Switzerland: Banking Regulation 2019

Last Updated: 28 May 2019
Article by Peter Hsu and Rashid Bahar

Most Read Contributor in Switzerland, July 2019

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”) to ensure Swiss financial institutions’ access to the European financial markets. Finally, the reforms were geared to revising Swiss regulations from a patchwork of sectorial rules to a consistent regulatory framework. The core of the new Swiss banking regulation will consist 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 Financial Market Infrastructure Act of 19 June 2015 (“FMIA”), 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 are expected to enter into force on 1 January 2020 and will materially change the Swiss regulatory landscape. The changes will affect domestic financial service providers as well as foreign providers with a physical Swiss establishment, but – in a departure from the current regime – also foreign providers that pursue their Swiss business on a cross-border basis only. All of these players have to review the new regulatory requirements and adapt their business accordingly.

Banks in Switzerland have been facing pressure due to regulatory and legal developments. They 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. Besides these increased burdens, the major challenges currently lie in responding to strong competitive pressure, including from new entrants coming from the technology sector, and more transparency on fees. These challenges are aggravated by the continued low (including negative) interest rates and the strong Swiss currency, which together have resulted in declining profitability.

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 based on the OECD CRS standard. 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 and anti-terrorism financing (“AML”) has also become more stringent.

The accumulation of these factors has forced many banks to scale back some of their activities in Switzerland and consequently led to a trend toward consolidation in the Swiss banking sector in recent years. These tendencies toward 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 27.5% (see Swiss Banking, Banking Barometer 2018: Economic trends in the Swiss banking industry, August 2018, available at 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 good infrastructure are also convincing arguments to build up Swiss banking presences. Moreover, the global position of Switzerland for currency trading has been further strengthened, since the Peoples’ Bank of China authorised the Zurich Branch of China Construction Bank to act as a clearing bank for the Chinese currency Renminbi in November 2015.

Looking forward, Switzerland has positioned itself to become a hub for innovative financial technologies (“Fintech”). As part of this effort, the Swiss regulatory framework was adjusted to create an appropriate environment for Fintech providers. 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 to introduce a so-called Fintech licence as a new regulatory licence category, with less stringent requirements as compared to the fully-fledged banking licence, with effect from 1 January 2019. The Swiss Financial Market Supervisory Authority FINMA (“FINMA”) has, furthermore, emphasised the technologyneutrality of the regulation and revised several of its circulars to specify the practice of the regulator under the current legislation.

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Originally published in GLI – Banking Regulation 2019, Sixth Edition

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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