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://www.swissbanking.org). 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
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