The Swiss banking industry has a long tradition, and has been internationally focused from the outset. Services offered by Swiss banks comprise all banking services.
Currently there are 265 licensed banks in Switzerland, of which:
- a two are big banks that are global systemically relevant banks (G-SIBs) (UBS AG, Credit Suisse AG) and three are systemically relevant banks or banking groups (SIBs) (the Zurich Cantonal Bank, Raiffeisen Switzerland and PostFinance);
- b 23 are (partly) state-owned cantonal banks;
- c 62 are regional banks and savings banks;
- d 80 are foreign controlled banks (i.e., banks controlled by significant foreign shareholders); and
- e 27 are Swiss branch offices of foreign banks.
Current challenges to the Swiss banking industry include the continued regulatory activity spurred by the 2008 financial crisis. The main focus is on enhancing the international regulatory framework and cooperation, as well as the stability of the financial industry and its systems in line with the Basel III requirements, generally by reinforcing capital adequacy and solvency requirements, cutting back on incentivising short-term risk-taking, and – as a particular topic for big banks – addressing the ‘too big to fail’ issue.
With Credit Suisse AG, UBS AG (G-SIBs) and the Zurich Cantonal Bank, Raiffeisen Switzerland and PostFinance (SIBs), Switzerland currently has five banks that are viewed as systemic banks. Since the financial crisis, Parliament has notably passed several amendments to the Banking Act that address capital adequacy, leverage ratios and liquidity requirements with specific and more stringent requirements for systemic banks, and the Swiss regulator, the Swiss Financial Market Supervisory Authority (FINMA), has strengthened its stance on risk (including legal and reputational risk) management and corporate governance requirements.
ii THE REGULATORY REGIME APPLICABLE TO BANKS
i Main statutes
The main statutes governing the Swiss financial markets are:
- a the Federal Financial Market Supervision Act of 2007 (FINMASA);
- b the Federal Banking Act of 1934 (BA);
- c the Federal Stock Exchanges and Securities Trading Act of 1995 (SESTA);
- d the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading of 2015 (FMIA);
- e the Federal Collective Investment Schemes Act of 2006 (CISA); and
- f the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector of 1997 (AMLA).
These statutes are supplemented by a number of ordinances enacted either by the government (i.e., the Federal Council) or, as regards more technical aspects, by FINMA, and their practical application is further regulated by FINMA circulars.
These regulations are complemented by the Federal Act on the Swiss Financial Market Supervisory Authority, which can be considered as a framework law governing the supervisory activities and instruments of FINMA.
ii Banking and securities dealing activities
From a Swiss perspective, a business entity that solicits or takes deposits from the public (or refinances itself with substantial amounts from other unrelated banks) to provide financing to a large number of persons or entities is considered a bank. The conduct of banking activities in or from Switzerland is subject to a licensing requirement and to ongoing FINMA supervision.
Swiss financial markets law makes no distinction between commercial and investment banks, and banks are not limited in the scope of their activities. As a result, banks may act as broker-dealers in securities, in addition to pursuing deposit-taking and lending activities (i.e., interest operations). Banks need to apply for an additional authorisation as a securities dealer, however, to conduct securities trading activities. The main statutes governing the securities business of both banking and non-banking intermediaries in Switzerland are SESTA, FMIA and their respective implementing ordinances.
Under Swiss law, securities dealing activities are broadly defined. They encompass the activities of securities dealers, issuing houses, market makers, derivative houses, and brokers maintaining accounts in their books or holding securities deposits for more than 20 clients.
Although banking and securities dealing licences are two separate authorisations, most requirements in terms of minimum substance and documentation overlap. From a practical perspective, both banking and securities dealing licensing requirements are thus usually assessed within the same FINMA process. In a nutshell, the conditions for the granting of a licence to conduct banking or securities dealing activities encompass financial and organisational requirements (see Sections III and IV, infra), as well as ‘fit and proper’ tests imposed on managers and qualified shareholders (see Sections III, IV and VI.i, infra). FINMA grants a licence to the legal entity pursuing the banking activities, not to its managers or shareholders. It then monitors compliance with licensing criteria (and other regulatory obligations) on an ongoing basis. If, at a later stage, any of the licence requirements cease to be fulfilled, FINMA may take administrative measures, including, in extreme cases, the withdrawal of the licence.
The Swiss regime for cross-border banking and securities activities has to date been rather liberal: foreign regulated entities that operate on a strict cross-border basis (i.e., by offering banking or securities services to Swiss investors without having a business presence in Switzerland) do not need to be authorised by FINMA. If, however, the activities of a foreign bank or securities dealer involve a physical presence in Switzerland on a permanent basis, this cross-border exemption is not available. In practice, FINMA considers a foreign entity to have such Swiss presence as soon as employees are hired in Switzerland. That said, FINMA may also look at further criteria to determine whether a foreign bank has a Swiss presence, such as the business volume of that bank in Switzerland or the use of teams specifically targeting the Swiss market.
The granting of a licence to a foreign bank to establish a Swiss branch, representative office or agency is conditional upon the principle of reciprocity being satisfied in the country in which the foreign bank has its registered office, and if a Swiss bank or securities dealer is permitted to establish a representative branch, office or agency in the relevant foreign country without being subject to substantially more restrictive provisions than those imposed in Switzerland, FINMA will deem the reciprocity test met.
The granting of a licence to a Swiss bank or securities dealer controlled by foreign shareholders is also made dependent upon the reciprocity requirement by the relevant foreign country of domicile or incorporation of the foreign shareholders (see Section VI.i, infra).
iii Other regulated activities
A Swiss bank may also serve as a custodian for collective investment schemes. This type of activity is subject to the CISA and its implementing ordinances.
Financial intermediaries are further supervised for the purpose of combating money laundering and the financing of terrorism according to the Anti-Money Laundering Act and its various implementing ordinances.
The single integrated financial market supervisory authority, FINMA, is responsible for the supervision of banks, securities dealers, stock exchanges and collective investment schemes, as well as the private insurance sector. FINMA also monitors financial intermediaries with a view to preventing money laundering and the financing of terrorism.
FINMA is a public institution with separate legal personality. Although it carries out its supervisory activity independently, FINMA has a reporting duty towards the Federal Council, which approves its strategic objectives, as well as its annual report prior to publication, and appoints FINMA’s CEO. Parliament is responsible for overseeing FINMA’s activities.
FINMA employs more than 500 people. Its operating expenses are covered by fees and duties levied from the supervised entities. FINMA is able to carry out its tasks with a relatively modest organisation mainly as a result of the Swiss financial markets supervision system’s strong reliance on external auditors and self-regulatory organisations. Indeed, external auditors carry out direct supervision and on-site audits, whereas FINMA retains responsibility for the overall supervision and enforcement measures (see Section III, infra).
Self-regulatory organisations are delegated certain regulatory duties: the Swiss Bankers Association (SBA), for instance, issues self-regulatory guidelines to its members, which FINMA recognises as minimum standards that need to be complied with by all Swiss banks. In particular, the SBA’s guidelines governing the banks’ duty of due diligence in identifying the contracting party and the beneficial owner of accounts,2 the rules of conduct in securities dealing3 and portfolio management4 play an important role in practice.
iii PRUDENTIAL REGULATION
i Relationship with the prudential regulator
The Swiss banking supervision system is based on an ‘indirect’ (or dual) supervision model. Banks, foreign banks’ branches and financial groups (or conglomerates) subject to Swiss supervision must appoint an external audit company supervised by the Federal Audit Oversight Authority. The auditor assists FINMA in its supervisory functions: it examines annual financial statements, and reviews whether regulated entities comply with their by-laws and with Swiss financial markets regulation and self-regulatory provisions. FINMA requires that financial and regulatory audits be conceptually separated and may require, where appropriate, that these two audits be carried out by different audit firms. The results of the financial and regulatory audits are detailed in annual audit reports that are to be handed over to the supervised entity and to FINMA. FINMA exercises its oversight and ascertains whether the various regulatory requirements are complied with largely based on these reports. The intensity of the supervision and the direct involvement of FINMA, in particular as regards qualitative aspects of supervision, depend on the category a bank or securities dealer is assigned to. In this context, FINMA applies a ‘risk-oriented’ supervision, classifying regulated banks and securities dealers according to their importance (notably in terms of assets under management, deposits and required equity) and risk profile:
- a category 1 institutions are extremely large, important and complex market participants, which require intensive and continuous supervision;
- b category 2 institutions are deemed very important and complex, and require close and continual supervision;
- c category 3 market participants are large and complex to which a preventive supervision model is applied; and
- d category 4 and 5 institutions are small to medium-sized participants, for which event-driven and theme-based supervision is generally deemed sufficient.
In addition, auditors are obliged to inform FINMA if they suspect any breach of law or uncover other serious irregularities. Supervised entities further have a general duty to inform FINMA of any event or incident, which may be of relevance from a supervisory perspective. Furthermore, banks have special reporting duties, for instance, in cases of changes in the foreign controlling persons (or entities), in the qualified shareholders, and in the status of statutory equity capital, liquidity ratios or risk concentrations. Based on such informational tools, FINMA initiates investigations (if necessary, through an appointed investigator) and, if a breach is ascertained, takes administrative measures aimed at restoring compliance. In cases of serious breach, FINMA can ultimately decide to withdraw the licence. In the event of serious breach (and, in particular, in the event of violation of market conduct rules), FINMA may also order the disgorgement of illegally generated profits. In practice, the most common sanctions that FINMA takes relate to the forced liquidations of unauthorised securities dealers, insolvency procedures and sanctions following non-compliance with Swiss know-your-customer rules.
Following the 2008 financial crisis, a more rigorous supervisory regime has been put in place for UBS AG and Credit Suisse AG, as the size and complexity of these institutions raise systemic risks. Accordingly, FINMA does not rely exclusively on the reports of the banks’ auditors, but carries out its own investigations and maintains close contact with the two banks.
FINMA has generally been more active and interventionist than was previously the case with these two banks. For several years, and in accordance with its risk-based approach, FINMA has carried out extensive stress tests at Credit Suisse AG and UBS AG to periodically and systemically assess their resilience against sharp deteriorations in economic conditions. In 2010, FINMA developed severe stress scenarios in conjunction with the Swiss National Bank that have recently been complemented to assume particular shocks from some European countries. FINMA requires systemic banks to have a Tier 1 ratio of at least 8 per cent under the stress events tested. In addition, FINMA requires them to hold sufficient first-class liquid assets to cover the amount of estimated outflows during a period of at least 30 days under a stress scenario.
Since their classification as SIBs between 2013 and 2015, the Zurich Cantonal Bank, the financial group Raiffeisen and PostFinance must, like UBS AG and Credit Suisse AG, fulfil enhanced supervisory requirements.
ii Management of banks
The granting of a banking or securities dealer licence is conditional upon the fulfilment of certain organisational requirements. In particular, the articles of incorporation and internal regulations of a bank must define the exact scope of business and the internal organisation, which must be adequate to the activities of the bank. As a general rule, two separate corporate bodies must be in place:
- a a board of directors, which is primarily in charge of the strategic management of the bank, and the establishment, maintenance, monitoring and control of the bank’s internal organisation. The board must comprise at least three members who meet professional qualifications, enjoy a good reputation and offer every guarantee of proper business conduct. Depending on the size, complexity and risk profile of the bank, FINMA may require that the board comprises more than three members. In addition, FINMA expects, as a rule, that a substantial number of the board members have a close relationship to Switzerland in terms of residence, career or education. In practice, FINMA expects at the very least that the chair or vice chair of the board be domiciled in Switzerland. As a matter of principle, the board must be free of any conflicts of interest with the management or with the bank itself. By law, the board of directors of a Swiss bank is non-executive, with a strict prohibition of a double mandate both as director and manager; and
- b the bank’s executive management, which carries out the executive management of the bank and implements the instructions of the board of directors. Its members must meet the various professional qualifications and ‘fit and proper’ tests. As a rule, FINMA requires that a Swiss bank be managed from Switzerland, and senior management are typically expected to be domiciled in Switzerland.
Under FINMA practice, the strategic management, supervision and control by the board of directors, the central management tasks of the management, and decisions concerning the establishment or discontinuation of business relationships may not be delegated to another affiliated or non-affiliated entity. As a result, a Swiss bank that is a subsidiary of a foreign group must be granted a certain degree of independence in its decision-making process. General instructions and decisions from a foreign parent entity are, however, permitted. For the rest, as a general rule, outsourcing of other functions within a Swiss bank to affiliated or non-affiliated service providers both in Switzerland and abroad is generally permitted, subject to the satisfaction of certain requirements, in particular in relation to Swiss banking secrecy and data protection rules. Outsourcing by banks is governed by FINMA Circular 2008/7, which is currently under revision. The draft new Circular 2017/xx on Outsourcing presented for consultation provides for the following noteworthy changes:
- a systemically important banks will no longer be permitted to outsource critical services to other group affiliates. Further, systemically important banks will have to ensure that any outsourcing in place would not risk disrupting the continuity of activities (and in particular critical services) in an insolvency or liquidation scenario;
- b banks will have to maintain an inventory of all outsourced services;
- c in the case of outsourcing outside Switzerland, banks will have to make sure that all necessary data for reorganisation, resolution and liquidation purposes remain accessible in Switzerland at all times; and
- d the requirements provided by the circular are to be complied with regardless of whether or not outsourcing is intragroup.
It is expected that a final version of the revised Circular will be issued shortly so as to enter into force in July 2017.
Specific constraints and requirements regarding the organisation of a Swiss bank (e.g., with respect to internal audit, controls, compliance and reporting, segregation between trading, asset management and execution function) vary depending on the actual business and size of the bank.
In this context, it is worth noting that FINMA Circular 2010/1 on remuneration schemes, whose purpose is to increase the transparency and risk orientation of compensation schemes in the financial sector, provides for 10 principles that certain financial institutions must observe. Although these rules do not impose any absolute or relative cap on remunerations, FINMA requires that variable compensations (i.e., any part of the remuneration that is at the discretion of the employer or contingent upon performance criteria) be dependent on long-term sustainable business performance taking into account assumed risks and costs of capital. FINMA thus expects a significant portion of such remuneration to be payable under deferral arrangements. Furthermore, the compensation policy is to be disclosed annually to FINMA. These rules are mandatory for banks, securities dealers, financial groups (or conglomerates), insurance companies, and insurance groups and conglomerates with capital or solvency requirements in excess of 2 billion Swiss francs. For other financial institutions, the Circular represents guidelines for adequate remuneration policies.
FINMA Circular 2010/1 was amended on 22 September 2016, and the revised version will enter into force on 1 July 2017. The scope of application of Circular 2010/1 has been reduced: as from July 2017, FINMA’s remuneration rules will only be mandatory for institutions with complex remuneration systems and materially relevant compensation levels. In practice, this will concern UBS AG and Credit Suisse AG and the largest insurance groups. FINMA will in any event also be able, as the case may be, to impose on other banks the implementation of some or all of the provisions outlined in the revised Circular.
Finally, on November 2016, FINMA published its revised corporate governance requirements for banks. The new Circular 2017/1 on Corporate Governance and the revised Circular 2008/21 on Operational Risks will enter into force on 1 July 2017. They consolidate several requirements that previously derived from less formal regulation and guidance and FINMA practice, and integrate the key principles of corporate governance and risk management recently issued by the Banking Committee on Banking Supervision into Swiss regulation. The new Corporate Governance Circular and the revised Operational Risks Circular are a response to the International Monetary Fund’s 2014 assessment of the Swiss financial sector, which notably called for more clarity and guidance on qualitative requirements applied by FINMA in the banking sector. Among the main changes or additions included in those circulars, the following can be noted:
- a the appointment of an audit committee, a risk committee and an independent chief risk officer will be mandatory for banks and securities dealers falling into supervision categories 1 to 3 (i.e., large and complex banks, very important and complex banks, and extremely large, important and complex banks; category 3 (large and complex) banks, however, will be able to set up a mixed audit and risk committee);
- b the establishment of an institution-wide risk management framework defining notably the institution’s risk policy, risk appetite and limits, to be approved by the board of directors, will be required for all banks and securities dealers;
- c risk management principles should be expanded to include IT and cyber-risks;
- d the executive management of systemically important banks will be required to have appropriate frameworks and resources in place to ensure the continued provision of critical banking services in the event of insolvency; and
- e while deviation from FINMA guidelines was previously admitted on a ‘comply or explain’ basis, deviations from Circular 2017/1 will require FINMA’s approval.
iii Regulatory capital and liquidity
The Swiss regulatory capital and liquidity regimes implement the Basel III recommendations.5 Capital adequacy and measurement rules are embedded in the Capital Adequacy Ordinance (CAO), and the Basel minimum standards are defined therein by reference to the most recent recommendations of the Basel Committee on the calculation of capital requirements. The CAO, therefore, overall implements pure Basel III requirements as regards the minimum capital requirements and their measurement.
As the Basel III capital requirements are minimum requirements and Switzerland has a tradition of imposing more stringent capital requirements on its banks, the CAO provides for an additional layer of capital (additional capital), which requires Swiss banks to have additional capital based on the size and specificities of their business.
The differences to Basel III can be summarised as follows:
- a possibility of a partial waiver of capital instruments in cases of a point of non-viability (PONV);
- b particular rules with respect to obligations to Swiss pension funds;
- c possibility of a direct deduction from common equity Tier 1 capital as an alternative to a risk-weighting of an asset;
- d certain minor deviations with respect to deductions pending clarification of respective international standards; and
- e application of requirements on a stand-alone basis for which Basel III does not make any recommendations.
Calculation of capital requirements
As regards credit risks, Swiss banks can choose between the standard approach (international standard SA-BIS) and an internal ratings-based approach (IRB in its two variations: foundation IRB or advanced IRB). The CAO no longer provides for the simple Swiss standard ‘SA-CH’, and banks using SA-CH have to move to the SA-BIS within a certain transitional period.
As regards operational risks, Swiss banks can choose between the basic indicator and the standard approach as simple methods. A Swiss bank having the necessary resources may also choose the advanced measurement approach and thereby use a tailor-made proprietary risk model approved by FINMA.
As regards market risks, the CAO implements the respective rules developed by the Basel Committee in cooperation with the International Organization of Securities Commissions.
Capital requirements must be met both at the level of the individual institution and at the level of the financial group or conglomerate. Stand-alone reporting is required on a quarterly basis and consolidated reporting on a semi-annual basis.
The required capital is as follows.
Minimum capital requirements
The minimum capital requirements (after application of regulatory adjustments) call at all times for an aggregate (Tier 1 and Tier 2) capital ratio of 8 per cent of a bank’s risk-weighted assets, with a minimum common equity Tier 1 capital ratio of 4.5 per cent and a minimum Tier 1 capital ratio of 6 per cent of such risk-weighted assets.6 In this context, banks’ assets are notably weighted against credit risk, non-counterparty-related risks, market risks, operational risks, risks under guarantees for central counterparties and value adjustment risks in connection with derivative counterparty credit risks.
From 1 July 2016, banks must have a capital buffer of up to the amount of the total capital ratio in accordance with requirements specified in the CAO for each bank category. If the minimum ratio is not met due to unforeseeable events, such as a crisis of the international or Swiss financial system, this does not amount to a breach of the capital requirements, but a deadline will be set by FINMA for replenishing the capital buffer.
The Swiss National Bank can request the Federal Council to order that banks must maintain a countercyclical buffer of up to 2.5 per cent of all or certain categories of their risk-weighted assets in Switzerland if this is deemed necessary to back the resiliency of the banking sector with respect to risks of excessive credit expansion or to counter an excessive credit expansion. A countercyclical buffer currently applies to mortgages.
Extended countercyclical buffer
From 1 July 2016, banks with total assets of at least 250 billion Swiss francs, of which the total foreign commitment amounts to at least 10 billion Swiss francs, or with a total foreign commitment of at least 25 billion Swiss francs, are required to maintain an extended countercyclical buffer in the form of common equity Tier 1 capital. Such extended countercyclical buffer is calculated on the basis of foreign private sector credit exposures, including non-bank financial sector exposures.
Additional capital requirements
In special circumstances and on a case-by-case basis, FINMA may demand that certain banks maintain additional capital, notably to respond to risks that FINMA deems not adequately covered by the minimal capital requirements. Such additional capital requirements primarily aim at ensuring, together with the capital buffer, that the minimum capital requirements can also be met under adverse conditions.
To qualify under the capital requirements, equity must be fully paid in or have been generated by the bank. As a rule, it cannot be directly or indirectly financed by the bank, set off against claims of the bank or secured by assets of the bank. All qualifying capital must be subordinated to all unsubordinated claims of creditors in the case of liquidation, bankruptcy or restructuring of the bank. Capital instruments that are not only convertible or subject to a conditional waiver in the case of an imminent insolvency of a bank are qualified based on their respective terms prior to such conversion or reduction, other than in the context of the requirements for additional capital or convertible instruments of systemic banks.
The capital qualifying under the above general requirements is divided into Tier 1 capital and Tier 2 capital. Tier 1 capital is, in turn, subdivided into:
- a common equity Tier 1 capital, which consists of the paid-in capital, disclosed reserves, reserves for general banking risks (after deduction of latent taxes unless provided for) and profits carried forward and, with certain limitations, profits for the current business year as shown on audited interim financial statements reviewed in accordance with FINMA guidelines; and
- b additional Tier 1 capital, which consists of perpetual equity or debt instruments with restricted optional repayments and discretionary distributions providing for a conversion into common equity Tier 1 instruments (or, in the case of equity instruments without a conversion feature, a waiver of any privilege over common equity Tier 1 instruments), or reduction and write-off to contribute to the restructuring of a bank in the case of its threatened insolvency (PONV). Such conversion or reduction must take place no later than at the acceptance of public aid or when ordered by FINMA to avoid insolvency in the case of equity instruments, whereas an additional trigger of breaching a minimum threshold of 5.125 per cent of common equity Tier 1 capital is required for debt instruments. Debt instruments with capital reduction may provide for a conditional participation in the benefits of a subsequent recovery of the bank’s financial situation. Additional Tier 1 capital issued by a special purpose vehicle, the proceeds of which are immediately and without restrictions passed on to the ultimate holding company or an operative company of the group in the same or higher quality, qualifies as additional Tier 1 capital on a consolidated basis.
Tier 2 capital consists of equity or debt instruments with a minimal term of five years with restricted optional repayments and discretionary distributions providing for their conversion or reduction at such time as the bank reaches the PONV as for additional Tier 1 capital. During the last five years until final maturity, the amount of such instruments qualifying is reduced by 20 per cent of their nominal amount for each year. FINMA is to issue guidelines for further elements to qualify as Tier 2 capital.
Banks must apply full or threshold deductions to the above capital elements to account for various items such as losses, unfunded valuation adjustments, goodwill, deferred tax assets and defined benefit pension fund assets in line with the Basel minimum standards.
Based on the Liquidity Ordinance (LO), which provides for the implementation of a leverage ratio in line with Basel III, on 1 January 2015 FINMA enacted Circular 15/3 Leverage Ratio, which defines the methodology for calculating the leverage ratio in line with the Basel III methodology.
Risk diversification rules
The maximum risk concentration permissible is 25 per cent of the overall required capital (after application of required deductions).
The LO sets out the quantitative and qualitative requirements for the minimum liquidity for banks and systemic banks. While FINMA is in charge of the implementation and enforcement of the new LO, it must consult with the Swiss National Bank on any questions relating to its implementation.
With the revision of the LO as of 1 January 2015, the quantitative elements required by the Basel III framework for the liquidity coverage ratio (LCR) have now also been introduced for non-systemic banks and will be gradually implemented until 2019, whereas systemic banks had to adhere to these requirements and the additional Swiss requirements applicable to them as from 2015. The net stable funding ratio (NSFR) will be implemented in January 2018 following a test reporting phase.
Banks have to report their LCR to the Swiss National Bank as of each month end, within 20 calendar days for non-systemic banks and within 15 calendar days for systemic banks.
Banks that hold privileged deposits must maintain additional liquid assets to cover their respective obligations as set by FINMA based on the amount of such privileged deposits reported by the bank on an annual basis. Financial groups must maintain adequate liquidity on a consolidated basis. Finally, certain short-term liabilities to one single customer or bank in excess of 10 per cent of the aggregate of such short-term liabilities on a gross basis must be reported.
Specific regime applicable to systemic banks: capital, liquidity and risk diversification
As regards capital requirements, on 11 May 2016 the Federal Council adopted an amendment to the CAO that sets out the specific capital requirements for SIBs and introduces new requirements for G-SIBs in line with G20 standards. The revised CAO came into effect on 1 July 2016, subject to certain phase-in provisions.
SIBs must have sufficient capital to ensure continuity of their service in a stress scenario and to avoid state intervention, restructuring or winding up by FINMA (i.e., going concern capital requirement). The going concern requirement consists of a basic and a progressive component, and is set with respect to both the bank’s leverage ratio and its risk-weighted assets.
The progressive component is calculated based on the degree of systemic importance of the bank such as its size and market share. The basic going concern capital requirement of a SIB consists of a base requirement of 4.5 per cent leverage ratio and 12.86 per cent risk-weighted assets, and a surcharge. With the inclusion of the progressive component, G-SIBs will have to comply with a 5 per cent leverage ratio and 14.3 per cent for risk-weighted assets. The size of the surcharge is set with respect to the degree of systemic importance (i.e., the total exposure and the market share of the relevant SIB). The going concern requirement is further split into a minimum requirement component of a 3 per cent leverage ratio and 8 per cent risk-weighted assets that the SIB has to maintain at all times, and a buffer component that a SIB may temporarily fall short of (e.g., in the case of losses and under strict conditions).
Systemic banks operating at an international level are further subject to an additional capital requirement to guarantee their recovery or the continuation of their systemic functions in an operating unit while liquidating other units without support from the public (i.e., gone concern requirement). By analogy, the gone concern requirement of a G-SIB quantitatively corresponds to its total going concern capital requirement: (that is, a minimum 4.5 per cent leverage ratio and a minimum 12.86 per cent risk-weighted assets, plus any surcharges applicable to the relevant G-SIB, to the exclusion of countercyclical buffers. FINMA, after consultation with the Swiss National Bank, may lower the level of those requirements, based on the effectiveness of measures taken to improve the global resolvability of the relevant G-SIB group and in consideration with other factors. However, the gone concern requirement must not fall below a 3 per cent leverage ratio or 8.6 per cent risk-weighted assets or, if higher, the applicable international standards, provided that such requirement adjustment does not jeopardise the implementation of the G-SIB’s emergency plan. The gone concern requirement is complied with, as a general rule, by means of bail-in instruments such as bonds with conversion rights subject to the regulator’s decision.
Systemic banks also have to satisfy the countercyclical buffer and extended countercyclical buffer requirements. Capital requirements apply both on a stand-alone basis and on a consolidated basis. In this context, FINMA may alleviate the requirements on a stand-alone basis if these would otherwise increase the requirements on a consolidated basis and the financial group has taken appropriate measures to avoid such increase. Both stand-alone and consolidated requirements, as well as any alleviation, have to be disclosed by FINMA with respect to the principles, as well as by the bank or the financial group as part of its regular reporting. Finally, FINMA may, in extraordinary circumstances, oblige a SIB to hold additional capital or demand that the going concern capital requirement is fulfilled with higher quality capital.
In addition, systemic banks are subject to more stringent liquidity requirements both on a stand-alone and on a consolidated basis that take extraordinary stress scenarios into account. As a result, systemic banks must be able to cope with all liquidity drains that are to be expected under a particular stress scenario over a 30-day time period. In this context, no liquidity gap, as defined for the relevant time period in the LO, may arise on a seven-day and 30-day liquidity outlook. The particular stress scenario must be based on the assumption that, inter alia, the bank loses access to financing in the markets, and that large amounts of deposits are being withdrawn. Systemic banks must further hold a regulatory liquidity buffer consisting of primary and secondary buffers comprising determined qualifying assets listed in the LO. FINMA may, however, modify such list and determine the minimum deductible to establish the sales value of such assets. The percentage of liquidity that can be generated by a sale of assets allocated to the regulatory liquidity buffer qualifying for the primary buffer must amount to at least 75 per cent on a seven-day outlook and 50 per cent on a 30-day outlook. Finally, systemic banks must report changes in their liquidity positions on a monthly basis, highlighting and explaining the reasons for the most significant changes.
As regards risk diversification, the maximum risk concentration permissible for systemic banks is 25 per cent of the common equity Tier 1 capital (other than common equity Tier 1 capital constituting the progressive element) only.
Finally, in addition to measures relating to capital, liquidity, organisational and risk diversification requirements, the amendment to the BA also entails provisions that allow the government to order adjustments to the remuneration system of a bank that would have to rely on government funding.
The new rules for banks and systemic banks overall not only provide for increased capital ratios, but also significantly vary as to the quality of such capital and deductions that need to be applied to such capital, and smaller banks that used the simplified SA-CH standard approach to measure credit risk will have to move to the SA-BIS.
In light of these changes, very detailed transitional rules aim at allowing banks and finance groups to adjust to such increased requirements over time by building up the required capital and replacing or phasing out capital that no longer qualifies under the new rules. The rules provide for a clearly defined implementation schedule over a time period stretching to 2018.
As regards capital requirements, both the going concern requirement and the gone concern requirement are subject to a phase in with gradually increasing requirements, and must be fully applied by 1 January 2020.
On 10 January 2017, FINMA launched a consultation on the partial revision of Circular 2015/2 Liquidity risks – banks aiming at introducing technical provisions for the implementation of the NSFR and simplifying the way in which the LCR requirements are applied to non-systemic banks.
Most of the legal and regulatory capital adequacy requirements deriving from the Basel III standards have been gradually implemented into the Swiss regulatory framework. The remaining parts of the standards will follow during the course of 2018 to complete the implementation of the Basel III standards into Swiss law.
iv Recovery and resolution
The provisions of the BA dealing with insolvent banks aim at streamlining reorganisation procedures, ensuring prompt repayment of preferential deposits and the continuity of basic banking services. These provisions enhance the flexibility of such proceedings, and confer additional instruments and powers to FINMA with a view to increasing the likelihood of a successful reorganisation. FINMA is, for instance, empowered to order a transfer of all or part of a failing bank’s activities to a ‘bridge bank’, the conversion of certain convertible debt instruments issued by the bank (CoCos or ‘convertibles’) as well as the reduction or cancellation of the bank’s equity capital and, as an ultima ratio, the conversion of the bank’s obligations into equity. The FINMA Banking Insolvency Ordinance reflects a quite extensive interpretation of such new instruments and powers of the BA. For instance, it allows FINMA to order, as an ultima ratio to ensure the presence of sufficient equity capital, the conversion of the bank’s obligations (third-party funding) into equity capital, with the exception of certain limited claims that would be ranked in privileged classes in the event of a liquidation procedure. This measure could also potentially concern clients’ deposits that do not qualify as ‘preferential’ deposits (being defined as cash deposits of up to 100,000 Swiss francs whose payment would be secured within liquidation proceedings). In addition, FINMA may order a temporary stay of a counterparty’s right to terminate agreements with a bank.
Following a revision of the BA that entered into force on 1 January 2016, FINMA’s power to order a stay of early termination rights has been considerably broadened: FINMA may now couple a stay with any of the protective or reorganisation measures it may take in the event of insolvency risk (and not only, as was formerly the case, in connection with a transfer of the relevant agreements to a bridge bank), and can order such stay in relation to any contractual agreement with the bank (and not only in relation to certain financial agreements). In this context, where agreements subject to termination rights in the case of protective or reorganisation measures are governed by non-Swiss law or non-Swiss jurisdiction clauses, Swiss banks and securities dealers are required to seek the contractual counterparty’s acknowledgement of and consent to such stay of the termination right. Finally, FINMA may also order the stay of certain netting, private sale and claim transfer rights that are, in principle, recognised and protected within FINMA insolvency proceedings.
On 15 February 2017, the Swiss Federal Council instructed the Federal Department of Finance to prepare, by November 2017, a consultation draft aiming at strengthening the current deposit protection scheme on the basis of the recommendations of the group of experts on the further development of the financial market strategy and the ongoing discussions between the State Secretariat for International Financial Matters, FINMA and the Swiss National Bank on this issue. In this context, the Swiss Federal Council has retained a certain number of measures that are to be implemented in the proposed draft. For instance, one notable proposal would be to require a Swiss bank to pay out cash deposits within seven business days following its bankruptcy, which is in line with international standards.
iv CONDUCT OF BUSINESS
The obligations imposed by anti-money laundering regulations have a material impact on how banks conduct their activities. Financial intermediaries are obliged to verify the identity of their contracting partners as well as the beneficial owner of accounts.
Furthermore, if reasons for suspicion of money laundering exist, banks must notify the Money Laundering Reporting Office (MRO) of the Swiss Federal Office of Police. The rules applicable to the freezing of assets following a suspicious activity report were recently revised. Up to January 2016, a reporting led to the immediate freeze of the assets relating thereto. Under the new rules, only reports linked to individuals or organisations identified in accordance with UN Resolution 1373 (2011) require immediate freezing measures. Otherwise, banks may continue to execute transactions requested while preserving a paper trail. The MRO examines cases and, if necessary, communicates a matter to the competent criminal prosecution authorities. If the MRO decides to forward a case to the criminal authorities, a freeze must be implemented. The MRO is vested with powers regarding requests for information from the Swiss financial intermediaries and the exchange information with foreign financial intelligence units (FIUs). The rules of conduct of Swiss banks in relation to the prevention of money laundering and terrorism financing are further detailed by the CDB, which represent minimum standards. A breach by a bank of its duty to communicate is subject to a fine of up to 500,000 Swiss francs. In addition, certain behaviours may constitute a criminal offence of money laundering, as the case may be, by negligence.
With respect to its customer relationship, a bank is primarily bound by the duties and obligations stated in the relevant contractual documentation. In addition, banks licensed as securities dealers are bound by qualified duties of information, diligence and loyalty towards their clients under Article 11 of SESTA. Inter alia, a bank must draw the client’s attention to the risks involved in the relevant securities transactions, and ensure that its clients are granted the best possible terms of execution for their transactions and that they are not disadvantaged by any conflicts of interests. These rules of conduct have been further defined by case law and supervisory practice, and are detailed in a number of self-regulation guidelines (see Section II.iv, supra). A breach of the duties of information, diligence and loyalty may give rise to civil liability as well as regulatory consequences to the extent that FINMA is of the view that a bank no longer meets the requirements of good reputation and proper business conduct. Against the backdrop of the 2008 financial crisis, FINMA has questioned the adequacy of these requirements and proposed new measures to improve customer protection (see Section VII, infra). These rules of conduct will be further strengthened in the future.
A Swiss bank is bound by a statutory duty of confidentiality towards its clients. A breach of the bank’s duty of confidentiality is considered a breach of the client–bank contractual relationship, and may give rise to civil and criminal liability. As a general rule, any disclosure of client data to a third party, including the parent company, its supervisory authority or an affiliated entity, is prohibited. Exceptions apply under certain circumstances, such as in the context of consolidated supervision, following a request of international judicial or administrative assistance issued by a public authority (including FIUs for anti-money laundering purposes), or if a client has consented to a disclosure. In recent years, the importance and scope of Swiss banking secrecy has been subject to intense discussion in Switzerland following pressure from foreign countries, and the situation is about to change with the upcoming implementation of the automatic exchange of information (see Section VII, infra).
Swiss banks’ main funding sources are money market instruments, interbank funding, customer savings accounts, other customers’ deposits, cash bonds and bonds.
vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
For purposes of the BA, a participation is deemed to be qualified if it amounts to at least 10 per cent of the capital or voting rights of the bank, or if the holder of the participation is otherwise in a position to significantly influence the business activities of the bank (a ‘qualified participation’). It should be noted that, in practice, FINMA often requires disclosure of participations of 5 per cent or more for its assessment of whether the requirements of a banking licence are continuously met.
The BA does not set any restrictions on the type of entities or individuals holding a controlling stake in a bank. However, one of the general licensing conditions is that individuals or legal entities that directly or indirectly hold a qualified participation in a bank must ensure that their influence will not have a negative impact on the prudent and reliable business activities of the bank. Thus, the bank’s shareholders and their activities may be of relevance for the granting and the maintenance of a banking licence. Shareholders with a qualified participation may be deemed to have a negative influence on the bank; for instance, in cases of lack of transparency, unclear organisation or financial difficulties of financial groups or conglomerates, as well as influence of a criminal organisation on the shareholders. Should FINMA take the view that the conditions for the banking licence are no longer met because of a shareholder with a qualified participation, it may suspend the voting rights in relation to such qualified participation or, if appropriate and as a last measure, withdraw the licence.
If foreign nationals with qualified participations directly or indirectly hold more than half of the voting rights of, or otherwise have a controlling influence on, a bank incorporated under the laws of Switzerland, the granting of the banking licence is subject to additional requirements. In particular, the corporate name of a foreign-controlled Swiss bank must not indicate or suggest that the bank is controlled by Swiss individuals or entities, and the countries where the owners of a qualified participation in a bank have their registered office or their domicile must grant ‘reciprocity’ (i.e., Swiss residents and Swiss entities must have the possibility to operate a bank in the respective country, and such banks operated by Swiss residents are not subject to more restrictive provisions than foreign banks in Switzerland). In practice, the reciprocity requirement no longer applies as regards foreign holders of ‘qualified participations’ domiciled or incorporated in Member States of the World Trade Organization or signatories of the General Agreement on Trade and Services.
Furthermore, FINMA may request that a bank is subject to adequate consolidated supervision by a foreign supervisory authority if the bank forms part of a financial group or conglomerate.
If a Swiss bank falls under foreign control, as described above, or if a foreign-controlled bank experiences changes in its foreign shareholders directly or indirectly holding a qualified participation, a new special licence for foreign-controlled banks must be obtained prior to such events. Under the BA, a ‘foreigner’ is (1) an individual who is not a Swiss citizen and has no permanent residence permit for Switzerland; or (2) a legal entity or partnership that has its registered office outside Switzerland or, if it has its registered office within Switzerland, is controlled by individuals as defined in (1).
As a matter of Swiss law, there are no restrictions as to the business activities of the entities holding qualified participations in a bank as long as the conditions for the granting and maintenance of the licence are complied with. Generally, transactions between the (controlling) shareholders of a bank and the bank itself may be subject to specific requirements (e.g., the granting of loans to significant shareholders must be in compliance with generally recognised banking principles).
Each controlling shareholder has the duty to notify about the acquisition or disposal of a qualified participation, as well as the fact that its participation reaches, exceeds or falls below certain thresholds. Further, as mentioned above, the holder of a qualified participation is required not to negatively influence the prudent and reliable business activities of the bank.
Even though the acquisition of a qualified participation in a bank by a Swiss individual or a Swiss entity in theory only triggers notification obligations, it is necessary to seek a letter of no objection from FINMA for the account of the bank prior to an envisaged transfer of a controlling stake in a Swiss bank, since FINMA controls the continuing compliance with the conditions of a banking licence. FINMA will examine whether the influence of the new shareholder with a qualified participation would be detrimental to the prudent and reliable business activities of the bank.
ii Transfers of banking business
The vast majority of acquisition transactions in the Swiss banking industry are structured as share deals. There are very few examples of transactions structured as asset deals, and such transactions require the consent of the customers concerned. ‘No consent’ structures are viewed as unfeasible from a Swiss law perspective, in particular due to Swiss banking secrecy restrictions.
vii THE YEAR IN REVIEW
In their continued effort to adapt financial regulation after the 2008 crisis, FINMA and the government have enacted several regulatory amendments, and have examined potential revisions concerning key aspects of banking regulation and supervision. 2016 has mostly been a year of consolidation and fine-turning of the substantial regulatory work developed and pursued in the years following the crisis.
i Regulatory developments
In addition to the issues addressed in the above sections, the following regulatory developments can be outlined.
Banking secrecy and administrative assistance
With respect to international administrative assistance in tax matters, 2009 saw the abolition of the historical distinction made by Switzerland between tax fraud and tax evasion. In March 2009, Switzerland announced that it would adopt the standard set by Article 26 of the OECD Model Tax Convention. Since then, more than 50 double taxation treaties (DTTs) integrating Article 26 of the OECD Model Tax Convention have entered into force.
In accordance with these revised DTTs banking secrecy is lifted, and the transfer of bank account data is allowed in situations where suspicions of tax offences exist.
The 2013 Federal Act on International Administrative Assistance in Tax Matters and its implementing ordinance govern the practical aspects of the implementation of administrative assistance within the scope of the revised DTTs. In comparison to the previous framework, the revised law is more restrictive as regards procedural rights of affected parties. However, it adds a layer of judicial review to the current process: decisions taken by the Swiss Federal Tax Administration on administrative proceedings can be appealed against before the Swiss Federal Administrative Court, and before the Swiss Federal Supreme Court in second instance.
In 2014, the government approved a declaration aimed at joining the multilateral agreement on the automatic exchange of information in tax matters developed by the OECD. On 18 December 2015, Parliament approved the Multilateral Agreement on the Automatic Exchange of Information in Tax Matters, as well as the dispatches prepared in relation to the Convention on Mutual Administrative Assistance in Tax Matters of the OECD and Council of Europe and to the Multilateral Competent Authority Agreement. This notably involved revisions to the Federal Act on International Administrative Assistance in Tax Matters and the issuance of a new Federal Act on the International Automatic Exchange of Information (AEOI Act).
Following this, the Federal Council adopted the relevant implementing ordinance (AEOI Ordinance) on 23 November 2016. Both the AEOI Act and the AEOI Ordinance entered into force on 1 January 2017. As a result, Switzerland’s first exchange of information with foreign countries (including EU countries, in accordance with the agreement of 27 May 2015 as regards the amendment to the EU Savings Tax Agreement with Switzerland) will take place in 2018 and cover information for the year 2017.
Direct transmission of information in supervisory matters
Since 1 January 2016, Swiss banks may directly share certain non-public information with foreign supervisory authorities under certain conditions set out in a new provision introduced in the FINMASA and further detailed in a new FINMA Circular 2017/06.
In a nutshell, under the new rules, a Swiss bank may only share non-public information with a foreign supervisor directly (i.e., without having to resort to international administrative assistance), provided said foreign supervisor is bound by official or professional secrecy provisions (confidentiality principle) and will use the information exclusively to enforce financial market law (specialty principle); and the protection of personal and confidential data relating to clients and third parties (notably employees) is guaranteed (in accordance with Swiss data protection, banking secrecy, business confidentiality and employment laws).
FINMA publishes a list of foreign supervisory authorities to which it has granted administrative assistance in the past. If a foreign authority is on the list, banks may, as a rule, assume that this authority meets the requisites of confidentiality and specialty. If, however, a foreign authority does not appear on FINMA’s list, further clarifications will have to be sought (including, as the case may be, by reaching out to FINMA), and if doubts remain, a direct transmission will have to be refused and the foreign authority directed towards administrative assistance channels. FINMA’s prior approval of a direct transmission must further be sought if the information to be transmitted is important and would in any event have to be reported to FINMA under Swiss law or if the transmission itself appears to be of substantial importance.
As a result, the scope of information that may be transmitted without FINMA’s prior approval under Circular 2017/06 is fairly limited and mainly concerns non-public information that has to be reported routinely to foreign supervisors, such as organisational charts, governance information, capital and liquidity figures that must be published periodically (e.g., common equity Tier 1 equity, leverage ratio, liquidity coverage ratio), or reports on proceedings that have been finally disposed of.
A transfer of information that is not made in compliance with rules on the direct transfer of information may be construed as an official act performed on behalf of a foreign state on Swiss territory in breach of Swiss sovereignty, which may constitute a criminal offence under Swiss law.
Anti-money laundering regulation and implementation of the latest recommendations of the Financial Action Task Force (FATF)
The backbone of the Swiss anti-money laundering framework is the 1997 Anti-Money Laundering Act (as revised, AMLA), as well as its implementing ordinances (FINMA AML Ordinance of 8 December 2010 and AML Ordinance of 11 November 2015). Following the issuance of revised recommendations by the FATF in 2012, the government worked on a revision of its legal and regulatory framework. In December 2014, Parliament passed legislation amending various statutes affected by the 2012 FATF recommendations, including the Swiss Civil Code, the Swiss Code of Obligations, the Swiss Criminal Code and the AMLA. The entry into force of these amendments took place in two stages in July 2015 and January 2016.
Among the most notable changes, the revision involved the inclusion in the Criminal Code of certain aggravated tax offences in the list of predicate offences for money laundering and terrorism financing. The revision also aimed at increasing the transparency of legal entities: holders of bearer shares of an unlisted company are required to disclose their identity to the company or to a financial intermediary appointed by the company. Shareholders whose participation reaches or exceeds 25 per cent of the share capital or voting rights of an unlisted company have to disclose the identity of their beneficial owner to the company or to a financial intermediary appointed by the company. Furthermore, financial intermediaries are now required to establish the identity of the beneficial owners of operating companies (i.e., individuals holding 25 per cent of the share capital or voting rights or controlling the company in any other manner) or, if no beneficial owner can be identified, the identity of the most senior member of management. The revision also allowed the extension of the concept of ‘politically exposed persons’ to persons exposed at local level and within intergovernmental organisations. Further due diligence obligations were introduced for financial intermediaries that receive cash exceeding 100,000 Swiss francs within a commercial transaction. Finally, the revision also amended the asset-freezing procedure. A financial intermediary must only implement a freeze if and when the MRO informs it that it has transferred the case to a criminal prosecution authority and for a maximum of five days until the decision to maintain the freeze is made by the criminal authority. This new mechanism aims at giving MRO more time for its analysis, while avoiding raising the account holder’s suspicion of an MRO communication.
To align them with the revised AMLA, the provisions of the FINMA AML Ordinance, the AML Ordinance and the CDB have been partially revised. It is worth noting that since 1 January 2016, the revised FINMA AML Ordinance and the CDB provide for, inter alia, the possibility for financial intermediaries to on-board clients exclusively online. In this context, FINMA published a new circular on video and online identification (FINMA Circular 2016/7), which entered into force on 18 March 2016. One of the main purposes of this circular is to clarify and facilitate video and online client identification for financial intermediaries subject to KYC duties.
Financial market infrastructure
FMIA and its implementing ordinances (FMIO and FMIO-FINMA) entered into force on 1 January 2016. The new law primarily aims at harmonising Swiss law with international developments (in particular with the Markets in Financial Instruments Directive II, the Market in Financial Instruments Regulation and the European Market Infrastructure Regulation) as regards the regime applicable to negotiation platforms, central counterparties, central securities depositories, payment and securities settlement systems, and derivatives trading. From a formal perspective, the new Federal Act on Financial Market Infrastructure also gathers in one single statute formerly existing provisions related to the organisation and operation of the market infrastructure. The new statute has, inter alia, introduced a licensing regime similar to that applied to stock exchanges for multilateral trading facilities and organised trading facilities, as well as a licensing obligation for central counterparties, central securities depositories and trade repositories, with the application of specific additional requirements. Further, clearing, reporting and risk-mitigation obligations have been introduced for determined exchange-traded and OTC derivative transactions to which a professional investment firm is party.
Following the entry into force of the new regime, financial market infrastructures and the operators of organised trading facilities were granted a one-year transitional period to comply with some of the new requirements (e.g., pre and post-trade transparency information duties). Moreover, participants on a trading venue and securities dealers were released from fulfilling the extended record-keeping and reporting duties regarding securities transactions until 1 January 2017. This transitional period was based on the expected date on which the corresponding provisions in MiFID II were expected to become effective. As this date has been postponed by a year, the Federal Council decided to extend accordingly the corresponding transitional period to 1 January 2018.
Finally, it is worth noting that FINMA authorised on 3 April 2017 the first Swiss trade repository, ‘SIX Securities Services’, and recognised the first foreign trade repository for Switzerland, ‘REGIS-TR’, for the purposes of the reporting obligations introduced by the FMIA. For the time being, the recognition of the foreign trade repository is however restricted to the receipt of reports under Swiss law (as opposed to any foreign law (e.g., the European Market Infrastructure Regulation)).
Federal act on the freezing and restitution of illicitly acquired assets of foreign politically exposed persons (PEPs)
In connection with the events of the Arab Spring, the Federal Council issued several freezing orders against PEPs directly based on the Federal Constitution in 2011. This led Parliament to decide to implement a formal legislative basis to comprehensively govern this question. In May 2014, the Federal Council proposed a draft federal act on the freezing and restitution of illicitly acquired assets of foreign PEPs to Parliament. This act will set out the conditions for the freezing, confiscation and restitution of assets of PEPs obtained by unlawful means, as well as targeted measures to support the country of origin in its effort to recover these assets. The referendum deadline for this act expired on 9 April 2016. The Act entered into force on 1 July 2016.
ii Future changes
Protection of investment advisory and wealth management clients: new proposed legislation on financial services and financial institutions
The improvement of the protection of investment advisory and wealth management clients has been at the top of FINMA’s agenda, and has truly been one of the most important legislative projects in the financial services sector in the past decade. In the wake of the financial crisis, FINMA issued proposals on ways to improve client protection in a comprehensive report entitled ‘Regulation of the production and distribution of financial products to retail clients – status, shortcomings and courses of action’ to start discussions on key regulatory measures. On 24 February 2012, FINMA issued a set of specific policy proposals in a position paper entitled ‘Regulation of the production and distribution of financial products’. Among other things, the supervisor stressed the need for uniform prospectus rules that apply to all securities offered publicly into or in Switzerland. FINMA also suggested strengthening and harmonising the rules governing financial services providers’ duties of information and disclosure (see Section IV, supra), notably with the introduction into Swiss law of suitability tests and, where no advice or management services are provided (e.g., execution only), appropriateness tests, under certain conditions. To further increase the degree of protection of unsophisticated clients, FINMA proposed a client segmentation mirroring the one adopted in the EU Prospectus Directive and MiFID. Furthermore, FINMA questioned Switzerland’s traditionally liberal stance with respect to the cross-border offering of financial services from other countries (see Section II.ii, supra), suggesting that this type of activity be subject to more stringent regulation. Finally, FINMA recommends subjecting financial services providers that are not yet supervised (such as asset managers) to licensing requirements in order, notably, to subject them to specific organisational requirements, fitness and propriety tests, and to control compliance with business conduct rules.
Based on this, the Swiss Federal Council worked on two new draft laws, the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The objective of the draft FinIA is to provide for a ‘new legal framework’ governing all financial institutions, while the purpose of the draft FinSA is to regulate financial services in Switzerland, whether performed in Switzerland or on a cross-border basis. The drafts FinSA and FinIA were submitted to Parliament on 4 November 2015 following a protracted consultation process in 2015 that led to numerous substantial amendments of the working drafts. Parliament’s preparatory commission requested additional amendments and simplifications, which further delayed the legislative process. Debates before Parliament started in December 2016 and will continue in the 2017 sessions. At this stage, it is difficult to assess how long the parliamentary work will take. The earliest likely date of entry into force of the FinSA and the FinIA is currently 1 July 2018.
The introduction of the new FinSA and the FinIA will involve a number of key changes to the current Swiss regulatory framework. Financial services and institutions will be governed in Switzerland by a general set of regulations on the supervision of financial services, embodied in the FinSA and the FinIA, to complement FINMASA as ‘framework laws’. In particular, the following notable changes would be introduced:
- a the introduction of prudential supervision over independent asset managers and trustees;
- b a set of categorisation rules based on the EU concept of ‘professional clients’ and ‘private clients’;
- c a number of market conduct rules, including the obligation to verify the appropriateness and suitability of financial services, as well as inducements and transparency rules (integrating into the draft FinSA the most recent case law of the Swiss Supreme Court as regards the transparency and consent requirements for a financial institution to keep trailer fees); and
- d uniform prospectus rules that generally shall apply to all securities offered publicly into or in Switzerland.
iii The UBS case, the tax dispute between Swiss banks and the United States, and the issue of cross-border financial services in and from Switzerland
The difficulties experienced in the context of US Internal Revenue Service legal assistance requests concerning UBS accounts between 2008 and 2010 have led to intense legal discussions in Switzerland.
Besides the tax law developments (see Section VII.i, supra), one aspect of the UBS case attracted the attention of the Swiss supervisor: following numerous accusations of breaches of US securities and tax law raised against the bank and its ensuing difficulties with the US authorities, FINMA was led to reappraise foreign legal risks. Indeed, the different legal risks deriving from supervisory, tax, criminal, civil or even procedural law that are linked to the cross-border provision of financial services to private clients residing outside Switzerland have increased in recent years. In a position paper of 2010, FINMA presented its expectations as to how Swiss financial institutions should address legal and reputational risks. It underlines that, although Swiss financial markets regulation does not expressly request Swiss financial intermediaries to comply with foreign law, it does require that their business be organised and conducted in a proper manner. In practice, this notably means that regulated institutions must define an appropriate service model for each of their target markets, give compliance elements an appropriate weighting in the variable component of employees’ remuneration, and have control and sanction processes in place covering the issue of cross-border financial activities. FINMA is closely following the implementation of its recommendations by Swiss financial intermediaries, and has also increased its focus on these aspects as a part of its ongoing supervision.
On 29 August 2013, the US Department of Justice (DoJ) announced a programme for Swiss banks to avoid potential prosecutions related to deemed non-tax-compliant US client accounts (US programme). The US programme was endorsed by the Swiss government and FINMA, which strongly recommended participation. For purposes of the US programme, Swiss banks are divided into four categories:
- a those already under investigation by the DoJ, which are not eligible to participate;
- b those with reason to believe they may have committed tax-related offences that request a non-prosecution agreement and are subject to a penalty payment;
- c those without reason to believe they may have committed tax-related offences that request a non-target letter; and
- d those purely domestic banks that are deemed compliant under the Foreign Account Tax Compliance Act (FATCA) because they merely have a local client base that request a non-target letter.
Participation in category (b) had to be announced to the DoJ by 31 December 2013, and 106 Swiss banks announced their participation in the US programme in this category. Swiss banks wishing to participate in categories (c) and (d) had to file their request by 31 December 2014. As of the end of January 2016, all remaining category (b) banks (representing 78 banks) had concluded a non-prosecution agreement with the DoJ settling their tax dispute with the United States. As a result, the DoJ collected more than US$1.36 billion in penalties. On 29 December 2016, the DoJ confirmed that all applications from category (c) Swiss banks have been reviewed, and that five non-target letters have been issued in this context. The DoJ further stated that none of the category (d) Swiss banks has received a non-target letter.
In parallel, the Swiss and United States governments signed an agreement for cooperation to facilitate the implementation of FATCA, which entered into force on 2 June 2014 and is based on a model agreement (Model II) tailored for countries such as Switzerland that do not have an automatic information exchange in place with the United States. Model II allows for an aggregate reporting of pre-existing accounts in the absence of consent of a client to individual disclosure, which may give rise to a group request by the US Internal Revenue Service (IRS). In this context, the Swiss government has further worked on a federal statute (FATCA Act) dealing with the implementation of the FATCA Agreement to detail financial institutions’ participation, identification and communication obligations; frame the procedures applicable to an exchange of information; and implement the levy of a withholding tax under the Agreement. On 27 September 2013, the FATCA Act was approved by Parliament along with the FATCA Agreement. The FATCA Act entered into force on 30 June 2014. Swiss participating and deemed-compliant financial institutions had to register with the IRS by 25 April 2014. On 8 October 2014, the Federal Council adopted a specific mandate to discuss with the US a changeover to Model I. The new agreement implementing Model I is not expected to enter into force prior to 2018.
viii OUTLOOK and CONCLUSIONS
The 2008 financial crisis brought up many regulatory topics that have been examined by the supervisory authority and extensively discussed in the banking industry, such as the effects of a high density of regulations for certain sectors, and governmental influence on and support of financial institutions. In general, FINMA has been more active and interventionist in recent years, in particular with the two largest Swiss banks, Credit Suisse AG and UBS AG. In line with international developments and discussions, as measures aimed at refining and strengthening of capital adequacy and liquidity requirements have been formally enacted, FINMA continues to focus closer attention on systemic risk issues. The Swiss regulatory framework is further converging from a principle-based to a rule-based approach, with a particular focus on systemically important financial institutions, in accordance with FINMA’s risk-based approach.
In November 2016, FINMA published its strategic goals and priorities for 2017 to 2020. These reflect current and future challenges in financial regulation and supervisory trends, and include:
- a ensuring that banks and insurance companies have strong capitalisation;
- b mitigating the ‘too big to fail’ issue through viable emergency plans and credible resolution strategies;
- c contributing to the protection of creditors, investors and insured persons through accompanying structural change in the financial industry;
- d promoting the removal of unnecessary regulatory obstacles for innovative business models;
- e providing for principle-based financial market regulation and promoting equivalence with relevant international requirements; and
- f keeping the cost of supervision stable and achieving further efficiency gains.
In addition, in recent years, FINMA has continuously increased its enforcement action and, consequently, the resources dedicated to it. In September 2014, FINMA issued a new enforcement policy, and in April 2016 published its second annual report on enforcement. These documents outline FINMA’s enforcement practice, which is generally focused on financial entities, and targeted actions against individuals responsible for serious violations of supervisory law with, as the case may be, a professional ban imposed on such individuals, and the publication of the relevant decisions.
One of the main regulatory challenges in future years is likely to be the implementation of the new proposed legislation on financial services and financial institutions (see Section VII.ii, supra), which will represent a complete overhaul of the framework applicable to financial institutions and to the provision of financial services in Switzerland. Moreover, the recent implementation of the automatic exchange of information will have a significant impact on the Swiss banking industry. Since 1 January 2017, banking secrecy will no longer preclude the transmission of bank data related to foreign clients, constituting a change of paradigm in Switzerland. This in turn is likely to lead to an acceleration of the concentration of the Swiss wealth management industry.
1 Shelby R du Pasquier, Patrick Hünerwadel and Marcel Tranchet are partners and Maria Chiriaeva and Valérie Menoud are senior associates at Lenz & Staehelin.
2 Agreement on the Swiss Banks’ Code of Conduct with regard to the Exercise of Due Diligence of June 2015 (CDB).
3 Code of Conduct for Securities Dealers governing securities transactions of May 2009.
4 Portfolio Management Guidelines of March 2017.
5 ‘Basel III: A global regulatory framework for more resilient banks and banking systems’ and ‘Basel III: International framework for liquidity risk measurement, standards and monitoring’.
6 These requirements form the first pillar of a bank’s regulatory capital base.