Claim repayment of kickbacks from Swiss banks

Kickbacks definition

Kickbacks are often referred to as retrocessions, rebates, distribution commissions, trailer fees, repayments, reimbursements, or hidden commissions.

These terms all refer to commissions that an asset manager (such as a bank) receives from a product provider (such as an investment fund) in return for using the products.

These kickbacks are often concealed from the client on whose assets the asset managers earned them. This is not allowed. A new ruling on this practice was handed down by the Swiss Federal Supreme Court on 30 October 2012.

Schweizer Bundesgericht Urteil Kickbacks

New ruling of the Swiss Federal Supreme Court on kickbacks

Excerpt from the ruling:

(…)According to article 400, paragraph 1 of the Swiss Code of Obligations (CO), the mandatary must surrender to the mandator all assets which are intrinsically related to the execution of the mandate. On the basis of case law to date, these include (but are not limited to) “retrocessions” or reimbursements paid to the asset manager by third parties (…).

Full ruling of the Swiss Federal Supreme Court (German)

Reclaim your kickback commissions

For you, as the client of a Swiss bank, this ruling means that you can claim these hidden commissions back from the bank.

Entitlement to reimbursement ranges from 0.5 to 0.75 percent of the value of the custody account per year. For products with especially high risks, moreover, banks and asset managers received over 1% of the invested capital as rebate. Banks like to use the term “distribution commission” in this context; what is meant are the retrocessions received as mentioned in the Swiss Federal Supreme Court’s ruling, better known elswhere as kickbacks.

For 1,000,000 euros or Swiss francs and a ten-year client relationship, the average amounts involved already come to between EUR/CHF 35,000 and 65,000. The amount of claims in individual cases depends mainly on the investment products for which the bank has acted as intermediary. In individual cases, however, the sums involved may exceed EUR/CHF 100,000.

If the investment decisions were taken by an asset manager and not by the bank, the issuer’s rebates were usually shared.

Example of calculation for reimbursement of kickbacks

Please click on the image to read or download the full example calculation in PDF format (German).

 

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Report on experience of reclaiming kickbacks

Go here to read the report on our experience of enforcing claims against Swiss banks and asset managers for the reimbursement of illegally retained distribution commissions.

The client has engaged his bank to safeguard his interests on the basis of an asset management agreement. As a general rule, the investment objectives are defined in an asset management agreement between the bank and the client. On the one hand, the bank manages the client’s custody accounts for him and on the other, the bank decides on the purchase and sale of the investments, based on distribution agreements with providers of these selfsame collective investments and structured products. In return for distribution, the banks receive what are known as trailer fees.

Hidden commissions: a conflict of interests for the banks.

This practice gives rise to a conflict of interests for the bank: the temptation to buy products that generate high distribution commissions and/or kickbacks is greater than the need to achieve an optimally balanced mix in the client’s portfolio.

Decision by the Swiss Federal Supreme Court

On 30 October 2012, the Swiss Federal Supreme Court decided that trailer fees (kickbacks) received by banks acting as asset managers belong to the client. In addition, the banks were obliged to account for their management whenever they were requested to do so, and to surrender all assets intrinsically related to the execution of the mandate to the client/mandator. Under previous case law, this obligation to surrender included retrocessions paid to an external asset manager by third parties.

Now, the referenced ruling has made it absolutely clear that trailer fees also qualify as retrocessions, so they must be surrendered to the client. Furthermore, it has now been clarified that trailer fees which the bank (acting as asset manager) receives from companies in its own group must be surrendered to the client.

In the meantime, it is becoming apparent that this ruling by the Swiss Federal Supreme Court is having virtually no impact on the way banks and asset managers approach their reimbursement obligations. All the rulings handed down in the past are simply ignored, and the same is true of FINMA’s recommendations. Time and again, the same reasons are given for this:

  1. Claims have become time-barred
  2. The client has waived his/her claims
  3. No asset management agreement is in place

Claimants also fall into one of two categories:

  1. clients who have declared their investments in their home country;
  2. clients who have not declared their investments in their home country.

The second category of clients – in particular – was the ideal group for banks and asset managers, because these clients were not especially sensitive to exorbitant fees, nor were they particularly interested in full documentation.

For individuals in this group, remaining anonymous was an especially important concern. All mail and documentation regarding the investments was retained by the bank. The banks even levied separate fees for this “retained correspondence” service.

These circumstances made it possible for banks and asset managers to act quite freely. Clients who preferred conservative investments were supplied with products that actually served one purpose only:

to optimise the banks’ own profit margins by frequent sales and purchases of securities, and by launching products such as index certificates and hedge funds that were highly profitable for the banks and asset managers – but were very dangerous for the clients.

Clients can neither understand nor quantify the actual amount of retrocessions and kickbacks that have been paid – nor yet the losses caused by banks and asset managers. The banks and asset managers use the arguments set out above to fight off clients who attempt to enforce their claims without additional expert knowledge or legal assistance.

In Germany alone, over 125,000 individuals have now submitted voluntary subsequent or amended declarations of their investment income (if any such income was actually earned) in order to obtain exemption from penalties.

The first wave of these declarations came from clients whose details were saved on one of the “tax CDs” as a result of various data leaks from Swiss banks. These leaks triggered a period of hectic activity from 2010 onwards. Tax advisors and attorneys specialised in this client segment. This business model was made easier for them by the banks’ open approach to client data. As well as breaching their due diligence obligations, banks and asset managers even passed on data regarding the individuals concerned to German law firms. The banks and asset managers actually went so far as to sell this “special service” to their clients.

On the one hand, this meant that “difficult” clients from the euro area were quietly purged while on the other, the former clients became enmeshed in a new dependent relationship.

To draw up the voluntary declaration, clients in this category needed precisely the documents that were inaccessible to them, for obvious reasons:

  •  the asset management agreement;
  • asset statements;
  • statements of deposits and withdrawals from the custody accounts (lists of transactions);
  • the income statement.

Yet again, the banks were able to cash in on the situation in a big way. It was not unusual for five-figure sums to be charged for reproductions of the documents required – usually income statements. The advisors were the only ones to receive these documents.

For this reason, banks and asset managers can also afford to ignore individual enquiries from their (former) clients. The claimant either receives no reply at all, or the familiar answers: claims for reimbursement were waived, the claims have unfortunately become time-barred and/or “at no time was an asset management agreement in place, so the Federal Supreme Court’s ruling is not applicable.”

Step 1: Suspend time-barring

First of all, time-barring of the claims must be suspended. To achieve this, it is sufficient to launch enforcement proceedings against the bank and/or the asset manager as per the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA). For claims of less than CHF 100,000, the enforcement costs amount to about CHF 150. We therefore recommend enforcement for the maximum amount (including 5% interest for the duration of the client relationship). The bank receives a summons to pay, against which it can raise an objection (known in German as a “Rechtsvorschlag”). But even if the bank does so, time-barring of the claims is still suspended.

Step 2: Obtain documents

Since clients who submit voluntary declarations typically have few documents or none at all, they themselves (or an expert whom they engage) must obtain all the documents required to value the claims (e.g. the asset management agreement or asset statements for the last 10-15 years). These documents are normally held by the advisors who have drawn up the voluntary declaration. Since they only require income statements covering the last ten years for a subsequent declaration of interest income, only a few claimants are fully documented. To close these gaps in the documentation, the former bank client can request these documents from the bank. However, past experience has shown that the banks are unwilling to meet such requests; they point out that the client is not entitled to disclosure, which is not true. As mentioned above, they like to assert that the client cannot present an asset management agreement with the bank. In such cases, it is advisable for the client to engage an external service provider to safeguard his interests. If need be, however, these documents can also be demanded on the basis of article 8 of the Swiss Data Protection Act.

Step 3: Valuation of claims for reimbursement and compensatory damages

As soon as the asset statements and lists of transactions are available, specialised advisors can make an initial assessment of the reimbursement claims.

In parallel, the bank and/or the asset manager must be requested to disclose their distribution commissions or retrocessions for the last 10 years after the client relationship was terminated. These lists are then compared to internal estimates and plausibility-checked. If the bank or asset manager only supplies totals for each year, the details for individual products must be requested. Banks are particularly keen to forget kickbacks that originate from companies in their own group, or those which have been paid back to the bank via circuitous routes from funds that belong to the group.

Step 4: Pre-litigation claim enforcement

Since the banks’ reflex reaction to a summons to pay is to raise a legal objection, the only option for the claimant/injured party is to have his claims quantified in an arbitration procedure, and to demand surrender of the “distribution commissions”. The first step in the proceedings before the justice of the peace is to sound out the parties’ readiness to reach a settlement, and to conclude one if appropriate. Prospects of a settlement improve significantly if the claimant/injured party is comprehensively documented. We have already been able to use this route to conclude many settlements that made economic sense, taking account of the litigation risk. In some cases, banks are prepared to pay back up to two thirds of proven retrocessions. If discrepancies become apparent from a comparison of the investor’s profile with the investment strategy of the bank or asset manager, it is not advisable to conclude a netting agreement in settlement of all claims in the arbitration court.

Step 5: Enforce claims in court

If the arbitration hearing fails to achieve agreement between the parties, the justice of the peace issues authorisation for a lawsuit. For this purpose, the claimant/injured party has a three-month grace period to bring a legal action against the bank/asset manager. This route requires considerable staying power and a well-filled “war chest”. Alternatively, it is possible to engage a litigation funder who takes on the litigation risk after submitting a draft legal complaint. However, litigation funders require payment for this preliminary work in the form of a contingent fee of up to 35% of the amount realised or awarded.

The legal position is crystal-clear: for many long years, Swiss banks have been receiving high distribution commissions (retrocessions) from fund providers and securities traders – and these payments are actually due to the investors. This was decided back in October 2012 by the Swiss Federal Supreme Court, sitting as the last instance of appeal. Nevertheless, former and current clients who now apply for repayment of rebates must expect to come up against powerful resistance.

Due to the passage of time and the arrogance with which the Swiss banks – yet again – wield their power, it can be said that claims adding up to about CHF 4 billion overall have neither been asserted nor enforced. Every year, claims amounting to CHF 400 million become time-barred.

Swiss banks and asset managers have collaborated with international law firms to achieve their purpose: they have shielded themselves completely against claimants and injured parties.

Banks and asset managers repeatedly deploy untruthful assertions and misleading information to discourage claimants and injured parties.

In some cases, additional legal entities have been set up between the client and the bank, such as:

  • institutions or foundations in Liechtenstein
  • insurance wrappers in Bermuda

Additional fees and commissions for the bank and the asset manager or fiduciary can be generated in structures of this sort. Experience shows that cases such as these can quite frequently give rise to claims for compensatory damages as well as for repayment of distribution commissions or retrocessions.

De iure AG advises investors never to be fobbed off by these threadbare excuses. As a general rule, the banks have almost certainly received commissions – and they are also able to put a figure on them. Likewise, investors who do not have an asset management agreement should never waive their claims, because De iure has already taken legal action against this restriction.

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