The Evolution of the Regulatory Environment in Switzerland for Financial Intermediaries

Foreigners are frequently intrigued, if not astonished, by the fact that Swiss financial intermediaries, most notably independent asset managers, are not subject to the same prudential supervision and public regulatory burdens as some other financial centres. Indeed, the regulatory framework in Switzerland is rather fragmented and complex, although all Swiss financial intermediaries are subject to regulation and a de facto licensing system, as will be shown below. 

With the introduction of the new Federal Financial Market Supervisory Authority (FINMA), which will become operational on 1 January 2009, some streamlining seems inevitable. FINMA will combine the regulatory work of the Swiss Federal Banking Commission (SFBC), the Federal Office of Private Insurance (FOPI), and the Money Laundering Control Authority (MLCA).  

FINMA will be established as an institution under public law which has functional, institutional and financial independence, and a modern management structure with a governing board, executive management, and auditing body. FINMA's independence, on the other hand, calls for accountability and political supervision by the Swiss Federal Government. FINMA personnel will be employed under private law. Along with organisational issues, the Financial Market Supervision Act (FINMA Act) also contains principles on financial market regulation and liability rules as well as harmonised supervisory instruments and sanctions. The FINMA Act effectively functions as an umbrella law for the other laws covering financial market supervision. 

It should be emphasised that the legally defined task of the supervisory authority remains the same, and the particulars of the different supervisory sectors have been taken into account. Thus, the banks still have to fulfil the requirements of the Banking Act; insurance companies must fulfil those of the Insurance Supervision Act; the investment funds, those of the Investment Fund Act; and the system of self-regulation in accordance with the Money Laundering Act and the Stock Exchange Act will also be retained.  

Some observers may conclude that FINMA is above all, or perhaps no more than an ‘umbrella’ of existing supervisory bodies and that nothing will really change apart from certain co-ordination functions. However, given recent developments it would seem that the regulatory environment will evolve considerably as of 2009 and perhaps not only for independent asset managers, but also for the Swiss fiduciary sector, i.e. for financial intermediaries active in the provision of trust and corporate services. 

All Swiss financial intermediaries are subject to the Swiss Federal Act on Money Laundering (MLA). This means that they are obliged to obtain an authorisation from the Federal Control Authority or to be affiliated to a Self-Regulatory Organisation (SRO). Although this system is principally designed to prevent money laundering, Article 14 of the MLA dictates much broader conditions to obtain the authorisation to carry on a fiduciary/trust business in Switzerland in terms of internal organisation, good standing and reputation, and the vetting of directors and officers. Furthermore, obligatory, regular, independent audits result in the effective monitoring of financial soundness, internal governance and overall reputation of Swiss financial intermediaries.

Nonetheless, regulatory developments and recommendations for a more systematic prudential supervision of independent asset managers have increased in recent years:  

•   In January 2007 the Federal Act on Collective Investments (CISA) came into force. It imposes that managers mandated by collective investment schemes obtain an authorisation by the SFBC, which is subject to, among other things, minimal capital requirements. The jurisdiction of the SFBC over securities intermediaries has therefore been broadened. In 2005, the SFBC had already decided to offer independent Swiss asset managers of foreign euro-compatible investment funds the opportunity to obtain a licence as securities dealers and place themselves under the SFBC supervision. 
•   In 2008 the Association of Swiss Bankers adopted a revised Due Diligence Agreement. This Agreement implements the revised recommendations of the Financial Action Task Force (FATF) and its nine special recommendations on combating the financing of terrorism. It also takes a systematic risk-based approach, giving banks greater freedom in their decision making. The due diligence requirements in the identification of contracting partners and beneficial owners are also expanded on. For example, in the case of legal entities and partnerships, the authorised persons opening the account must be formally identified as well as the company. Most importantly, the new due diligence Agreement effectively applies to independent asset managers through the bank’s acceptance conditions for accepting custodianship.
•   In June 2007 the International Monetary Fund (IMF) issued their Financial Sector Assessment Report on Switzerland. While generally laudatory in its conclusions, paragraph 27 states: “Less progress has been attained in the area of SFBC sanctioning powers, particularly over the unregulated institutions. The SFBC has no sanctioning powers over unregulated institutions. While the later are still subject to the provisions of the criminal code, these are too narrowly defined and difficult to sanction, making enforcement less effective. To overcome this limitation, the SFBC should be given the power to impose administrative sanctions on all financial intermediaries, regardless of whether they are registered or not.”

On 5 September 2008 the SFBC opened a consultation process on its draft circular guidelines on asset management. The guidelines are meant to serve as a reference for the codes of conduct of asset management professional associations (and, inter alia, their individual members) that wish to have their codes recognised by the SFBC as a minimum standard. These include detailed obligations and prescriptions related to, among other things: 

•   form and content of investment management agreements;
•   principles of good faith and loyalty (no conflict of interest);
•   due diligence in the investment process (risk profiles, choice of agents, etc).
•   provision of information flow;
•   principles of remuneration (transparency). 

It is important to note that these guidelines do not represent a mere code of conduct; rather, full compliance by independent asset managers is to be controlled by regular audits, and non-compliance subject to the appropriate sanctions. 

While a majority of independent asset managers are members of overall professional organisations, such as the Swiss Association of Asset Managers (SAAM), there are hundreds of independent asset managers which are only members of ‘generic’ SROs. These SROs will urgently need to adapt their organisational structures to accommodate their members who are asset managers, especially as regards critical control and audit functions. In fact, the consultation process as defined by the SFBC expires on 10 November 2008. 

The recently issued guidelines certainly require clearer definitions and clarifications. In particular, the notion of ‘asset management’ must be clarified. Due to the current absence of any licensing system (except for money laundering regulations) to differentiate non-banking financial services, any trust/fiduciary service provider can freely engage, and often does, in asset management activities on a discretionary or non-discretionary basis. As a result, such service providers would potentially fall under such new regulations and, de facto, be indirectly subject to SFBC supervision. Indeed, the Swiss Association of Trust Companies (SATC), as well as the banks, have in the past advocated more extensive regulation. 

When we consider the size, fragmentation and diversity of the Swiss non-banking financial sector with a view to the forthcoming revision of the MLA, we can expect a lively professional debate in the near future about activity-based regulation, provided the SFBC and FINMA clarify their policy prerogatives and outline a regulatory road map for the future.