In our view, the principal regulatory challenges facing the Swiss banking industry may be summarised as follows.
Banking secrecy and administrative assistance
On 13 March 2009, the Swiss Federal Council announced that Switzerland would adopt the Organisation for Economic Cooperation and Development (OECD) standard on administrative assistance in tax matters, in accordance with article 26 of the OECD Model Tax Convention. This amendment would in turn allow the lifting of Swiss banking secrecy in situations where suspicions of tax non-compliance exist. The Swiss government, therefore, started the renegotiation of the network of double-taxation agreements to which Switzerland is a party. In June 2010, the Swiss parliament had already approved the first 10 double-taxation agreements integrating article 26 of the OECD Model Tax Convention. To date, 51 double-taxation agreements have been signed and have entered into force. As a result of this process, the distinction between tax fraud and tax evasion is no longer relevant in the context of international assistance.
In parallel, on 19 November 2014, the Swiss Federal Council approved a declaration aimed at joining the Multilateral Agreement on the Automatic Exchange of Information in Tax Matters developed by the OECD. On 5 June 2015, the Swiss Federal Council adopted the dispatches on the OECD and Council of Europe Convention on Mutual Administrative Assistance in Tax Matters and on the Federal Act on Automatic Exchange of Information (AEOI Act). Both drafts, as well as the Multilateral Agreement on the Automatic Exchange of Information in Tax Matters, were approved by the Swiss parliament on 18 December 2015. Following this, the Swiss Federal Council adopted the relevant implementing ordinance (AEOI Ordinance) on 23 November 2016. Both the AEOI Act and the AEOI Ordinance finally entered into force on 1 January 2017. As a result, Switzerland’s first exchange of information started in 2018 regarding information from 2017 between the relevant foreign countries (including all EU member states, in accordance with the agreement of 27 May 2015 regarding the amendment to the EU Savings Tax Agreement with Switzerland).
In January 2016, FINMASA was amended to allow, under certain circumstances and under FINMA supervision, regulated entities to directly transmit non-public information to foreign financial market supervisory authorities responsible for their supervision, provided the prerequisites for granting international administrative assistance would be fulfilled and client and third-party (confidentiality and banking secrecy) rights are preserved. Following the entry into force of this revision, FINMA has enacted a new Circular 2017/6 ‘Direct transmission’, which sets out under which criteria supervised institutions may directly transmit non-public information to foreign authorities and entities. This Circular entered into force on 1 January 2017.
Anti-money laundering regulation and implementation of the latest Financial Action Task Force recommendations
Between 2013 and 2014, the Swiss government amended AMLA with a view to adapting it to the revised Financial Action Task Force (FATF) recommendations. The entry into force of the revised AMLA took place in two stages; first in July 2015 and then in January 2016. The revision included, inter alia:
- the obligation for financial intermediaries to establish the identity of the beneficial owner(s) of unlisted operating companies (ie, individuals holding 25 per cent of the share capital or voting rights or controlling the company in any other manner) or, if no beneficial owner can be identified, the identity of the most senior member of management; and
- a two-stage mechanism following the reporting of suspicions to the Money Laundering Reporting Office (MRO) of the Swiss Federal Office of Police, which requires the monitoring of the concerned account by the financial intermediary, for a period up to 20 days during the analysis of the case by the MRO, to suspend any transaction that may result in preventing the confiscation of the concerned asset, followed, if the case is transferred to a criminal prosecution authority, by the implementation of a full freeze on the account for five days until the decision to maintain the freeze is made by the criminal authority.
In the above context, the provisions of the FINMA AML Ordinance of 8 December 2010 and the AML Ordinance of 11 November 2015 were partially revised in order to align them with the revised AMLA. The revised provisions also entered into force on 1 January 2016. In parallel, the Swiss Bankers Association published the 2016 version of its Agreement on the bank’s code of conduct with regard to the exercise of due diligence (CDB), which entered into force on the same day. Finally, the revised FINMA AML Ordinance and the CDB introduced the possibility for financial intermediaries to on-board clients exclusively online. In this context, FINMA published a circular on video and online identification (FINMA Circular 2016/7), which entered into force on 18 March 2016. FINMA Circular 2016/7 has been partially revised on 17 July 2018 to take into account the latest developments in technology. A transitional period ending on 1 January 2020 will apply in order to grant sufficient time to market participants to adjust their processes. Generally, one of the main purposes of this circular is to clarify and facilitate video and online client identification for financial intermediaries, subject to know-your-customer duties (see Update and trends).
Following the latest FATF assessment of the Swiss AML legal framework, FINMA has decided to further revise the FINMA AML Ordinance in order to address certain remaining shortcomings identified by the FATF, as well as to implement FINMA’s practice in this area. The revised FINMA AML Ordinance will enter into force on 1 January 2020 and introduces, inter alia, more detailed requirements for global monitoring of AML risks. It specifies the risk management measures that must be put in place if domiciliary companies or complex structures are used or if there are links with high-risk countries. Further, FINMA has reduced the threshold for identification measures for cash transactions from 25,000 Swiss francs to the level set by the FATF (ie, 15,000 Swiss francs). In parallel, the Swiss Bankers Association published a revised Swiss banks’ code of conduct with regard to the exercise of due diligence that will come into force on 1 January 2020. This document sets out the duties of the banks relating to the identification of contracting parties as well as the identification of controlling parties or beneficial owners. The updated version will be in line with both the revised FINMA AML Ordinance and the revised FINMA Circular 2016/7 on video and online identification.
Outsourcing by banks, securities dealers, as well as insurers will be governed from 1 April 2018 by FINMA Circular 2018/3 ‘Outsourcing - banks and insurers’. This new Circular 2018/3, which replaces the current FINMA Circular 2008/7, lays down the requirements applicable to the outsourcing of significant functions (ie, functions having a material effect on compliance with the aims and regulations of financial market legislation). It should be noted that FINMA has aligned this new text to reflect not only its principle-based approach, but also its technology-neutral approach enabling financial institutions to comply with outsourcing requirements, irrespective of their business model. FINMA has further clarified the rules governing the outsourcing of risk management and compliance functions. One of the main changes is that financial institutions are to maintain an inventory of all outsourced services and to assess on their own (self-assessment) whether those are linked to significant functions. Further, any outsourcing outside Switzerland requires that financial institutions make sure that all necessary data for reorganisation, resolution and liquidation purposes remain accessible in Switzerland at all times. Finally, it is worth noting that this new Circular 2018/3 partially applies to intra-group outsourcing projects. The intra-group nature of such projects is to be taken into consideration within the risk assessment to be performed by financial institutions. This new Circular provides for a transitional period up to five years.
New proposed Swiss legislation on financial services and financial institutions
On 15 June 2018, the Swiss parliament enacted the Swiss Financial Services Act (FinSA) and the Swiss Financial Institutions Act (FinIA). Both statutes will enter into force on 1 January 2020. While the purpose of the FinIA is to provide a ‘new legal framework’ governing all financial institutions, the objective of the FinSA is to regulate financial services in Switzerland, whether performed in Switzerland or on a cross-border basis. On 24 October 2018, the Swiss Federal Council opened up a consultation procedure on the implementing provisions for the FinSA-FinIA, namely the Financial Services Ordinance (FinSO) and the Financial Institutions Ordinance (FinIO). The consultation was to last until 6 February 2019, after which time it is expected that FINMA will also publish implementing ordinances that will enter into force on 1 January 2020, along with the FinSA, FinIA, FinSO and FinIO.
The introduction of the new FinSA-FinIA will, inter alia, involve the following key changes to the current Swiss regulatory framework:
- under the proposed legislative framework, financial services and institutions will be governed in Switzerland by a general set of regulations on the supervision of financial services, embodied in the FinSA, the FinIA and the FMIA;
- the FinSA introduces an obligation for foreign services providers, which would be subject to an authorisation in Switzerland, to register, as a prerequisite to providing financial services in Switzerland;
- the FinSA introduces categorisation rules based on the European Union concept of ‘professional clients’ and ‘private clients’;
- the FinSA also introduces market conduct rules, including the obligation to verify the appropriateness and suitability of financial services, as well as inducements and transparency rules (integrating into the FinSA the most recent case law of the Swiss Supreme Court as regards the transparency and consent requirements for a financial institution to keep trailer fees);
- the FinSA further introduces uniform prospectus rules that generally shall apply to all securities offered publicly into or in Switzerland, as well as a change of paradigm in the enforcement of the claims of investors against financial institutions; and
- the FinIA provides that independent asset managers who are currently not subject to prudential supervision will be newly supervised. Although they will not be directly subject to FINMA supervision, their supervision will be conducted by independent supervisory organisations approved and monitored by FINMA.
Financial market infrastructure
The FMIA, including its implementing ordinances (FMIO and FMIO-FINMA), entered into force on 1 January 2016. The purpose of this statute is twofold:
- first, from a formal perspective, the FMIA aims at achieving consistency by gathering in one single statute all existing provisions related to the organisation and operation of market infrastructures, including conduct of business rules (eg, shareholding disclosures); and
- second, it aims at harmonising Swiss financial legislation with international recommendations and standards (including the EU’s MiFID 2, MiFIR and EMIR), in particular, regarding the regime applicable to negotiation platforms, central counterparties, central securities depositories, payment and securities settlement systems and derivatives trading.
The introduction of the FMIA involved, inter alia, the following key changes to the Swiss regulatory framework:
- the introduction of a licensing regime similar to the one applied to stock exchanges for multilateral trading facilities and organised trading facilities;
- the introduction of a licensing obligation for central counterparties, central securities depositories and trade repositories with the application of specific additional requirements; and
- the introduction of clearing, reporting and risk-mitigation obligations for determined exchange-traded and over-the-counter derivative transactions to which a professional investment firm is party.
Following the entry into force of the new regime, financial market infrastructures and the operators of organised trading facilities were granted a one-year transitional period to comply with a certain number of new requirements (eg, pre- and post-trade transparency information duties). Moreover, participants on a trading venue and securities dealers were released from fulfilling the extended record-keeping and reporting duties regarding securities transactions until 1 January 2017. This transitional period was based on the expected date on which the corresponding provisions in MiFID II were expected to enter into force. Because this date was postponed by a year, the Swiss Federal Council extended the corresponding transitional period to 1 January 2018. As of 1 October 2018, this reporting obligation was expanded to include derivatives with an underlying asset admitted to trading on a Swiss trading venue. However, the new rules contemplate a ‘backloading’ period. All derivatives transactions that would be reportable under the new rules transpiring between 1 January 2018 and 30 September 2018 had to be reported by 31 December 2018. In this context, it is also worth noting that, on 14 September 2018, the Swiss Federal Council decided to further extend the transitional period for non-financial counterparties with low derivatives’ trading volumes. Reporting for such small non-financial counterparties will now become mandatory on 1 January 2024 for over-the-counter derivatives’ transactions and exchange-traded derivatives’ transactions in cases of derivatives’ transactions with foreign counterparties that do not report in accordance with FMIA. This decision is in line with international developments aiming at reducing the administrative burden to small non-financial counterparties.
In May 2018, FINMA amended the FMIO-FINMA in order to introduce a clearing obligation for certain OTC standardised interest-rate and credit derivatives listed in Annex 1 of the FMIO-FINMA. These OTC derivatives are already subject to the clearing obligation under EU regulations. The revised FMIO-FINMA entered into force on 1 September 2018 and from then on, the deadlines to implement the clearing obligations laid down in the FMIO will apply. The effective dates of the clearing obligation of each counterparty are as follows:
- 1 March 2019 for derivatives transactions which participants in an authorised or recognised central counterparty conclude anew with one another;
- 1 September 2018 for derivatives transactions that participants in an authorised or recognised central counterparty conclude anew with other financial counterparties that are not small or derivatives transactions that other financial counterparties that are not small conclude anew with one another; and
- 1 March 2020 for all other derivatives transactions concluded anew.
Finally, the FDF is planning to revise the FMIA in the future in order to take into account international developments, as well as technological developments, in particular, those of fintech companies.
Corporate governance in the banking sector
In November 2016, FINMA published its corporate governance requirements for banks by consolidating provisions of a certain number of related circulars and its relevant FAQs into a new circular, the FINMA Circular 2017/1 ‘Corporate governance - banks’. The revised regime entered into force in July 2017.
The purpose of Circular 2017/1 is to streamline the regulatory framework by providing for principles and guidelines in relation to corporate governance. In particular, it leaves banking institutions free to implement the requirements in question, taking into account their own business models and the specific risks associated with them. The circular sets minimum requirements, not only regarding the composition of boards and the qualifications of their members, but also for the organisation of the banks’ internal control systems. Further, it details the allocation of responsibilities between the board of directors and the executive board of the banking institutions. Moreover, it provides exceptions to the rule most committee members must be independent (eg, absence of links with the institution, which may lead to a situation of conflict of interest). It is worth noting that smaller banks are now allowed to have a combined audit and risk committee, instead of two separate committees.
On 14 February 2013, the Swiss and US governments signed a cooperation agreement to facilitate the implementation of FATCA (FATCA Agreement). This agreement, which entered into force on 2 June 2014, is based on a model agreement (Model II) tailored for countries, such as Switzerland, that do not have an automatic information exchange in place with the United States. Model II allows for an aggregate reporting of pre-existing accounts in the absence of consent of the client to individual disclosure, which may give rise to a group request by the US Internal Revenue Service (IRS). In this context, the Swiss government has further worked on a federal statute dealing with the implementation of the FATCA Agreement to detail financial institutions’ participation, identification and communication obligations and to frame the procedures applicable to information exchange and to the levy of a withholding tax under the agreement. On 27 September 2013, the FATCA implementing act was approved by the Swiss parliament along with the FATCA Agreement. The FATCA implementing act entered into force on 30 June 2014. Participating Swiss and deemed-compliant financial institutions were to register with the IRS by 25 April 2014. On 8 October 2014, the Swiss Federal Council adopted a specific mandate to discuss a changeover to Model I with the United States. Meanwhile, it is unknown when the new agreement introducing Model I will be implemented.
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