Pictet splits research and banking

Pictet is separating research and investment banking Keystone

One of Switzerland's biggest private banks is to separate research from investment banking amid increasing pressure for the industry to become more transparent.

Pictet is the first Swiss bank to introduce such measures following similar moves by the world’s largest banking group, Citibank.

“To avoid any potential risk of conflicts of interest, Pictet has decided to separate the buy-side research business from the sell-side activities, by setting up a distinct brokerage company,” the bank said in a statement.

Pictet & Cie will remain the majority shareholder of the new company, which will start operating in the first half of next year.

The bank said the research team would move to new offices “to ensure genuine operational and structural independence”.

The newly formed company will group together the members of the existing brokerage service team, currently made up of 55 people, working in Geneva, Zurich, London and Montreal.

The bank said members of the investment banking management would keep their positions, and would act as shareholders in the new company, which will be known as a member of the Pictet group.

Chinese Walls

So-called “Chinese Walls” are supposed to guarantee the organisational and operational separation of a bank’s individual divisions.

But the increasing number of scandals surrounding analysts’ recommendations has dented confidence in their effectiveness.

The Swiss Bankers Association takes the view that Chinese Walls are sufficient to guarantee its honest advice for clients.

“We are in favour of clear ‘Chinese Walls’, however, we think that a complete separation of research and investment would go too far,” said the association’s Thomas Sutter.

He added that new rules and regulations were currently being drafted, and that these would be presented to the Swiss Bankers Association by the end of the year.

“These new rules will regulate minimal standards, affecting organisation and analysts’ salaries and selling behaviour,” Sutter emphasised.

AOL shareholders

The effectiveness of Chinese Walls has most recently been called into question by a class-action lawsuit brought by AOL shareholders against the Credit Suisse Group.

The suit claims that analysts recommended to buy AOL shares even though the bank’s investment arm, Credit Suisse First Boston (CSFB), was sceptical about their value, leading to a clear conflict of interest.

Credit Suisse has had problems over its analysts’ advice before. In 2000, an analyst at the bank was sacked after advising investors to sell shares in Swissair, warning that the airline was in deep trouble.

The Credit Suisse analyst, Thomas Chandiramani, said he had been told to “correct the news and that we must recommend Swissair shares on a ‘buy’ again”. The carrier collapsed last October under huge debts.

Chandiramani sued Credit Suisse for unfair dismissal and accepted an out-of-court settlement of SFr200,000.

He said the incident was a clear case of a conflict of interest. “Mr Mühlemann was chief executive at Credit Suisse and a member of the board of Swissair. It was the same with Philippe Bruggisser – he was head of Swissair and a member of the Credit Suisse board.”

Credit Suisse did not want to comment about whether it intended to follow Pictet’s move and separate research from investment banking.

CSFB is facing charges in the US state of Massachusetts that it issued biased research that was favourable to its clients.

swissinfo

Key facts

Pictet’s move is in line with moves to make investment banking more transparent.
A new brokerage company will handle the group’s research activities.
It will operate from a different office to ensure “genuine independence”.