Sunday, 2 September, 2007

Walter Stresemann article in Offshore Investor.

Vistra’s profile in the press received a further boost recently with Offshore Investor Magazine publishing an informative article about the Swiss Trust Industry by Walter Stresemann of Vistra, in their July/ August issue.

The article looks at the effects of Switzerland’s recent ratification of the Hague Convention on the international recognition of trusts.

Walter asserts that the ratification of the Hague Convention will create a firm legal basis for Switzerland’s growing trustee business and unlike other countries, which have already ratified the Convention, Switzerland is also introducing specific rules in its private international law dealing with international jurisdictions and the recognition/enforcement of judgments in trust-related matters.

On the international private law level, there will be freedom of choice with respect to legal forums for contesting trustee actions and with regard to debt enforcement and bankruptcy. The Swiss government has amended the Federal Debt Enforcement and Bankruptcy Act to explicitly distinguish between the personal assets of the trustee and the trust in Swiss-based debt enforcement proceedings.

The article praises the greater legal certainty that these legislative changes provide because a solid legal foundation is likely to create a better climate for the setting up and administration of trusts in Switzerland, and also promotes the country’s appeal as an excellent location for private wealth management.

However, the question of appropriate regulation is portrayed as a contentious issue with the Swiss Bankers’ Association (SBA) supporting the introduction of specific licensing requirements for trustees which would ultimately exclude the majority of existing trust companies, lawyers and independent asset managers from acting as professional trustees.

In general the trust practitioners themselves, support the idea of establishing an adequate regulatory framework and have committed to the setting up of a Swiss Association of Trust Companies (SATC), which will have the purpose of "engaging in the furtherance and development of trustees’ activities inSwitzerland and to promote the adherence to certain professional and ethical standards."

The Swiss government on the other hand has taken the opposing point of view by deciding not to introduce a specific regulatory framework for trustees in Switzerland, relying instead on the regulatory framework that governs all financial intermediaries in the country. This authorization from the Federal Money-Laundering Control Authority ensures that intermediaries prevent money laundering acts and obliges them to report suspicious transactions.

Walter argues that it would be logically inconsistent to introduce regulation that specifically includes trustees but not independent asset managers or fiduciaries. To do so would create a two tier system that implies that non-trustee activities of Swiss fiduciary/trust companies are somehow less accountable, "serious" or complex than trusteeships. Taking this route would also give banks and bank-like institutions the advantage of being the only organisations to automatically qualify for regulation as equitable trusteeships.

The article also makes the important point that banks which offer trustee services are placing trustees in a position where there is a strong potential for conflict of interest and self-dealing. As trustees, decisions such as which investment manager to choose should be made with the beneficiaries’ best interests in mind rather than the benefits that specific services may bring to the bank or its Trust division. Walter Stresseman warns that banks in Switzerland should beware of the reputational risks that acting as Swiss trustees could have, particularly as beneficiaries can sue in the Swiss courts.

In concluding, Walter argues that the present "level-playing field" approach to regulation in Switzerland is appropriate and certainly more so than an activity-based supervisory legal regime and specific rules of conduct for trustees. Given that these are early days under the new trust legislation, he suggests that the industry be given time to develop and that the regulatory situation should be assessed in the future. This would also allow time to better understand the banks’ positioning and strategies with regard to the growing demand for Swiss trusteeships.