Switzerland – Between a rock and a hard place

As the eurozone economy slows down after six years of uninterrupted growth, Switzerland is an anxious spectator. Amid increased concerns among the EU27 over the potential impact of a disorderly Brexit and the halt to quantitative easing from the European Central Bank’s asset-purchasing programme, Europe’s big three are bracing themselves while Switzerland sits in the middle, watching intently.

To the west, France endures its gilets jaunes; to the south, Italy faces a looming debt crisis with its banks. In the north, Germany has just avoided a technical recession and, like many of the other 18 eurozone countries, forecasters suggest that it will be fortunate to see 1% GDP growth this year. ‘What I see in Italy and France is scary, in particular the rise of populism,’ says Manuel Bianchi della Porta, managing partner of BianchiSchwald in Geneva. ‘A lot is going on in the eurozone: most Swiss trade depends upon Germany, France and Italy. But it seems that we are living on a small island unaffected by all the turmoil that is happening around us. It is like the political stability of our country is protecting us and the business community we are serving.’

Bianchi describes his firm’s performance last year as solid, ‘in line with the budget, in contrast with 2017 when a significant amount of energy was dedicated to the merger’. In Switzerland, he adds, there are many mid-market companies for sale because of lack of a suitable successor, which fuelled share deals in 2018. ‘We benefited from this trend. Of the 35 M&A transactions we advised on, 20 were sales of a family business.’

At Homburger, managing partner Daniel Daeniker is upbeat. ‘The economy has been doing rather well – particularly anything that is export-oriented – and last year was also good for our firm. The political climate, the economy, the business environment… sometimes I think we are really defying gravity. We have moderate but constant economic growth, we have social stability, we don’t have any yellow vests roaming the streets… It’s almost too scary to be true because at some stage the tide just has to turn. Everything seems to work perfectly well in Switzerland, especially compared with the rest of the world around us.’

‘It seems we are living on a small island unaffected by all the turmoil that is happening around us.’
Manuel Bianchi della Porta, BianchiSchwald

The consensus is that hourly rates are holding up quite well: partners can still charge around $550 in Geneva and $600 in Zurich, sometimes higher for premium work. Philippe Weber, managing partner of Niederer Kraft Frey (NKF), says: ‘The Swiss economy is very robust; it’s doing well – relatively stable at a high level and that also applies to the legal market.’ NKF acted on SIG, the largest Swiss initial public offering (IPO) of 2018 – the fifth consecutive year in which the firm achieved the accolade of advising on the largest IPO in Switzerland.

However, Benjamin Borsodi, managing partner of Schellenberg Wittmer, offers a counterview to the optimism. ‘We don’t see the economy booming. As to the performance of the legal market, things are rather steady and not exploding, but nor is there anything really negative.’ When talking about progress, he professes to be ‘very proud’ that four of the five Schellenberg partners made up last year were female.

Safe haven

Switzerland is not entirely immune from the problems experienced just over the border: if Germany went into recession there would be a ripple effect. It is, however, somewhat different in character from its immediate neighbours. Shortly before this year’s World Economic Forum in Davos, the annual Global CEO Survey published by PwC found that 47% of Swiss chief executives think that global economic growth will decline over the next 12 months. The continued backdrop of trade tension between the US and China, burgeoning protectionism and the strength of the Swiss franc were the main factors contributing to their bearish outlook.

And then there is the international perception of Switzerland as a place to do business. The Swiss Economy Reputation Index, published by Basel-based consultancy commsLAB and the fög Research Institute at the University of Zurich, dropped to a five-year low in 2018. This came in the wake of the Raiffeisen Bank scandal, in which the bank’s former boss is facing criminal proceedings for suspected corporate fraud, and there are assorted legal problems facing UBS in France and the US.

‘The legal market is steady, not exploding, but nor is there anything really negative.’
Benjamin Borsodi, Schellenberg Wittmer

Ironically, the dominant issue for businesses in Switzerland and for their lawyers appears to be the consistent stability for which the country is renowned. ‘Our main problem is that we always have been, and still are, a safe haven,’ suggests Hans Rudolf Trüeb, partner at Walder Wyss. ‘If things escalate in the eurozone, what happens is that people park their money in Switzerland, which drives the Swiss franc up against the euro and the US dollar. This is not good news for our industries because we have a large export surplus. Since the Swiss National Bank has been taken hostage by the ECB [European Central Bank] and its ever-expansive policies, we will have to live longer with negative interest rates than many of us would appreciate.’

Trüeb is more naturally ebullient about Walder Wyss’ performance last year than most of his counterparts. ‘It’s hard not to be enthusiastic about 2018, which was for us and many of our peers the best year ever. For the first time in our history we passed $100m in revenues, which is a huge step for us. Profits have also gone up substantially, we have costs under control and we have grown steadily to 225 lawyers. The Swiss legal industry is growing too, but we were able to outgrow our competitors. We still see potential for future expansion.’ That growth, fuelled by six domestic offices, now makes Walder Wyss the second-largest Swiss firm in lawyer headcount after Lenz & Staehelin.

‘It’s always good to have competition,’ responds Guy Vermeil, managing partner of Lenz. ‘It forces us to work hard to be on top and not to fall asleep. We also have Kellerhals Carrard, which is growing very fast. For 20 years, Lenz has been the largest law firm in Switzerland in terms of the number of lawyers. Clearly, that may not be the case over the next few years, but we remain focused on quality. The strategy is to stay on the top, not necessarily to be the largest, not to go to different places, but to stay in Geneva, Zurich and Lausanne, and to remain strong in the Swiss market by trying to provide top-quality work.’

Trüeb makes no secret of his ambition for Walder Wyss to become the largest Swiss firm. Alongside Kellerhals, which has close to 200 lawyers, it has grown significantly in recent years, primarily by acquiring teams and individual lawyers. Both are disruptors in a legal market where change of any kind is typically incremental rather than fundamental.

Unsurprisingly, reaction from some other firms is characteristically muted. ‘The big consolidators – Walder Wyss and Kellerhals Carrard – it’s mostly volume growth: selecting people, adding revenues and not necessarily being more profitable or more successful at large,’ says one managing partner. This view is reinforced by another: ‘From the moves they made in the French-speaking part of Switzerland, they have grown, but whether it really strengthens them, or makes them more profitable, is uncertain. Organic growth, even if it’s at a slower rate, is preferable. One has to look very critically and see who they are picking up and how successful they turn out to be in the new environment. I am certainly not concerned.’

Despite these comments, Trüeb cites double-digit revenue and profit growth at Walder Wyss last year. ‘We invested in the platform while growing. Usually, we would have expected to add just a bit to the bottom line, but the truth is that size has helped revenues in line with profit because we could realise economies of scale in IT and other back-office functions. We have a good platform that allows for growth in various locations without additional investment. If you build a snowman and you roll the first little lump of snow, it’s slow in the beginning, but the more you roll it, the more snow sticks. Our business is very similar. We yet have to test the limits.’

‘Since the Swiss National Bank has been taken hostage by the ECB, we will have to live longer with negative interest rates than many of us would appreciate.’
Hans Rudolf Trüeb, Walder Wyss

Disputes and regulation

Beyond M&A, regulatory work continues to be a perennial breadwinner for many. As with lawyers across the EU, this included GDPR compliance last year. ‘There is no single regulation or piece of legislation that has had a major impact,’ says Daniel Hochstrasser, senior partner of Bär & Karrer. ‘It is really the bulk of continued change in the regulatory environment for financial institutions that creates the need for legal advice. It’s a continuous flow of work, not cyclical, because banks and other financial services companies are having to comply and change structures. At some point, there will be a consolidation and things will probably slow down a bit, but not yet.’

Urs Feller, head of Prager Dreifuss’ disputes team, suggests that 2018 was a ‘very successful year for the firm – no single area experienced huge spikes, but the firm was busy in many different areas. A standout was financial services with issues on the regulatory side, where compliance at the basic level and at the corporate governance level needed much attention’. The firm was also engaged in ‘substantial work regarding bankruptcy matters and we have expanded both our asset recovery and arbitration teams’.

Weber also identifies ‘a lot of activity in regulatory work’. He points to ‘the new financial services regulation coming into force’ – the implementation in Switzerland of MiFID II-like regulation, which has been applied across the EU since January 2018. ‘The whole financial services regulation framework will be renewed from January 2020 and that gives us a lot of work. We have been mandated to help clients assess how they need to change documentation to adapt to the new regulation.’

Among other regulations having an impact in Switzerland are the Common Reporting Standard and the Automatic Exchange of Information relating to bank accounts between tax authorities in different jurisdictions. This too has required significant legal advice. ‘We have wealthy foreign families consulting us to restructure their asset and estate planning,’ says Nicolas Piérard, partner at Borel & Barbey. ‘We have also had a very busy year advising asset managers and banks. It has certainly had an impact, particularly with the Geneva private banks. MiFID II is also keeping regulatory banking lawyers busy.’

Such work extends beyond advising on compliance. Vischer partner Benedict Christ points to regulatory disputes as a strong area for the firm across several sectors. ‘There are ongoing disputes or issues involving discontent with regulations – that keeps my colleagues very busy in regulatory work,’ he says.

According to Alexander Troller, partner and co-chair of LALIVE’s litigation practice group, ‘Switzerland is definitely one of the fora of choice for high-end litigation and arbitration. One of its significant advantages compared to other jurisdictions is the pace and efficiency with which cases are handled. Increased regulation in the financial sector results in more litigation and asset-tracing work for lawyers in Switzerland, where assets are often located.’

He points to ‘new sources of disruption where new opportunities for litigation arise’ such as the impact of sanctions on contractual relationships between business partners or with their bankers. He also identifies a rise in shareholder and trade disputes ‘because business is going faster, quicker, while the duration of disputes is also becoming shorter. Disputes have always been part of the business cycle – what we see is that the time intervals between them are becoming shorter.’

Much of LALIVE’s disputes work is in arbitration. The firm boosted its arbitration team, comprising 45 full-time lawyers qualified in 16 jurisdictions, by opening a London office last September, led by a two-partner team featuring Marc Veit (who relocated from Zurich) and Timothy Foden. The new branch focuses on arbitration and public international law, and acts as a liaison for inbound litigation work to Switzerland. Recent arbitration clients include the governments of Romania, Latvia and Mauritius; as well as Ukrainian oil companies Ukrnafta and Stabil in a matter against Russia that the firm describes as ‘cutting edge and innovative’.

‘It’s always good to have competition. It forces us to work hard to be on top and not to fall asleep.’
Guy Vermeil, Lenz & Staehelin

The general increase in disputes work has multiple strands. ‘Last year, dispute resolution and the investigation sector, including white-collar crime, have been pretty strong – stronger than in recent years,’ says Hochstrasser. ‘That is probably the most striking feature of 2018. Going back ten or 20 years, Switzerland used to attract some shady people, which is the reason why Swiss banks sometimes end up on the radar of foreign investigating authorities.’

Major corporate disputes also feature prominently. Last May, Swiss chemicals manufacturer Sika and French building materials company Saint-Gobain settled an almost four-year fight that resulted in Saint-Gobain acquiring a large stake in Sika: a rare example of Swiss corporate enmity emerging into the public domain. Lenz advised the Sika board on the litigation over the attempted sale of the Burkard family’s Sika participation to Saint-Gobain. ‘Many of our lawyers were involved and it ended up very positively for our client, and in terms of workload it was very important,’ says Vermeil.

According to Daeniker, the litigation process has become more burdensome and laborious, which inevitably provides more work for lawyers. ‘There is not necessarily more litigation in Switzerland, but if there is litigation, it is larger scale, document heavy, people heavy, more resources required… The same goes for investigations. Ten years ago, if you had a fund management company and breach of distribution rules – no damage to any investors, but they sold high-market products to retail investors – you would have had a slap on the wrist from the regulator and just carried on. Five years ago, you had to do a big investigation and then provide a remedy plan.

‘Now, there is a big investigation of the remedy plan and an investigator who stays there after the fact, plus publication of the censure by the regulator – all for the same kind of breaches. The rules have become more stringent, the costs of compliance have become bigger, the song and dance surrounding post-breach remedies have become more important. That is not necessarily to the benefit of the institutions affected because it just means more money spent on legal fees, compliance departments, and regulatory relations. That’s just the way it works now.’

His critique is experienced by others. Weber says: ‘Investigations and enforcement, both Swiss and cross border, are an increasingly important source of revenue involving some very large matters.’ The US Department of Justice continues to be very active in international investigations, partly to enforce US tax, sanctions and bribery rules. ‘The Swiss market and economy are very much impacted by that, not only financial services institutions but also other regulated areas in a whole range of industries, for instance life sciences and pharmaceuticals,’ he says. ‘We are very busy in this field.’

Investigations do not make headlines, as Hochstrasser notes: ‘Quite often, investigations are not publicised. If decisions are rendered by the Swiss courts on attachment of assets and so forth, where the information has to be provided to foreign authorities, they are not published, and if they are published, you will not be able to recognise who the parties are and what the case behind it was because they are usually quite technical in nature.’

‘No single regulation has had a major impact. It is the continued change in the regulatory environment for financial institutions that creates the need for legal advice.’
Daniel Hochstrasser, Bär & Karrer

Borsodi confirms his experience of a radical change in investigations. ‘They are blooming in Switzerland, keeping large firms busy, not only in the financial industry, where the risk of corruption is quite high, but in other sectors.’ More investigations inevitably result in more prosecutions. ‘One of the main factors is the willingness of prosecuting officers, especially the office of the Attorney General, to enforce corporate criminal liability,’ he comments, citing the Federal Prosecutor’s Office and ‘especially the Attorney General, Michael Lauber, who has made some very loud statements that corporations, especially financial institutions, should be prosecuted whenever there is a transgression.

‘We now see that in reality. For example, when a financial intermediary does not report suspicion of money laundering to the authorities or a company acts as a financial intermediary without having obtained all the necessary authorisation, we see the Swiss authorities deciding to go after those cases, which was unthinkable five to ten years ago. There is a change of approach to amend the behaviour of different actors and strengthen the market.’ As for those at risk, he concludes: ‘The bigger you are and the more activity you conduct, the bigger the risk that you’re exposed to.’

The dreaded B-word

A recent tweet from Vischer was headlined ‘Immigration: UK and Switzerland prepared for no-deal Brexit’. It continued: ‘As Brexit deadline approaches, odds for a no-deal scenario grow. Preparing for any eventuality, the Swiss government has been working with its British counterparts towards a ‘plan B’ for businesses and citizens of both countries. When the agreement on free movement of persons ceases to apply to the UK, special regulations will come into force and minimise the impact.’

‘There are ongoing disputes or issues involving discontent with regulations – that keeps my colleagues very busy.’
Benedict Christ, Vischer

At first blush, Brexit might appear to have less impact on Switzerland than its larger EU neighbours – a view that is confirmed by its lawyers. ‘There will be some companies and individuals who make decisions one way or the other that might have an effect on Switzerland,’ says Hochstrasser. ‘But I don’t think anybody in Switzerland hopes for a windfall.’

Daeniker adds: ‘Right after the Brexit vote, there was talk in the Financial Times about asset managers and hedge funds moving from London to Geneva or other places in Switzerland. Of course, there were comments about how boring these places are: you couldn’t go to a decent table-dancing joint at 3am like you could in London. It didn’t really materialise in terms of a lot of new business here. We don’t really see the relocation of companies from Britain to Switzerland.’

Vermeil confirms: ‘Most of the companies that decided to leave the UK went to Paris or to Germany and not to Geneva. The Brexit effect has been neither positive nor negative at this stage. No increase of work, no big companies establishing in Switzerland and nothing material in terms of workload.’

‘After the Brexit vote, there was talk about asset managers and hedge funds moving from London to Geneva. It didn’t materialise.’
Daniel Daeniker, Homburger

But a Brexit effect is already being felt by Switzerland in its relationship with the EU27.

Weber notes: ‘We feel the consequences of Brexit in our relationship with the EU and the ongoing negotiations with regards to the existing and the potential new framework. You need to negotiate as a small country. There is very little flexibility at present because the EU fears the precedent vis-à-vis the UK, so contractual negotiations with the EU are difficult: first, because the EU is very much focused on Brexit, and second because they don’t want to give Switzerland a better deal. If they did, that could then be used by the UK.’

‘What will make our lives more miserable going forward is our pending discussions with the European Union on bilateral treaties,’ says Daeniker. ‘We sense the drag of Brexit on Swiss negotiations because it is clearly a secondary priority and therefore it took much longer than expected to finalise. We see a certain lack of willingness to compromise on the European level.’

Hochstrasser concludes: ‘The most dramatic impact of Brexit on Switzerland is how it will affect our relationship with the EU on a political level because a lot of people at the EU were primarily concerned with dealing or discussing with Theresa May and coming up with an agreement. That certainly made it more difficult for Switzerland in its own attempt to conclude a framework agreement with the EU, which will be important, but of course only desirable if the terms are acceptable. Certainly, Brexit itself was not a welcome development for Switzerland.’

‘English firms have been instructing us to advise on the relocation of British people wishing to move to Switzerland, often for tax reasons.’
Nicolas Piérard, Borel & Barbey

Another Brexit effect has been felt in private client work – a shift of assets by some investors away from London towards jurisdictions such as Switzerland. ‘In the last few months, English law firms have been instructing us to advise on the relocation of British people wishing to move to Switzerland, often for tax reasons,’ says Piérard. ‘These are mainly non-doms.’

As for the outlook this year beyond Brexit, Trüeb says: ‘It gets more difficult to repeat the numbers from year to year, but two months into 2019, things are looking pretty good. I believe 2019 will be equal to or better than 2018.’ Schellenberg Wittmer had a record year in 2018, according to Borsodi. ‘We are looking at 2019 with the hope that it will continue with the same level of activity,’ he says. LB