Pictet and Lombard Odier, Geneva’s biggest private banks, plan to reorganize their structures in a move that may presage the end of Swiss bankers assuming unlimited personal liability for losses.
The banks will establish corporate partnerships overseeing limited companies as of Jan. 1, pending regulatory approval, they said in separate statements. The managing partners will continue to own and manage the firms, without unlimited liability for the limited companies.
Swiss banks are aiming to improve their access to international markets while increased international scrutiny of offshore havens and declining revenue crimp the margins on $2.1 trillion of cross-border business booked in the Alpine country. The U.S. Department of Justice indicted Switzerland’s oldest bank, Wegelin & Co., last year as part of a probe of at least 11 Swiss financial firms.
“Swiss private banks traditionally bragged they were the safest in the world, with principals assuming personal liability for the bank’s actions,” said Jeffrey Morse, a private client attorney with Withers LLP in Geneva. “The principals were comfortable assuming liability over managed portfolios, but given recent events with the U.S. authorities, they may be revisiting the issue. The liabilities may now be too much to bear.”
Pictet, established in 1805, and Lombard Odier, whose 1796 founding makes it Geneva’s oldest bank, have used the trademarked badge of Swiss “private banker” to differentiate themselves from their larger rivals with investment-banking arms: UBS AG, which was forced to accept a $59.2 billion bailout in 2008, and Credit Suisse Group AG, both based in Zurich.
The closely held model favored in Geneva requires at least one partner to have unlimited liability for the bank’s commitments. That pledge earns them the private banker label enshrined in law in 1934 and registered as a trademark in 1997 with the Swiss Federal Institute of Intellectual Property.
Under the new legal structures, the eight managing partners at Pictet and eight managing partners at Lombard Odier will retain unlimited liability for the corporate partnership while relinquishing liability for the underlying companies, including their banks in Switzerland.
The new legal structure will make it easier for Pictet “to grow and adapt in an increasingly complex international environment,” Jacques de Saussure, senior partner at Pictet, said in the statement.
It will “maintain the benefits of a private partnership” in line with international norms on corporate structures, according to Patrick Odier, senior partner at Lombard Odier.
Wegelin, based in St. Gallen, Switzerland, was indicted by the Department of Justice in February last year and may pay U.S. authorities as much as $74 million after pleading guilty to helping American taxpayers hide assets from the Internal Revenue Service.
“The situation around partners’ liability has changed fundamentally,” said Alessandro Bizzozero, a Geneva-based lawyer providing regulatory and compliance advice to banks, adding that other smaller firms may also discard the traditional structure. “A private bank’s liability may extend to creditors or to state authorities. The Wegelin case is an example of that.”
Pictet and Lombard Odier will leave the Swiss Private Bankers Association when the changes take effect, leaving nine smaller private bankers deliberating whether to continue with the old structures. Bordier & Cie, Mirabaud & Cie and Gonet & Cie in Geneva and La Roche & Co. in Basel, Switzerland, said they don’t plan to adapt in the same way.
“We have thought about all these problems and about the structure of the company and we decided not to change anything yet,” said Michel Juvet, one of four partners at Bordier, a family-run private bank established in 1844. “For clients, having someone in front of them who is personally totally liable for his assets should make a difference.”
“Our bank has no intention to change its legal structure,” Christoph Gloor, one of six general partners at 226-year-old La Roche., said in an e-mailed statement. Officials at Mirabaud and Gonet said the banks prefer their current structures. The other five private bankers weren’t immediately available or declined to comment immediately by phone.
Pictet and Lombard Odier’s motive for switching legal structures isn’t to remove liability from partners, the two firms told reporters at a joint press conference in Geneva yesterday. Furthermore, the existing liability arrangements will continue for three years after the new formations take effect in 2014, according to de Saussure.
“Wegelin wasn’t in any way the trigger for this evolution,” said Nicolas Pictet, a managing partner at Pictet & Cie. “What happened to Wegelin would have had the same effect on either legal structure.”
The reorganization will help shed light on the performance of firms in Geneva’s secretive banking industry. While both Pictet and Lombard Odier already disclose assets under management, they will publish an annual report from 2014 providing results for the first time.
Both firms said their profitability was better than that of Switzerland’s two biggest banks. UBS, Julius Baer Group Ltd., the nation’s third-biggest wealth manager, and Vontobel Holding AG all reported declines in their full-year margin figures for private banking this week.
Pictet said it had 374 billion Swiss francs ($412 billion) of client assets at the end of December, including assets held in custody. The firm, which recorded 13 billion francs of net inflows and added 100 employees last year, plans to reveal assets under management later this month.
Lombard Odier said its managed assets were 164 billion francs. Including custody, they were 188 billion francs, compared with 36 billion francs overseen 20 years ago.
The private bankers are reforming complex legal structures to satisfy possible concerns from foreign regulators as they extend abroad, according to Peter Boeckli, a lawyer with Boeckli, Bodmer & Partner in Basel, who has advised Lombard Odier.
“The partnership was an idea of the 19th century,” said Boeckli. “These banks have had a huge growth in assets under management and now have a much larger international presence. Carrying on in this way is unacceptable for the authorities.”