One of the side effects of a global economy is that all financial regulations seem to be getting extended beyond national and continental boundaries, creating a potentially confusing array of conflicting ‘extra-territorial’ legislation and rules.
One of the most significant hedge fund management industries in Europe is landlocked Switzerland, which is not part of the EU – and viewed widely as something of a fortress outside of it.
But now the country, which has often been seen as being ‘light touch’ in its approach to financial regulation, seems to be aligning itself squarely with the tougher new international norms.
Prompted by the EU’s Alternative Investment Fund Managers Directive (AIFMD), the Swiss government is going to bring in tighter regulations which will, if approved, give the Swiss Financial Market Supervisory Authority, or FINMA, increased regulatory oversight of the industry.
This may effectively mean that Switzerland will be a dramatically different place to do business – effectively bringing down the shutters on the old era.
Why the change?
Switzerland, like all major financial centres, has had its usual way of doing things challenged because of the global financial crisis in 2008.
The response to this from governments around the world has been to increase regulation and crack down on tax avoidance, with some also proposing a financial transaction tax – with the aim of creating a sounder financial system.
One result has been Switzerland’s oldest bank, Wegelin & Co, closing down following a tax dispute with the US authorities. This came after it was also revealed that many of the country’s private banks had exposure to Madoff – all of which has resulted in a swing in public opinion.
But probably more importantly, the country had arguably become perceived by some hedge fund managers as a regulatory and tax haven. And when governments in some other major jurisdictions such as the UK threatened the industry with tighter regulation and/or higher taxes, it even seemed possible that the entire hedge fund industry may relocate en masse to its friendly shores.
Indeed, some of the top personnel at London-based hedge fund firms such as BlueCrest and Brevan Howard have moved to Geneva in recent years.
It should be remembered that neither of those firms, however, is officially headquartered in Switzerland – and that the lion’s share of the European hedge fund industry, including more than 50 of the region’s ‘Billion Dollar Club’ firms, remain based in London, as opposed to only a handful in Geneva.
Nevertheless, Europe’s most important non-EU jurisdiction appears to have responded to the perception that it is used for regulatory arbitrage – and the need to avoid being locked out of trade with its neighbours. It wants to remain competitive – and to do so, being ‘light touch’ doesn’t seem to have the same advantages any more.