Financial Institutions Act adopted by the Swiss Parliament
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.
This Homburger Bulletin expresses general views of the authors at the date of the Bulletin, without considering the facts and circumstances of any particular person or transaction. It does not constitute legal advice. This Bulletin may not be relied upon by any person for any purpose, and any liability for the accuracy, correctness or fairness of the contents of this Homburger Bulletin is explicitly excluded.