All eyes are on the legal market in Switzerland as the wealthy, lightly regulated country deals with new bank rules, a surge in M&A and even a backlash against immigration. Dominic Carman reports

At the heart of Europe, Swiss lawyers bask in the reflected glory of their dynamic, lightly regulated, low-tax economy – consistently ranked the world's most competitive, and a good place for multinationals to base their regional headquarters. Characterised by innovative, skilled workers and flexible employment, it also enjoys the highest per capita income of any major country, except Norway.

There is much substance in this cameo of Switzerland, although the complete picture of its eight million citizens is distinctly more diverse. Swiss lawyers, for example, don't bask. They work. Very efficiently. But alongside their fellow Swiss, they face challenges in preserving the country's stellar reputation. These stem as much from politics as economics: a national impetus to reshape Swiss immigration, and an international desire to reform Swiss banking.

However, the legal business is booming. "We've had a convergence of three phenomena, which has made us spectacularly busy," says Daniel Daeniker, managing partner at Homburger. This analysis of 2014 applies not just to his firm, but also to his leading competitors, all of which are independent.

The Swiss legal market exemplifies stability. Sophistication and size have, to date, made it a relatively closed shop – impenetrable and uneconomic for most international players to have any presence, save Baker & McKenzie and CMS. One day this might change; in the meantime, fee pressure, so prevalent elsewhere, is far less of an issue.

Daeniker's first phenomenon is the US Department of Justice (DoJ) tax evasion programme. In August 2013 the Swiss Federal Department of Finance and the DoJ jointly agreed to encourage Swiss banks to cooperate in the DoJ's investigation into the misuse of foreign bank accounts for tax evasion. The programme allows banks to come clean and pay penalties for previously untaxed wealth, thereby avoiding prosecution in relation to the custody of undeclared assets of former or existing US customers. The DoJ had previously forced many to settle, like UBS; to plead guilty, like Credit Suisse; or even to close, like Wegelin.

The second phenomenon stems from new capital adequacy rules (under the Basel III framework), and a revamp of the architecture of Swiss financial markets regulation.

And third is an M&A wave. "It's pretty close to the peak of the last two waves in 1999 and 2007, both in terms of the number and magnitude of instructions," comments Daeniker.

Banking shake-up
Schellenberg Wittmer partner Benjamin Borsodi says that "all major Swiss firms have been heavily involved in the DoJ programme for the past three years, assisting banks", keeping them "very busy".

Guy Vermeil, managing partner at Lenz & Staehelin (pictured), agrees that the programme is "the main event" in the legal market. "There are approximately 300 banks in Switzerland; 106 decided to join the programme," he explains. "In Geneva alone, we're representing 20 banks, with 40 lawyers involved in internal investigations. Usually, the Geneva office has nearly 100 lawyers, so it's quite exceptional: we had to hire external lawyers to serve our clients."

Once the investigation process is complete – and no firm predicts exactly when that will be – the consensus view is that the number of banks may eventually reduce by half, possibly less.

"There will be consolidation. It's a tough exercise for many banks and asset managers with the increase in regulatory requirements," says Andreas Casutt, managing partner at Niederer Kraft & Frey. "Smaller banks and asset managers, I expect, will either merge into bigger organisations or disappear."

Investigations morphing into mergers should be further good news. But Daniel Hochstrasser, managing partner at Baer & Karrer, sounds a note of caution: "The continued problems of Swiss banks ultimately affect us because we're serving the financial market and, if that suffers, it can have a negative impact on us, too."

Vermeil adds: "The banking sector will have to restructure. Consolidation is the next step in Swiss banking and we've already started to advise on that. It's good for work in the short term, but in the long run, when clients are not doing well, it's not good news for lawyers."

Regulatory overhaul
Daeniker's second phenomenon – the reforming of financial market regulation – started with Basel III rules on capital adequacy. The current revamp of Swiss financial markets regulation crystallised in October when the Swiss government published three new draft statutes, designed to overhaul the status quo.

Many see a downside risk of being overregulated, causing independent asset managers to move elsewhere. "Some proposals in the Swiss parliament are stricter and more far reaching than those in the EU," says Hochstrasser. "These could have a negative impact on the competitive level of Swiss banks and financial institutions." As an interested party, Baer & Karrer is submitting a paper to parliament in the hope that some of the shortcomings are eliminated.

"We're advising clients on how to react to the draft tax proposals," says Daeniker. "As a legislative project, it's going to come in over the next three or four years. We're still in the phase of trying to convince the government that they should change as little as possible."

Casutt, however, sees great potential for the legal profession: "It's a complete overhaul of Swiss financial services regulation – quite remarkable. We currently have four pillars: acts dealing with the Swiss Financial Market Supervisory Authority, banking, stock exchange and securities, and investment funds.

"Of these, three will be replaced by totally new acts with completely new regulation of financial infrastructure on top. So it will fundamentally change the regulatory landscape. All of that, obviously, brings a huge amount of work."

Thriving M&A
And Daeniker's third phenomenon? Examine the list of Swiss M&A transactions in 2014 and it is hard not to be impressed by the values and volume in healthcare, telecommunications, media and technology, retail and industrial goods and services.
Among the most noteworthy is the merger between Lafarge and Holcim, the world's two largest cement makers, currently subject to regulatory approvals. "We advise the French group Lafarge. [The deal] has a transaction value of €40bn (£31.9bn), which is quite significant," explains Hochstrasser, with characteristic Swiss understatement.

Daeniker is more enthusiastic: he heads the Homburger team acting on behalf of Switzerland's Holcim. "We're lead deal counsel," he says. "It's fascinating to do a merger of equals from two completely separate corporate and national cultures."

The blending of cultures, seen throughout Europe, has been most acutely felt in Switzerland: nearly 25% of the population are immigrants, mostly skilled EU workers in IT, finance and healthcare. Since 2002 it has had bilateral agreements with the EU allowing free movement of labour.

Under Switzerland's direct democracy, the federal popular initiative 'against mass immigration' squeezed a 50.3% majority in February's referendum. Hochstrasser argues the business case: "If you limit immigration, you prevent companies finding employees they need from outside Switzerland. Attempts to limit the free movement of people has a negative effect on the economy."

A further vote on 30 November proposes an annual limit of 0.2% of the population, just 16,000 people. Casutt remains optimistic: "The vote we had on immigration was to our detriment, which people realise. We will continue to have a flow of people into Switzerland, which is good for our economy – one of the main drivers."

Switzerland may be wrestling with how to respond effectively to its recent problems, and how best to deal with immigration, a new regulatory regime and tax and employment reform. But when internal confidence and external perceptions are critical, there seems little doubt that pragmatism will prevail.

Further reading: The future of independent law firms 2014 – online special