss financial market policy therefore aims at stability and crisis resistance and at defusing the problem of the size of individual institutions (“too big to fail“).

The two major banks are of systemic importance to the Swiss national economy. Trusting that the State will support them in the event of crisis, they may be tempt-ed to assume exaggerated risks. The “too big to fail“ problem is especially salient in Switzerland: the balance sheet total of the two major banks is six times as high as the entire GDP, and their debt is four times the en-tire GDP. For Switzerland, the risks due to the size of the major banks are especially high. A default of one or both financial institutions would have disastrous consequences for the Swiss national economy. n

For systemically important institutions, special require-ments will henceforth apply. Should a case of in-solvency occur despite higher crisis resistance, the affected bank should be allowed to fail – perhaps while separating out and saving the parts relevant to the system. This requires adjustments to insol-

ImplementationCrisis resistance of the banks is improved in three ways:– more equity capital– more liquidity (potentially with a progressive structure)– better risk diversification

vency law.

Strategic guideline 4

Secure integrity and reputation

The Swiss financial centre must continue to distin-guish itself with its stability, predictability and integri-ty. This strengthens the trust of clients and market par-ticipants and enhances acceptance abroad. This is the goal of the fourth strategic guideline of Swiss financial market policy.

Every significant financial centre faces the threat of misuse for criminal purposes. Financial market crime can be combated even more effectively if regulators and central banks engage in intensive exchange at the international level and work together with authorities in other countries. Switzerland has long been actively engaged on behalf of cross-border suppression of money laundering, corruption and terrorist financing.

Also in tax matters, Switzerland is open to an ex-change of opinions and international dialogue. The federal government endeavours to harmonise the long-term interests of the Swiss financial centre to the extent possible with the justified fiscal interests of foreign countries; in return, Switzerland expects its financial service providers to be given unimpeded mar-ket access in the country in question. Switzerland also offers its help in ensuring improved taxation of capi-tal and the income it generates (see final withholding tax p.17).

ImplementationSwitzerland continues to participate intensively in numerous peer review processes of the Financial Stability Board, the Global Forum, the Financial Action Task Force on Money Laun-dering, and other international bodies.

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13

Protecting privacy in the financial sector

Banking secrecy does not protect banks, but rather citizens. This basic understanding continues to apply. It is a fixed component of the democratic tradition of Switzerland and an expression of trust between citizen and State. The low share of the underground econ-omy in Switzerland compared with other countries shows that this basic understanding works and is in any event more successful than a system that treats citizens with distrust from the outset.

Banking secrecy does not protect criminal acts. In the event of qualified indications of an offence, banking secrecy can be lifted with regard to both Swiss citi-zens and foreign citizens. The OECD standard on ad-ministrative assistance in tax matters, which now ap-plies practically all over the world, has led to changes in Swiss practice. The less restrictive administrative assistance policy will henceforth permit information exchange with foreign States in cases of tax evasion – not automatically, however, but rather only upon re-quest and in specific individual cases. Switzerland re-jects automatic information exchange, because it vio-lates financial privacy.

In focus

Source: Schneider, Torgler, Schaltegger, 2008

Underground economy in % of GDP

USA

Switzerland

Japan

Netherlands

United Kingdom

France

Canada

Ireland

Finland

Denmark

Germany

Norway

Sweden

Spain

Portugal

Italy

Greece

7.0

7.9

8.8

9.6

10.1

11.1

12.0

12.2

13.8

13.9

14.2

14.7

14.9

18.7

18.7

21.4

24.3

14

15

International collaboration

In economically difficult times, many countries have a strongly increased need to bolster the national budget with additional funds. Numerous bailout and econom-ic stimulus programmes in the wake of the financial crisis have further increased sovereign debt to unpre-cedented levels. Many States are therefore looking for opportunities to tax their citizens‘ income as compre-hensively and with as few gaps as possible.

As long as the protection of privacy of citizens and cli-ents is guaranteed, Switzerland supports internation-al cooperation in tax matters. However, legal certain-ty and predictability must continue to be ensured. For Switzerland, this means:

– Information exchange is granted to foreign tax authorities only upon request and in specific indi- vidual cases– “Fishing expeditions“ are ruled out– The prohibition of retroactivity applies to new rules– In administrative assistance, the principles of sub- sidiarity and reciprocity apply– Legal protection of the person concerned must be guaranteed

ImplementationSince Switzerland‘s adoption of the OECD standard on ad-ministrative assistance in cases of tax evasion in March 2009, Switzerland has negotiated double taxation agreements with 25 States in which the new standard has been incorporated on a bilateral basis. Agreements with other States will follow constantly.

In focus

Final withholding tax and EU taxation of savings income

Switzerland has always worked closely together with the European Union. Long before the financial crisis, Switzerland signed a Taxation of Savings Income Agreement with the European Union. This agreement provides for a retention tax that is collected by Switz-erland and passed on to the entitled EU countries. This ensures that interest income of persons resident in EU States is taxed appropriately. Currently, consultations are underway between Switzerland and the EU on the technical workings of the agreement. Switzerland is ready to close gaps that remained open at the instiga-tion of individual EU countries.

As an element of expanded bilateral cooperation, Switzerland is willing to introduce a comprehensive final withholding tax. This tax would apply to cross-border income on capital and, like the EU taxation of savings income, would be based on the paying agent principle. The privacy of foreign clients is preserved, and the foreign State immediately receives revenue (in contrast to the automatic information exchange whereby just data is supplied). The final withholding tax effect would over time lead to a legal-isation of non-declared assets. Additionally, a rule for non-declared legacy assets could be agreed at a negotiated rate.

ImplementationSwitzerland is considering abolition of the anticipatory tax in favour of a paying agent tax with a lower rate, a broader tax base, and a final withholding tax effect.

In focus

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17

Engagement in international bodies

International financial market regulation is current-ly undergoing fundamental reform. Switzerland is ac-tively involved in these reforms because it acknowl-edges that highly complex financial crises can no longer be tackled by one country alone. When finan-cial markets and suppliers are globally integrated, then regulation must also operate internationally.

Switzerland is committed to shaping the new frame-work for open markets. It holds the view that all pro-viders should be subject to the same conditions in in-ternational competition. Where the stability of global financial markets can be increased through the use of regulatory minimum standards, Switzerland ad-vocates corresponding measures. The risks posed by future crises – which could have a severe impact on Switzerland – can thereby be greatly reduced. How-ever, preventive efforts only have an impact if they are supported not just by one country but by as many countries with global financial centres as possible.

Switzerland’s representation in political steering bodies is extremely important for the country’s interests. By virtue of its presence in the IMF Executive Board and in the Committee of the Whole for the Financial Sta-bility Board, Switzerland is able to have an influence on reforms at an early stage. In addition, it is repre-sented in numerous technical bodies via the Swiss Fi-nancial Market Supervisory Authority (FINMA) and the Swiss National Bank. These institutions also set inter-national standards. It is Switzerland’s aim in these in-ternational bodies to ensure that a framework which is effective, efficient and pragmatic is established.

In focus

What are the next steps?

When implementing the new Swiss financial mar-ket policy, the focus is on strengthening international competitiveness, improving market access, strength-ening crisis resistance, and the integrity of the finan-cial centre.

To achieve these goals, the State and the financial sec-tor must continue to work together intensively. In ad-dition, financial market authorities must regularly ex-change information at an international level, so that Swiss interests can be heard abroad. Switzerland is strengthening its early-warning mechanisms in order to identify and analyse the impact of international de-velopments at an early stage.

The goal of the new financial market policy is to cre-ate a good framework for the high-added-value finan-cial sector, to ensure a high level of systemic stability and performance, to preserve the integrity and repu-tation of the Swiss financial centre, and to enable sup-pliers in the Swiss financial centre to continue to offer high-quality services for the national economy.

Outlook

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19

“But if we wish to remain human, then there is only one way, the way into the open society. We must go on into the unknown, the uncertain and insecure, using what reason we may have to plan for both security and freedom.“Karl R. Popper, Philosopher