Switzerland: Banking & Finance

In Switzerland, the primary regulator for supervising the financial market and its participants as well as certain products is the Swiss Financial Market Supervisory Authority FINMA (FINMA). FINMA also acts as rule maker where federal acts or their implementing ordinances delegate such power to FINMA, and acts as resolution authority in restructuring or liquidation proceedings of Swiss banks and securities dealers. The Swiss National Bank (SNB) is entrusted with the task to ensure the stability of the Swiss financial market – including the task commonly referred to as the macro-prudential supervision.

As a general rule, no one is allowed to accept deposits from the public on a professional basis, or rec-ommend himself for doing so, without a prior banking license from FINMA. Unauthorised acceptance of deposits, advertising such services, other use of the terms bank, banker or savings by non-banks are subject to criminal punishment.

Switzerland recognises the concept of universal banks, where banks can perform different types of ac-tivities, for example asset management, lending, investment banking, deposit taking, etc. Certain activi-ties not related to the banking business may be permissible, but require an express power in the bank’s articles of associations, which need to be approved by FINMA. Moreover, the bank’s business will have to be specified in its business rules.

The banking license does not automatically permit other licensed activities, such as broker dealer activi-ties. However, most banks have both, a banking and a broker dealer license and/or request such a li-cense in the licensing proceedings. Switzerland does currently not have a comprehensive regulation of payments services and issuance of e-money.

With effect as of 1 August 2017 and 1 January 2019, respectively, Switzerland introduced a sandbox exemption as well as a license light.

The sandbox exemption applies to businesses that accept client deposits from more than 20 persons, or publicly state that they do so, provided that the aggregate amount of client deposits is less than CHF 1 million, no interest is paid on the client deposits, the client deposits are not invested, and the depositing clients are informed in written from that the company accepting the deposits is not supervised by FINMA and the deposits are not covered by the Swiss depositor protection regime.

In order to allow innovation in the financial sector, since 1 January 2019, entities mainly active in the fi-nancial sector that only accept deposits in the aggregate amount of up to CHF 100 million, or publicly state that they do so, and neither pay interests on such deposits nor invest them are regulated in a spe-cific way. To them, the Swiss Banking Act only applies by analogy and they only have to meet certain requirements, e.g., as to their organization, risk management, compliance, financial means, etc. Such entities also have to inform their clients in written form (not to be included in the general terms and condi-tions) about the risks associated with their business model, services and utilized technologies as well as about the fact that the deposits are not covered by the Swiss depositor protection regime.

There are no specific rules in place with respect to the issuance or custody of crypto currencies. For such activities, a case-by-case analysis is necessary in order to determine whether the general prospec-tus, banking (deposit taking), anti-money-laundering or other rules and regulations apply.

There is no regulatory moratorium with respect to crypto assets in place, either. To the contrary, Switzer-land is very crypto friendly and the legislator and regulators try to be ahead of the curve in addressing the challenges and questions the new blockchain technology brings with it. Notwithstanding this, certain Swiss banks have installed a self-imposed crypto restriction/moratorium that they likely only discontinue when there is more legal certainty in some of the remaining open questions.

In order to obtain a banking license from FINMA, one must submit a written application in an official language of Switzerland (German, Italian or French), together with several exhibits supporting the statements made therein (which may also be in English), that shows that all requirements relevant under prudential supervision are met and are appropriate for the bank’s intended business.

The application procedure will in most cases be prepared and conducted by the legal advisor in close co-operation with the (future) legal owner / shareholder of the bank. The bank’s special licensing auditor plays an important role in the application procedure since the license will not be issued by FINMA until FINMA has received an audit report confirming compliance of the constituting documents and the bank’s organisation with all relevant regulatory requirements.

The duration of the licensing process depends on the complexity and completeness of the application. According to FINMA, the average duration of the proceeding (not including the preparation therefor) is six months.

For banks, mere cross-border activities from abroad into Switzerland are not subject to FINMA supervision and licensing as of yet. Specific rules may, however, apply to protect Swiss consumer clients independently of FINMA supervision or licensing requirements. For example, certain lending activities on a professional basis to Swiss consumers could trigger licensing requirements under the rules of the Consumer Credit Act. Also, in case of mortgage loans, restrictions on foreign ownership of Swiss real estate may apply. A new Financial Services Act, currently expected to come into effect on 1 January 2020, would introduce a register of advisers providing cross-border services.

A bank may primarily be established in the form of a corporation (Aktiengesellschaft), but may also be a cooperative (Genossenschaft, with certain special requirements), a sole proprietorship (Einzelfirma, for private bankers), a general partnership (Kollektivgesellschaft), or a partnership limited by shares (Kommanditaktiengesellschaft). Cantonal banks may take the form of an establishment (Anstalt) or a corporation (Aktiengesellschaft) on the basis of Cantonal law.

The Banking Act, Banking Ordinance and FINMA Circulars require a certain governance structure. For example, the members of a bank’s governing body for its guidance, supervision and control (e.g., the board of directors) are not allowed to be members of the bank’s management and must meet fit and proper requirements, at least 1/3 of the board must meet certain criteria of independence, and banks generally must have an audit committee on the board level, as well as an independent risk control function, compliance function and an internal audit. The bank’s risk management needs to be carried out on the appropriate organisational level, using adequate methods, and must reflect the particularities of the specific bank.

Swiss regulatory compensation rules are contained in a FINMA-Circular 2010/1 “Minimum standards for remuneration schemes of financial institutions” (Compensation Circular). The scope of the Compensation Circular generally applies to the remuneration of all persons (institution-wide) who are employed by firms that are subject to Swiss financial market supervision (each a Relevant Firm) or by an affiliate of such Relevant Firm and who are remunerated for work performed in respect of the Relevant Firm, including persons entrusted with the executive management (Senior Management (Geschäftsleitung)) and persons responsible for the overall direction, oversight and control (Board of Directors).

The Compensation Circular is mandatory for Relevant Firms that are required to maintain minimum equity capital of CHF 10 billion (stand-alone or consolidated). Where this threshold is not met, adherence to the Compensation Circular merely is recommended as best practice guidelines. The Compensation Circular must be adhered to (or be considered as best practice, as the case may be) by the Relevant Firms’ do-mestic and foreign subsidiaries and branches which are mandatorily included in consolidation.

Switzerland implemented the Basel III capital framework with effect as of 1 January 2013.

Building up on these rules, special requirements apply for systemically important banks (SIBs), subject to certain phase-in provisions. SIBs must hold sufficient capital that absorbs current operating losses to ensure continuity of service (going concern requirement). The going concern requirement fully applicable in 2020 consists of:

• a minimum requirement of 8% of RWA and 3% of leverage exposure, and
• a buffer of (i) 4.86% of RWA and 1.5% of the leverage exposure, leading to a so-called base re-quirement of 12.86% of RWA and 4.5% of leverage exposure, and (ii) an additional buffer sur-charge, which reflects the systemic importance.

In general, this requirement for systemically important banks must be met by CET1 capital, with up to 3.5% of RWA and 1.5% of the leverage exposure of the minimum requirement and up to 0.8% of RWA in the buffer permissible to be held in additional tier 1 capital instruments that would be converted into common equity or written down if the CET1 ratio falls below 7%. The gone concern requirement does not include any countercyclical buffers, which have to be held on top.

For systemically important banks operating internationally (G-SIBs), such as Credit Suisse or UBS, addi-tional requirements for loss-absorbing capacity apply. In addition to the above-mentioned going concern requirement, they must issue sufficient qualifying debt instruments to allow for restructuring without re-course to public resources (gone concern requirement, see below at Question 25.). Similar rules apply to domestically systemically important banks (D-SIBs), with certain quantitative alleviations and qualitative specialities (mainly driven by the legal nature of some of the existing D-SIBs).

Furthermore, Swiss capital requirements provide for a supplemental counter-cyclical buffer of up to 2.5% of a bank’s risk-weighted assets. Since 30 June 2014, the counter-cyclical buffer is set at 2% of a bank’s risk-weighted assets pertaining to mortgage bonds that finance residential property in Switzerland. Effec-tive July 1, 2016, Switzerland introduced the option of an extended countercyclical buffer, which is based on the BIS countercyclical buffer that could require banks to hold up to 2.5% of RWA in the form of CET1 capital.

In order to implement the BCBS’s final leverage ratio requirement, the Swiss regulations will be revised to, starting the course of 2018, require a leverage ratio of 3% for all banks.

See above at Question 12. for the existing leverage ratio requirements for systemically important banks and Swiss G-SIBs or D-SIBs.

The Liquidity Ordinance reflects the final Basel III rules, in particular also on the LCR. Under the Liquidity Ordinance, since 2015, Swiss banks are subject to an initial 60% LCR requirement, with incremental in-creases by 10% per year until January 1, 2019. SIBs are subject to an initial minimum LCR requirement of 100% since January 1, 2015, and the associated disclosure requirements, and, based on FINMA require-ments, a minimum LCR of 110% at all times.

FINMA further requires Swiss banks to report the NSFR to FINMA on a monthly basis. The reporting in-structions are generally aligned with the final BCBS NSFR requirements. Following an observation period that began in 2012, the Swiss Federal Department of Finance lately informed banks that the NSFR re-quirements will not be finalised as was initially planned. The Swiss Federal Council is currently expected to decide on next steps at the end of 2019.

Additionally, in order to facilitate the smooth functioning of the money market, Swiss banks are required to keep minimum reserves consisting of Swiss Franc denominated coins, banknotes and sight deposit accounts which the banks hold with the SNB in an amount of 2.5% of the average of such bank’s short-term Swiss Franc denominated liabilities at the end of the three months preceding the reporting period.

Yes, banks have to publish an annual report and an interim report (at least half-yearly) and also make these available to FINMA (in addition to applicable listing requirements, if any).

FINMA may subject a financial group or financial conglomerate to its group or conglomerate supervision.

Under Swiss standards of consolidated supervision, it is required that the financial group is adequately organised; has an adequate internal control system; adequately records, mitigates and monitors risks in connection with its business activities; is managed by persons who can guarantee proper business con-duct; complies with the duty of segregation of duties between management and the governing body for the guidance, supervision and control; adheres to the capital adequacy and risk diversification regula-tions; has adequate liquidity; correctly applies the accounting regulations on financial statement ac-counting; and has a recognised, independent and competent auditor.

Natural persons or legal entities that directly or indirectly participate in a Swiss bank with at least 10% of the bank’s capital or voting rights (a Qualified Participation) or otherwise may influence the bank in a significant manner (Controlling Influence) are subject to prior notification requirements and a related proper business conduct review. Although the Banking Act calls the above notice requirements a notifi-cation duty, it is a de facto approval requirement. Further notification duties exist whenever participation is increased or decreased so that it reaches, exceeds or falls below the thresholds of 20%, 33% or 50% of the bank’s capital or voting rights. In addition, a bank itself also must notify FINMA where it has knowledge that any person is a qualified participant or reaches, falls below or exceeds the thresholds of 10%, 20%, 33% or 50% of the capital or voting rights or otherwise exercises a controlling influence on the bank.

In addition to the members of the board of directors, the executive body, and any other persons who – due to their responsibilities within the bank – could jeopardise the bank’s continued existence and proper business, the holders of Qualified Participations (see Question 17.) or persons exercising a Controlling Influence (see Question 17.) are subject to the fit and proper requirements in FINMA’s practice.

The fit and proper requirement covers matters of professional qualifications (e.g., required for the proper management of a supervised entity) and personal reputation. The principal criterion used in assessing a person’s suitability is their professional track record.

A special additional licensing requirement exists if a bank is under a controlling foreign influence. In these cases, certain additional requirements have to be met. A controlling foreign influence is given whenever foreigners with a Qualified Participation (see Question 17.) directly or indirectly hold more than 50% of the voting rights in the bank or a significant influence on the bank is exercised in another manner. In addition, if the bank is part of a financial services group or a group being also engaged in the banking business, appropriate consolidated supervision by a recognised foreign supervisor must exist and be evidenced.

A subsequent additional license must be obtained from FINMA if a Swiss-controlled bank becomes for-eign-controlled after its establishment or if a foreign-controlled bank experiences a change of its foreign controlling person(s) at a later point in time.

Yes, Swiss systemically important banks must meet special capital requirements (quantity and quality, see above at Question 12.), liquidity requirements (see above at Question 14.), risk diversification re-quirements (measured against their CET1 rather than their total capital) as well as emergency planning requirements. G-SIBs and D-SIBs also have to comply with a gone concern requirement (see at Question 25.).

FINMA has a broad range of supervisory instruments available to perform its tasks. It has relatively wide discretion with respect to which measures it decides to take, as long as the measures are suitable, re-quired and proportionate. These instruments include: measures to restore compliance with the Financial Market Acts; declaratory rulings stating that a legal requirement had been breached; prohibition from acting in a management capacity at any firm subject to its supervision for a period of up to five years; confiscation of profits; appointment of an independent investigating or audit agent; revocation of the license/recognition/registration; or suspension of voting rights.

Moreover, the violation of Financial Markets Acts can lead to severe punishment, including imprisonment (e.g., unlicensed deposit taking or insider trading) or substantial fines (e.g., the violation of disclosure duties with respect to listed companies). The authority responsible for prosecution and judgement of violations of any criminal provisions of FINMASA or the Financial Market Acts is the Federal Department of Finance’s Criminal Division. Where proceedings before the courts are requested or if the Federal De-partment of Finance is of the view that the requirements for imprisonment or a custodial measure are met, the offence is subject to federal jurisdiction. In such a case, the Federal Department of Finance shall refer the files (which is deemed to be the bringing of changes) to the Office of the Attorney General of Switzerland for proceedings before the Federal Criminal Court.

Swiss banks are subject to a special resolution regime regulated in the Banking Act and BIO-FINMA.

Before FINMA may initiate resolution proceedings (restructuring or liquidation) with respect to a bank, one of the following prerequisites must be met: (i) there is justified concern that the bank is over-indebted, i.e., the bank is not yet insolvent, but insolvency can reasonably be expected to occur imminently and the bank no longer is or likely no longer will be in a position to avoid insolvency by its own efforts in a sustainable way; (ii) the bank has serious liquidity problems; or (iii) the bank fails to fulfil the applicable capital adequacy requirements after expiry of a deadline set by FINMA. If the requirements are met, FINMA may also order protective measures.

FINMA may only initiate restructuring proceedings rather than liquidation proceedings if (i) restructuring proceedings are likely to result in the recovery of the relevant bank, or the continued provision of certain banking services by the relevant bank or another entity, and (ii) the creditors of the relevant bank are likely to fare better in restructuring proceedings than in liquidation proceedings. In restructuring proceed-ings, FINMA has a variety of tools, including bail-in and the transfer of assets, to try to successfully restructure the bank.

Depositor protection in Switzerland is based on a three-tiered system:

1. As a first step, privileged deposits (up to CHF 100,000 per customer) are immediately paid out from the liquid assets of the failed bank.
2. If the institution’s liquidity does not suffice to cover all the privileged bank deposits as per step one above, the system-wide self-regulatory depositor protection scheme is used as a second measure to protect privileged deposits, provided that such privileged deposits are booked in Switzerland.
3. And as a third measure to protect deposits, privileged deposits are treated preferentially, i.e., in the event of bankruptcy, these deposits are treated as second creditor class claims and will thus be satisfied after certain claims in the first class (e.g., claims of employees) but before general creditors in the third class. Claims with respect to deposits exceeding the privileged amount are ranked in the third class of creditors and participate pro rata in the proceeds of realisation of the bank`s assets to any other unprivileged creditors.

Unlike cash deposits in bank accounts, assets in custody accounts such as shares, units in collective investment schemes and other securities are client property and, in the event of bankruptcy, all such assets are immediately separated from the bank`s assets and then released to clients owning such as-sets or to a custodian designated by them.

In restructuring proceedings with respect to Swiss banks, a restructuring plan may provide for a broad range of restructuring measures, depending on the concrete circumstances of the case at hand and sub-ject to the principle of proportionality. FINMA has broad discretion to take decisive action, including, among other things, converting the bank’s debt into equity (a debt-to-equity swap); and/or partially or fully writing-off (certain of) the bank’s obligations (a haircut). A debt-to-equity swap and a haircut are generally referred to as a bail-in and are FINMA’s preferred restructuring measure for systemically rele-vant banks.

As a general rule, all debt capital may be converted into equity capital. The following are excluded:

• privileged claims (including privileged deposits, see above at Question 23.) to the extent that they are classed as preferential;
• secured claims to the extent that they are secured; and
• offsettable claims to the extent that they are offsettable.

Systemically important banks must issue sufficient qualifying debt instruments to fund restructuring without recourse to public resources (gone concern requirement). Going concern capital (see above at Question 23.) and gone concern capital together form the total loss-absorbing capacity (TLAC). The Swiss going concern and gone concern requirements for systemically important banks operating interna-tionally (G-SIBS) are generally aligned with the FSB’s total loss-absorbing capacity standard.

The gone concern requirement of a G-SIB is equal to its total going concern requirement (see above at Question 12.); D-SIBs are subject to a gone concern requirement of 40 percent of their going concern requirement, subject to a phase-in until 2025. The gone concern requirement should primarily be fulfilled with bail-in debt instruments that are designed to absorb losses after the write-down or conversion into equity of regulatory capital of a G-SIB or D-SIB in a restructuring scenario, but before the write-down or conversion into equity of other senior obligations of the G-SIB or D-SIB, respectively. Bail-in debt in-struments do not feature capital triggers that may lead to a write-down and/or a conversion into equity outside of restructuring, but only begin to bear losses once the G-SIB or D-SIB is formally in restructur-ing proceedings and FINMA orders capital measures (i.e., a write-down and/or a conversion into equity) in the restructuring plan. According to the Capital Adequacy Ordinance, bail-in debt instruments must fulfil certain criteria in order to qualify under the gone concern requirement, including FINMA approval. Specific types of D-SIBs subject to a state guarantee or similar mechanism may also meet half or all, depending on whether certain criteria are met, of their gone concern requirement by way of the state guarantee or similar mechanism.

We currently see three trends in Swiss bank regulation:

1. The further (de)regulation in the area of FinTech to allow innovation, disintermediation, and techno-logical developments;
2. fine-tuning of restructuring measures (bail-in tool etc.); and
3. revision of the depositor protection regime.

Furthermore, in November 2018, the Swiss Federal Council has instructed the Swiss Federal Department of Finance and the Swiss Federal Department of Justice and Police to prepare a new draft legislation addressing several topics in the DLT | Blockchain area (including tokenization of shares and other finan-cial instruments, regulation of trading platforms for crypto assets, and segregation of digital assets in insolvency).

Continuing trends of nationalisation may limit or impact Swiss bank’s access to other markets. Defragmented regulation also resulting from such nationalisation – including in the implementation of international frameworks – may further increase the costs of doing business and may continue to drive some players out of the market.