Blog: Banking Regulation 2023 – 10th Edition – Financial Services … – Mondaq News Alerts

Introduction

In the aftermath of the financial crisis of 2008/2009,
Switzerland launched a massive overhaul of its financial
regulations. These reforms followed several objectives. First,
banking regulations were revised to ensure the stability of the
financial system, in line with the recommendations of the Financial
Stability Board (“FSB“) and other
international standard-setters. Second, Switzerland reacted to EU
law in order to ensure equivalence and to be able to continue to
access the European market as a third-party state. Therefore, the
reforms also aimed to align Swiss law with EU regulations Directive
2014/65/EU on Markets in Financial Instruments II
(“MiFID II“) and Regulation (EU) No
600/2014 on Markets in Financial Instruments
(“MiFIR“). Finally, the reforms were
geared towards revising Swiss regulations from a patchwork of
sectorial rules to a consistent regulatory framework.

The core of the new Swiss banking regulation consists of the
existing Federal Act on Banks and Savings Banks of 8 November 1934
(“BankA“), the existing Federal Act on
the Swiss Financial Market Supervisory Authority of 22 June 2007
(“FINMASA“), the Federal Act on
Financial Market Infrastructures and Market Conduct in Securities
and Derivatives Trading of 19 June 2015
(“FinMIA“), as well as the Federal Act
on Financial Services of 15 June 2018
(“FinSA“) and the Federal Act on
Financial Institutions of 15 June 2018
(“FinIA“). The latter two, together with
the implementing Ordinance on Financial Services of 6 November 2019
(“FinSO“) and the Ordinance on Financial
Institutions of 6 November 2019
(“FinIO“), entered into force on 1
January 2020, subject to transitional periods (with the last ones
having expired on 31 December 2022) and have materially changed the
Swiss regulatory landscape. The changes have affected domestic
financial service providers as well as foreign providers with a
physical Swiss establishment, but – in a departure from the
former liberal regime – also foreign providers that pursue
their Swiss business on a cross-border basis only. All of these
players had to review the new regulatory requirements and adapt
their business accordingly.

Banks in Switzerland have been facing pressure due to regulatory
and legal developments, which have led to heavily increased
reporting burdens. In addition, the tougher international capital
and liquidity standards such as Basel III, issued by the Basel
Committee on Banking Supervision
(“BCBS“), or the new standards set by
the FSB over the last few years, have led to increased costs of a
bank’s capital and long-term funding and other regulatory
requirements including, e.g., new standards for resolution
planning.

In addition, the importance of the sanctions regimes has grown
over the last year due to the outbreak of the war in Ukraine.

Besides these increased burdens, the major challenges currently
lie in responding to strong competitive pressure, including from
new entrants and business models coming from the technology sector,
and more transparency on fees. Further, in Q3 of 2022, the Swiss
National Bank (“SNB“) increased its
benchmark interest rate to 0.5% to fight inflation in Switzerland.
The positive interest rate is reopening the banks’
possibilities in the core banking business.

Furthermore, the current environment has been characterised by a
variety of related legal developments, particularly in
international tax matters. Switzerland implemented the automatic
exchange of information (“AEOI“) based
on the Organisation for Economic Co-operation and Development
(“OECD“) Common Reporting Standard
(“CRS“). In this context, the Federal
Act on the International Automatic Exchange of Information in Tax
Matters of 18 December 2015 (“AEOI-Act“)
entered into force on 1 January 2017, and the Federal Tax
Administration for the first time exchanged information with
partner states in September 2018. In addition, in the course of the
implementation of the revised recommendations of the Financial
Action Task Force (“FATF“) and the
Global Forum on Transparency and Exchange of Information for Tax
Purposes (“Global Forum“), several laws
have been amended and further reforms are under way. Since 2016,
aggravated tax misdemeanours constitute a predicate offence for
money laundering. Furthermore, the legal framework on anti-money
laundering (“AML“) and anti-terrorism
financing has also become more stringent. In addition, foreign
regulations are a limiting factor for outbound Switzerland
cross-border banking business.

The accumulation of these factors has forced many banks to scale
back some of their activities in Switzerland and has consequently
led to a trend towards consolidation in the Swiss banking sector in
recent years (from 292 banks in 2014 to 241 banks in 2021 (FINMA
statistics, supervised financial market participants 2021,
https://www.finma.ch/
de/dokumentation/finma-publikationen/kennzahlen-und-statistiken/statistiken/aufsicht/).
These tendencies towards consolidation are primarily seen with
small banks and Swiss subsidiaries of foreign banking groups, while
the latter in particular either close down their operations in
Switzerland by liquidation or sale, or try to seek a critical mass
of assets under management through acquisition or merger.

Despite this currently challenging environment, Switzerland is
still a very attractive financial centre, as it combines many years
of accumulated expertise, particularly in private banking and
wealth management. In particular, the Swiss financial centre is the
global market leader in the area of assets managed outside the
owner’s home country, with a global market share of approx. 25%
(see Swiss Banking, Banking Barometer 2022: Economic trends in
the Swiss banking industry, August 2022, available at
https://ift.tt/6ZIJSyq). Professional advice, top-quality
services and sophisticated banking products are the traditional
strengths of Swiss financial institutions.

A good educational and training infrastructure, guaranteeing a
reliable stream of qualified staff, political and economic
stability, a flexible labour market and well-developed
infrastructure are also convincing arguments to build up Swiss
banking presence.

Furthermore, Switzerland has positioned itself to become a hub
for innovative financial technologies
(“Fintechs“), and projects such as Diem
(formerly Libra), the envisaged global cryptocurrency, even if
eventually not realised in Switzerland, brought it into the focus
of the public globally. As part of this effort, the Swiss
regulatory framework is continuously being adjusted to address the
needs of Fintech providers and to create a suitable environment for
applications of distributed ledger technology
(“DLT“). As a first measure, the Swiss
Federal Council adopted amendments to the Federal Ordinance on
Banks and Savings Banks of 30 April 2014
(“BankO“) that entered into force on 1
August 2017 (see below). In addition, the Swiss Parliament amended
the BankA with effect from 1 January 2019 to introduce a so-called
Fintech licence as a new regulatory licence category geared towards
limited deposit-taking activities, with less stringent requirements
compared to the fully fledged banking licence. Within the
regulatory framework defined by federal laws and regulations, the
Swiss Financial Market Supervisory Authority
(“FINMA“) aims to take a
technology-neutral approach in its practice and revised several of
its circulars to remove obstacles for technology-based approaches
to financial services.

On 25 September 2020, the Swiss Parliament adopted the new
Federal Act on the Amendment of Federal law in light of the
Developments regarding DLT. The new regulations include a number of
fairly significant changes to federal laws, in particular the
Federal Code of Obligations of 30 March 1911
(“CO“), the Federal Debt Enforcement and
Bankruptcy Act of 11 April 1884
(“DEBA“), the Federal Act on the
Prevention of Money Laundering and Terrorist Financing of 10
October 1997 (“AMLA“), and the FinMIA.
The changes introduce, in particular, a concept of DLT-based
uncertificated securities (DLT-Wertrechte) into civil
securities law pursuant to the CO, as well as a new stand-alone
licence type under the FinMIA for so-called “DLT Trading
Facilities” (DLT-Handelssysteme), i.e., institutions
for multilateral trading in standardised DLT securities. On 1
February 2021, the provisions related to the introduction of the
DLT-based uncertificated securities and an exemption provision
related to the ombudsman’s office affiliation requirement for
financial service providers entered into force, while the remaining
new provisions and the implementing ordinance entered into force on
1 August 2021. The new regulation improves the environment for
blockchain and DLT projects in Switzerland.

Regulatory architecture: Overview of banking regulators and key
regulations

Responsible bodies for banking regulation

FINMA is the supervisory authority for banks, securities dealers
and other financial institutions such as collective investment
schemes and insurance undertakings. FINMA’s primary tasks are
to protect the interests of creditors, investors and policyholders
and to ensure the proper functioning of financial markets. To
perform its tasks, FINMA is responsible for licensing, prudential
supervision, enforcement and regulation.

In parallel, the SNB, the Swiss central bank, is responsible for
monetary policy and the overall stability of the financial system.
This includes the mandate to determine banks and bank functions as
systemically important, in consultation with FINMA.

Under the so-called dual supervisory system in the banking
regulation, FINMA largely relies on the work of recognised audit
firms. As the extended arm of FINMA, these audit firms exercise
direct supervision over financial institutions. They conduct
regulatory audits of the banks on behalf of FINMA. In addition,
FINMA may undertake targeted, on-site supervisory reviews with the
aim of achieving timely and comprehensive supervision. As an
exception to the dual supervisory system, FINMA has a dedicated
supervisory team that is responsible for directly monitoring UBS
Inc./UBS Switzerland Ltd and Credit Suisse Group Ltd/Credit Suisse
(Switzerland) Ltd, the two largest Swiss banking groups.
Furthermore, FINMA also increasingly performs on-site inspections
and takes “deep dives” into selected financial
intermediaries to get a better understanding of the inner workings
of supervised entities.

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Originally Published by GLI Global Legal Insights, 10th
Edition, 2023

The content of this article is intended to provide a general
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