SWITZERLAND: An Introduction to Banking & Finance
Swiss Banking Law: Current Status and Future Outlook
Introduction
The Swiss banking industry is one of the most important sectors of the Swiss economy, contributing to its stability, innovation, and competitiveness. The industry is subject to a regulatory framework, which aims to ensure the safety and soundness of the financial system, protect the interests of depositors and investors, and maintain the reputation of the Swiss financial center.
Swiss banking law is based on a combination of federal legislation, self-regulation, and international standards. Federal legislation codifies the fundamental principles, while specific details are outlined in Federal Council ordinances. The international standards, such as the Basel III framework, the Financial Action Task Force recommendations, and the OECD Common Reporting Standard, are also incorporated into the Swiss banking law, either through legislation or through self-regulation.
Key Regulators in Banking
The regulatory architecture governing banking in Switzerland involves several key bodies and regulations.
FINMA, the supervisory authority, oversees banks, securities dealers, and other financial institutions to protect the interests of stakeholders and ensure market functioning. As part of its dual supervisory system, FINMA delegates regulatory audits of financial institutions to recognsied audit firms on its behalf.
Key legislation includes the Financial Market Supervision Act, Banking Act (BankA), Financial Market Infrastructure Act, and Financial Services Act (FinSA) covering licensing, prudential supervision, and market conduct.
In addition to "microprudential" regulation applied at the individual institution level, the Swiss National Bank (SNB) possesses distinct authority over "macroprudential" regulation concerning the entire system. This authority includes the ability to recommend the activation of the countercyclical capital buffer. The SNB mainly concentrates on monetary policy and overall financial stability. In the realm of financial stability, the SNB typically collaborates with FINMA.
Supra-national organisations like the Financial Stability Board and regulatory regimes like Basel III significantly influence Swiss regulations. The EU's harmonisation efforts, exemplified by MiFID II, also impact Swiss legislation. The recent Berne Financial Services Agreement between Switzerland and the UK further aims to enhance co-operation and market access.
Key Regulations
Swiss banks must adhere to strict governance requirements, primarily outlined in the BankA, Banking Ordinance, and FINMA Circular 2017/1, to maintain their banking licences. These standards cover various key aspects including ensuring good reputation and conduct, implementing clear separation of powers between the board of directors and executive management, establishing diversified boards with independent members, and forming audit and risk committees for larger banks. Further requirements encompass setting up independent internal audit functions, ensuring remuneration systems do not encourage behavior detrimental to internal controls, regulating outsourcing of functions while retaining key decision-making within the bank, and complying with accounting rule changes mandated by FINMA.
Apart from this, Swiss banks must meet stringent capital requirements to obtain and maintain their licenses. These requirements encompass maintaining a minimum share capital, adhering to regulatory capital requirements based on the Basel III Framework, including a minimum required capital and holding capital buffers such as countercyclical buffers to enhance resilience against credit risks and economic fluctuations. Large banks with significant foreign commitments or balance sheets must also maintain an extended countercyclical buffer. FINMA has the authority to require additional capital if minimum requirements and buffers are insufficient to cover specific risks. Banks are also mandated to maintain a minimum leverage ratio based on Tier 1 capital and un-risk-weighted assets. Systemically Important Banks (SIBs) must fulfill additional capital requirements, including going-concern and gone-concern capital requirements, to ensure business continuity and facilitate restructuring if necessary.
The regulations governing banks' interactions with clients and third parties in Switzerland are primarily rooted in private civil law, particularly the Swiss Code of Obligations (CO), and FinSA. Banks must adhere to principles of fidelity and diligence in their dealings, with legal duties and customs further refined through court precedents and standards set by recognized self-regulatory organisations. FinSA ensures client protection, aiming for informed investment decisions and transparent services from knowledgeable professionals. Recognising the varying client needs, FinSA tailors its regulations accordingly and covers inter alia suitability tests, documentation, conflict of interest avoidance, transparency, and ombudsman participation. The Anti-Money Laundering Act mandates financial institutions to combat money laundering, including due diligence requirements. Strict sanctions compliance is crucial, with fines up to CHF1 million for violations. Switzerland's sanctions regime, led by the Embargo Act, enforces international law, especially in human rights areas, with severe penalties for non-compliance, including asset freezes and service restrictions.
Upcoming Trends
Swiss banking law is constantly evolving to adapt to the changing needs and challenges of the financial sector. Specifically, the recent Credit Suisse crisis prompted discussions about potential long-term regulatory changes. Some of the most relevant trends that might shape the future of the Swiss banking law are the following:
• Systemically Important Banks and Banking Stability: Following mandates from Parliament and in accordance with Article 52 BankA, the Federal Council conducted a thorough evaluation of the regulation concerning SIBs. During its session on 10 April 2024, it adopted the accompanying report on banking stability. The focus areas of the proposed measures include:
- Strengthening prevention: Enhancing corporate governance and risk management in SIBs through additional regulatory requirements and expanded powers for FINMA. This shall involve implementing a senior managers regime, regulating bonuses, and the introduction of FINMA's fine-imposing abilities. Additionally, capital requirements for SIBs shall be tightened, and FINMA's intervention capabilities broadened.
- Strengthening liquidity: Further, SIBs liquidity holdings shall be improved and SNB's capacity to provide liquidity shall be expanded.
- Strengthening the crisis toolkit: The ability of SIBs to orderly exit the market during crises shall be enhanced by strengthening resolution planning and crisis organization, reducing legal risks, and clarifying inter-authority co-operation.
• Digitalisation of Banking Services and Fintech Regulation: Swiss banks embrace digital channels for service delivery, leveraging platforms and blockchain for efficiency. However, the technological shift is challenging as it involves ensuring robust security measures, protecting customer privacy, and maintaining regulatory compliance amidst rapid digital transformation. Switzerland has eased regulatory requirements for innovative fintech solutions and its proactive regulation in this regard, led by FINMA, fosters innovation by reducing barriers. While deregulatory measures promote efficiency and disintermediation, careful oversight seems essential to manage associated risks and ensure financial stability.
• Further Implementation of Basel III Standards: Switzerland has implemented Basel III requirements regarding capital and liquidity, with further amendments expected to align with Basel III standards by 2025.
• Climate-related Financial Risk Disclosure: The sustainability of the financial system entails the integration of environmental, social, and governance (ESG) factors into the risk management, the disclosure, and the product offering of financial institutions, as well as the promotion of green finance and social impact investing. In November 2022, the Swiss Government released an ordinance detailing climate-related reporting obligations, which took effect on 1 January 2024, and mandates large Swiss corporations, public companies, banks, and insurance firms to adhere to the Task Force on Climate-related Financial Disclosures recommendations. In May 2021, FINMA furthermore introduced obligations requiring certain entities to report on environmental issues (with a focus on CO2 targets), social matters, employee welfare, human rights respect, and anti-corruption measures. Furthermore, the Swiss Bankers Association has issued guidelines for integrating ESG preferences and risks into investment advice and portfolio management, effective since early 2023.
These upcoming trends reflect Switzerland's efforts to enhance financial stability, protect customers, promote innovation, and ensure compliance with international standards in the financial sector.