Despite jitters over the US targeting of Switzerland's famously private bankers, the country's law firms are poised to profit from the resulting surge in regulatory and compliance work, writes Helen Mooney

It is no exaggeration to say that the Swiss financial market – including corporate lawyers – has had the jitters of late. The fall of the private bank Wegelin, coupled with the indictment by the US authorities of former Niederer Kraft & Frey partner Edgar Paltzer, has certainly caused a stir, especially in the banking sector. 

The once fabled image of private Swiss banks ready to cut favourable deals and hide the money of the rich and famous from prying eyes and international tax authorities is without doubt crumbling. So where does this leave Switzerland's legal powerhouses?

In fact, they may not be in as difficult a place as some may have feared. Deals remain steady and the opening-up of the once impregnable banking towers is indeed generating work for law firms. 

Daniel Daeniker (pictured), managing partner of Zurich-based firm Homburger, describes 2012 as a year of gentle recovery after a "somewhat slow 2010 and 2011″ and he believes 2013 has picked up further in terms of M&A and capital markets work.

He says the steady pace of work for Swiss firms is down to the fact that although there are peaks and troughs in the Swiss legal market, they are much less pronounced than elsewhere. 

"When things go up, we don't mushroom as much as in the UK or US, for example. When things go down, we do not really experience any partner demotions or associate layoffs you would see elsewhere.

"In the past year, we have seen some interesting initial public offerings (IPOs) and a couple of M&A transactions. But what is really interesting is that the financial services and banking work with the teams advising clients on the new banking regulations, structuring the new-fangled regulatory capital instruments, and doing investigation work."

Alexander Troller, Geneva partner at Lalive, agrees: "Firms that are truly integrated are faring well. We have not seen big firms collapsing in Switzerland – a good indicator that the market is stable and profitable. The importance firms place on succession plans and hiring good talents shows that there is rejuvenation."

M&A on the rise

Compared to other jurisdictions, there has been a decent amount of work for lawyers in the M&A market. A series of big deals started last August with Swiss banking group Julius Baer's purchase of Bank of America Merrill Lynch's private wealth business for $880m (£580m).

At the start of April 2013, the bank announced it had absorbed operations in Chile, Uruguay, Luxembourg and Monaco, and planned to incorporate further regions, including the UK, later this year.

Other mergers towards the end of 2012 included Swiss mining giant Glencore and Xstrata, and in pharmaceuticals the Johnson & Johnson-Synthes deal.

But according to Daeniker, the next 'boom' in the legal market will come in banking and financial services: "There are three reasons for this. Firstly, after the financial crisis, there has been a flurry of new rules and regulation and banks are having to reorganise themselves.

"Secondly, in Swiss banking there are legacy issues surrounding the bank secrecy. Finally, the financial markets regulator, as a result of its self-assessment after the financial crisis, has taken a tougher regulatory stance than before."

Franz Stirnimann Fuentes, a partner at US firm Winston & Strawn's Geneva office, agrees that banking has been a particularly busy practice area for Swiss firms:  "As you probably suspect, Swiss firms are busy advising on the US tax issue and relevant compliance issues, which are raising a host of new and complex legal issues. Advice on regulatory issues and compliance is certainly one of the more lucrative markets, also in the long term."

As Charles Adams, managing partner of Akin Gump Strauss Hauer & Feld's Geneva office, sums up: "The whole dynamic around US-Swiss issues having to do with undisclosed bank accounts of American citizens and taxation has naturally generated a cottage industry of activity."

Baker & McKenzie partner Stephanie Jarrett heads up the firm's wealth management practice in Geneva. She says that in financial services, Switzerland is facing a "different future".

"For those of us involved in tax planning and helping clients become tax compliant, there is a lot of work because of the changing environment."

She adds that as a result of the regulatory and market changes in the financial services sector, many of the small and medium-sized banks are facing consolidation, which is generating M&A and insolvency work for law firms.

"The financial services industry as a whole has been put under pressure by the regulator and there is market pressure to consolidate. Because of the new approach to tax compliance, we may see some money move elsewhere – further East in many cases."

Patrick Sommer, partner at CMS von Erlach Henrici, agrees: "There are a couple of banks who could be next in line and we have seen some quite nervous reactions [after Wegelin]. We will also see a change in the banking environment. 

"Smaller banks will probably get taken over by the larger banks in order to be able to comply with the regulations. In particular, in the private banking world the Swiss banking environment will change."

Competition for legal work is also becoming much more intense, admits Daeniker: "Big-ticket clients are carefully managing their legal budgets now. In-house lawyers have become more active and are somewhat more selective in giving out external work."

Lack of flexibility?

As well as having to engage in beauty parades for the first time, the problem many Swiss firms face is a lack of flexibility in terms of offering discounts on their fees compared to their Anglo-Saxon peers.

So are there any new international entrants taking a plunge in the Swiss market? Bird & Bird's recent association with BCCC Avocats is an example of the way some Anglo-Saxon firms are targeting the Swiss market, and future entrants may employ a similar strategy. 

However, it is still rare for non-Swiss firms to attempt to increase their footprint. One partner in a Swiss firm says that in terms of new international entrants, "three out of the five UK magic circle firms have confirmed to us that they are not coming to Switzerland".

As Adams explains: "Switzerland is a tiny market and it is over-lawyered as it is. There is very little value-added that could be brought in by a new legal entrant. By and large, Switzerland is one of the least likely places a foreign law firm would want to be setting up shop on a greenfield basis."

It is also a market which rarely sees partner moves. Matthew Parish (pictured, above), partner at Holman Fenwick Willan's Geneva office, explains: "Switzerland is a highly illiquid market where everybody knows each other and the general culture is still to stay put. So when occasionally partner moves happen, they are often controversial." 

Daeniker agrees: "Law firms in the first tier in Switzerland still remain remarkably stable in terms of movement. You will see switches at third or fourth-year associate level, but then that is it. This will not change in the immediate term as firms keep clients and keep young partners happy." 

That said, there will be two noticeable moves this year: arbitration partners Philipp Habegger and Marc Veit are jumping ship from local firm Walder Wyss to the Zurich office of Lalive at the end of the year.

And Adams predicts that in five years, some of the conservative customs in Swiss firms will start to break down: "Lawyers will begin to view themselves as free agents and lateral movements will become the norm as they are in the UK, US and indeed Germany." 

Shareholder scrutiny

Elsewhere, the Swiss business environment took another hit earlier this year when the Swiss public voted to back enhanced shareholder scrutiny of executive pay packages.

Known locally as the Minder Referendum, the proposals were conceived by politician Thomas Minder in 2008 in response to significant losses at UBS, which were blamed on a bonus culture leading to excessive risk-taking by managers. 

The legislation – not scheduled for implementation for at least a year – will allow shareholders in publicly-listed Swiss companies to curb senior executive remuneration, particularly by cracking down on golden hellos and goodbyes, as well as bonus payments and salaries generally.

Reaction to the proposals within the legal community is, however, mixed about the referendum's impact. Ricardo Ugarte, managing partner of Winston & Strawn's Geneva office, believes that while the vote was "very symbolic", it is unlikely to "have the effect of dissuading the business community from coming to Switzerland".

Sommer agrees: "It could have an impact on the investment climate in Switzerland, but I do not think people will decide not to invest in Switzerland or reconsider whether they should have their HQ here because of the referendum."

Yet Jakob Hoehn, a partner at Pestalozzi in Zurich, warns that the Minder Referendum has started to alert foreign clients to the fact that Switzerland is not such a stable environment as it has been: "Clients are becoming a bit wary. It is a little like a shock to them." 

But despite such concerns, it seems that the Swiss legal community is fairly sanguine about its immediate prospects. Bolstered by large-scale M&A and the extra work being generated by the global tax crackdown, it looks like both local and global firms can sit comfortably for some time to come.