The upcoming Swiss Financial Market Regulations – Risks and Opportunities

Switzerland is currently in the process of overhauling the existing Swiss financial market regulations in order to implement international standards, to create a level playing field for market participants and to increase the stability of financial market infrastructures and client protection. This summer, the Swiss Federal government took a number of key decisions; important changes will be implemented in early 2016, others in 2017. Generally speaking, the idea was to shift the regulatory structure from specific regulations for each sector (banks, stock exchanges, insurance companies, etc.) to regulations applying to all industry sectors alike under the rule of “same business, same rules”. However, in the process, it became clear that specific rules and laws for collective investment schemes, for insurance companies and for banks will remain in place. Hence, the scope of application of the new acts will overlap with these existing laws. Three new acts are planned: FINFRAG, FIDLEG and FINIG. However, in addition, most of the existing laws will be or have been subject to considerable changes, the most relevant of which are summarized below:

FINFRAG

The new FINFRAG (Financial Market Infrastructure Act) is the first of the new acts that passed parliament; it will become effective on 1st January 2016. Its content is heavily influenced by EMIR and MiFID II. Under the act, new licensing requirements for FMIs (financial market infrastructures) such as trading venues (stock exchanges and multilateral trading facilities), central counterparties, central securities depositories, trade repositories and payment systems will be introduced. However, there will be a number of differences to the regulations in the EU, among which are the following: Self-regulation will continue to play an important role; an operator of an organized trading facility may trade on the platform for its own account; and the transfer of data to foreign authorities is more restricted than under the EU regulations. The act furthermore introduces new standards on derivatives trading which are compatible with foreign regulations, in particular Emir and the US Dodd-Frank Act. Swiss market participants, among others, have to clear derivatives transactions through central counterparties, must report transactions to trade repositories, and must take certain risk-mitigating measures. Again, there will be a number differences to the current EU regulations due to FINFRAG introducing local concepts such as that asset managers that do not manage collective investment schemes and investment advisors will qualify as non-financial counterparties, that group internal transactions are not subject to approval by the authorities (compliance will be monitored by the auditors of the participant) and that it will not be necessary to disclose the beneficial owner under the reporting obligations.

FIDLEG

In June 2015, the Swiss government agreed on key elements of the new Swiss Financial Services Act (FIDLEG) and mandated the Federal administration to draft the so-called message to parliament by the end of 2015. Therefore, it can be expected that parliament will discuss the new act in 2016 and that it may become effective sometime in 2017. The new act introduces a variety of MiFID II standards into the Swiss Financial Market Regulation, in particular with respect to conduct and prospectus requirements. Conduct duties include comprehensive information duties, appropriateness and suitability obligations, rules on inducements, cost transparency and conflicts of interest and the need for client segmentation, among others. The rules differentiate between professional and private clients, with possibilities to opt in or out. The rules may also apply to non-licensed market participants such as investment advisors. Product documentation requirements will be similar to those applicable in the EU. For the first time in Switzerland, FIDLEG intends to introduce regulations on the rendering of cross-border services and product offerings into Switzerland (up to today, this was only regulated and restricted for collective investment schemes and insurances) and such service or product providers will have to register with the Swiss FINMA (Financial Market Supervisory Authority); the same will apply to client advisors of non-prudentially supervised market participants. For the offering of financial products, a prospectus is required which needs to be pre-approved by FINMA in case of a public offering.

FINIG

Timing for the introduction of the Swiss Financial Institutions Act is parallel to the introduction of FIDLEG. FINIG will govern the supervisory and regulatory regime for financial institutions, including financial institutions providing asset management services to third parties. As a rule, independent asset managers were not subject to prudential supervision in Switzerland (unless managing collective investment funds). Under the new act, the Federal Council decided in June 2015 that independent asset managers should become prudentially supervised by a new supervisory organization which will in its turn be authorized and supervised by FINMA. A risk based supervision approach will be taken so that small asset managers will only be subject to a reduced supervisory burden. Certain small asset managers will benefit from a grandfathering clause.

New AML and Due Diligence Convention

Considerable changes were made in 2015 to the existing Anti-Money Laundering Act. New rules regarding bearer shares (increased transparency) became effective as of 1st July 2015. As of 1st January 2016, new rules on predicate offences under the Anti-Money Laundering Act will become effective rendering the qualified tax offence a predicate offence under the act. A qualified tax offence is defined as any tax fraud (in Switzerland or abroad) by which the amount of taxes not paid per tax period exceeds the amount of CHF 300’000.

Furthermore, stricter rules on the identification of the beneficial owner of bank accounts are introduced under the new Swiss Bankers Due Diligence Convention (VSB 16) which will become effective on 1st January 2016. Banks have to identify the beneficial owner of operative companies (defined as a person holding 25 % or more of the voting rights or of the capital or the person exercising factual control over the company by other means). If there no such controlling persons, the managing director of the company has to be determined and will be treated as the person controlling the company.

Automatic Information Exchange and changes to FINMAG

Also in June 2015, the government published the message to parliament for a Federal Act about the Automatic International Information Exchange in Tax Matters. The proposed act implements the global AEOI standard of the OECD. The introduction of the federal act is part of the general strategy of the Swiss government to implement international standards (including with respect to tax transparency) in Switzerland. Under the act, finance companies will collect finance information of their customers domiciled abroad and will transfer such information to the Swiss tax authorities which will forward the information to the foreign tax authority at the customer’s domicile.

The already existing FINMAG (Financial Markets Supervision Act) will also be revised and amendments include new rules for cross-border information flow. FINMA will be entitled to spontaneously exchange information with foreign authorities (no longer limited to supervisory authorities), provided that such information exchange serves the purpose of enforcing financial market regulations and that the foreign authority is bound by official or professional secrecy. As the client may be refused access to the formal request by the foreign authority and as FINMA has the option not to inform the client prior to the delivery of the information, client defense rights against transfer of the information will become more restricted.

Conclusions

Switzerland’s financial market laws are going through a period of dramatic change, which has implications not only for markets participants in Switzerland but also for foreign participants involved in cross-border financial services or transactions. Key issues to be aware of include, among others, the increased cross-border exchange of information, new licensing requirements for FMIs, new rules applicable to derivatives trading, prudential supervision of asset managers, new rules on retrocessions, new rules for clients segmentations, client information and suitability tests and new prospectus requirements. Any participant in the Swiss market needs to review its current business model and evaluate whether and to what extent it needs to be adapted to comply with the comprehensive changes made to the Swiss regulatory architecture.

Thomas A. Frick

Thomas A. Frick

Email: [email protected]
Tel: +41 58 800 8000

Thomas A. Frick specializes in counselling Swiss and foreign banks and other financial institutions in all kinds of legal and regulatory issues, with a particular focus on regulatory and compliance issues, customer contracts, interbank contracts and syndicated finance. Recent instructions from clients include the acquisition of Swiss banks, the founding and setting up of Swiss banks, negotiations with the Financial Market Supervisory Authority and with other authorities relevant to market participants in Switzerland and various internal investigation mandates. Mr. Frick is member of the board of directors of Swiss banks, a lector in the LL.M.-Program of Zurich University on banking and financial markets law and published various articles on financial law.

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About Thomas A. Frick

Email: [email protected]
Tel: +41 58 800 8000
Thomas A. Frick specializes in counselling Swiss and foreign banks and other financial institutions in all kinds of legal and regulatory issues, with a particular focus on regulatory and compliance issues, customer contracts, interbank contracts and syndicated finance. Recent instructions from clients include the acquisition of Swiss banks, the founding and setting up of Swiss banks, negotiations with the Financial Market Supervisory Authority and with other authorities relevant to market participants in Switzerland and various internal investigation mandates. Mr. Frick is member of the board of directors of Swiss banks, a lector in the LL.M.-Program of Zurich University on banking and financial markets law and published various articles on financial law.