Financial Institutions Act adopted by the Swiss Parliament

Abstract

New differentiated supervisory regime in Switzerland

Today, the Swiss Parliament adopted the Fi­nancial Institutions Act (FinIA). The FinIA gov­erns the license requirements for portfolio managers, trustees, managers of collective as­sets, fund management companies and invest­ment firms (Financial Institutions) as well as for Swiss branches and representative offices of foreign Financial Institutions. It also introduces a new regulatory pyramid and uniformly regu­lates certain core license requirements. Entry into effect will be determined by the Swiss Fed­eral Council and is currently expected no ear­lier than mid 2019. The draft implementing ordi­nance is expected this autumn.

I. Uniform rules for license requirements

The FinIA will introduce new uniform rules for the license requirements of Financial Institutions as well as for Swiss branches or representative of­fices of foreign Financial Institutions. The license requirements for, e.g., banks or insurance compa­nies, will continue to be governed by existing spe­cial regulations.

II. New regulatory pyramid

Moreover, the FinIA revises the regulatory archi­tecture for all Swiss financial institutions by intro­ducing a new regulatory pyramid: a more stringent license automatically carries the license to carry out the business of a less stringent or narrower li­cense. For example, the banking license also au­thorizes to perform activities as an investment firm, as managers of collective assets, as portfolio man­ager and as trustee.

III. New license requirement for and (indirect) supervision of portfolio managers and trustees

The FinIA introduces a new prudential regulation for portfolio managers and trustees. So far, they have only been subject to the rules for combating money laundering.

According to the FinIA, a «portfolio manager» is a person or entity who, on a professional basis and based on one or more mandates, manages assets in the name and on behalf of individual clients and|or is otherwise in a position to dispose over assets of clients in a defined way.

A «trustee» is defined as any person or entity who, on a professional basis and based on a trust in the sense of the Hague Trust Convention of July 1, 1985, manages or otherwise disposes over a spe­cial estate for the benefit of the beneficiaries or for a specific purpose.

Conversely, certain other types of financial ser­vices, e.g., investment advice, remain unregulated but will be subject to the duties of the Financial Services Act that was also adopted today.

The Swiss Financial Market Supervisory Authority FINMA (FINMA) will be the licensing authority. The day-to-day supervision will then be performed by a new supervisory organization (or organizations) for portfolio managers and trustees that will itself be li­censed by FINMA for this purpose.

IV. General license requirements

Under the FinIA, all covered Financial Institutions will be subject to common core requirements that they need to comply with. These requirements will be largely modeled on the current regime applica­ble to banks and securities dealers as applied by FINMA. For example, all Financial Institutions will be required to have an appropriate organization, including risk management and an effective inter­nal control system, will have to be effectively man­aged in Switzerland, and both the institution as such and the members of the board of directors and executive management will be subject to a fit and proper requirement. Qualified shareholders of Financial Institutions will be subject to a (less strin­gent) fit and proper test and will be subject to a duty to disclose their shareholding prior to reaching or crossing certain thresholds.

Furthermore, the FinIA generalizes the rules on outsourcing by permitting Financial Institutions to engage third parties only if they have the requisite skills, knowledge and experience and hold the req­uisite licenses to carry out the relevant business. In addition, the FinIA empowers FINMA to make the delegation of investment management services to persons in other jurisdictions subject to the require­ment of the existence of an agreement between FINMA and the foreign regulator on cooperation and exchange of information.

All Financial Institutions will be required to join an ombuds organization upon starting their business to ensure the effectiveness of the rules on alterna­tive dispute resolution for investor disputes pro­vided for by the Financial Services Act that was also adopted today.

The FinIA also regulates the special individual li­censing requirements, e.g., with respect to capitali­zation, to be met by the respective Financial Insti­tutions.

V. Grandfathering | transitory rules

The FinIA is expected to enter into effect mid 2019. However, certain grandfathering or transitory rules will ensure a smooth transition to compliance with the new regulation. For example:

  • Financial Institutions that, at the time of entry into force of the FinIA, hold a license for the rel­evant activity in accordance with a Swiss finan­cial market act (e.g., the Stock Exchange and Securities Trading Act or the Collective Invest­ment Schemes Act) do not require a new li­cense. However, they must comply with the re­quirements of the FinIA within one year of its entry into force. In extraordinary circumstances, FINMA may extend this deadline.
  • Financial Institutions that newly become subject to a licensing requirement when the FinIA comes into force must report to FINMA within six months of its entry into force. They must meet the requirements and submit an applica­tion for authorization within three years of their entry into force. They may continue their activi­ties until the license has been granted provided that they are affiliated with a self-regulatory or­ganization pursuant to article 24 of the Swiss Federal Act on Combating Money Laundering and Terrorist Financing (AMLA) and are super­vised in this respect in relation to the compli­ance with the corresponding obligations. In ex­traordinary circumstances, FINMA may extend this deadline.
  • Asset managers and trustees who commence their activities within one year of the entry into force of the FinIA must contact FINMA without delay and, from the start of their activities, meet the conditions for authorization (with the excep­tion of an indirect supervision by a new supervi­sory organization). Within no later than one year after approval of a new supervisory organi­zation by FINMA, they must affiliate with a su­pervisory organization and submit an applica­tion for authorization with FINMA. Until the li­cense has been granted, they may carry out their activities provided that they are affiliated with a self-regulatory organization pursuant to article 24 AMLA and are supervised in this re­spect in relation to the compliance with the cor­responding obligations.

VI. Details in the implementing ordinance

The FinIA continues to be a framework regulation and many detailed rules and requirements will be contained in the implementing ordinances. The publication of the draft implementing ordinance for consultation currently is expected in the autumn of this year.

We will continue to monitor these developments and reach out to you as soon as the draft implementing ordi­nance is available.

If you have any queries related to this Bulletin, please refer to your contact person at Homburger or to: