Q&A: Islamic finance regulation and supervision in Switzerland

Supervision

Which are the principal authorities charged with the oversight of banking, capital markets and insurance products?

The Swiss Financial Market Authority FINMA supervises insurance and reinsurance undertakings, insurance intermediaries and groups as well as other financial institutions such as banks, securities firms, asset managers and collective investment schemes. Banking and insurance activities may only be conducted in Switzerland if the relevant entity has been granted a licence by FINMA. Pure lending activities (being subject to anti-money laundering regulations only) are supervised by self-regulatory organisations.

The various requirements to be complied with to obtain a licence are set out in the Financial Institutions Act FinIA, the Federal Banking Act (FBA)and the Swiss Federal Insurance Supervision Act (ISA). The requirements are equally applicable for Islamic banks and insurance providers that want to carry out business in Switzerland. No specific requirements apply to Islamic banks for takaful or retakaful operators.

Identify any notable guidance, policy statements or regulations issued by the regulators or other authorities specifically relevant to Islamic finance.

There is no guidance, policy statement or regulation issued by Swiss regulators or other authorities specifically addressing Islamic finance.

Is there a central authority responsible for ensuring that transactions or products are sharia-compliant? Are IFIs required to set up sharia supervisory boards? May third parties, related parties or fund sponsors provide supervisory board services or must the board be internal?

Switzerland has no central authority responsible for ensuring that transactions or products are sharia-compliant. Further, Switzerland has no specific regulation in place regarding sharia-compliant products. To ensure that contractual documentation or products governed by Swiss law are sharia-compliant, the relevant financial institutions will often seek approval through obtaining an Islamic ruling or legal opinion (fatwa) by an expert in Islamic law (mufti). Also, for contractual documentation governed by Swiss law adhering to sharia principles (eg, master murabahah agreements), it is common that the customer represents and warrants that they have examined the transaction documents and sought independent advice from advisers and is convinced that the documentation does not contravene sharia principles and that they waive any objection as to matters of sharia compliance.

Do members of an institution’s sharia supervisory board require regulatory approval? Are there any other requirements for supervisory board members?

There are no specific provisions for sharia boards under Swiss law.

What are the requirements for Islamic banks to be authorised to carry out business in your jurisdiction?

Because there is no regulatory framework specifically applicable to Islamic banks in Switzerland, for an Islamic bank to carry out its business in Switzerland, it must be licensed as a bank under the general Swiss banking regulations and, like conventional Swiss banks, it will be subject to the supervision of FINMA.

Subject to regulations applying to consumer credits and to compliance with Swiss anti-money laundering regulations, pure lending or financing activities do usually not require a banking licence in Switzerland, provided that the financing provider neither refinances itself via more than five banks for more than 500 million Swiss francs nor solicits or accepts deposits from the public. Where loans are granted to refinance transactions with financial instruments (eg, Lombard credits) such a loan would be treated as a financial instrument and lead to the applicability of FinSA. Financial institutions that manage third-party assets (particularly, external portfolio managers, trustees, managers of collective assets, fund management companies and securities firms) must be licensed and supervised by FINMA, whereby the ongoing supervision over portfolio managers and trustees is carried out by supervisory organisations.

According to the FinSA, client advisers of Swiss financial service providers that are not licensed by FINMA (eg, distributors and financial advisers) and of foreign financial institutions that are not subject to similar supervision in their home jurisdiction or that target Swiss retail clients and opt-out professional clients (ie, high net worth individuals), must register with a client advisory register and, in case financial services are not provided exclusively to institutional or per se professional clients according to FinSA, join an ombudsman office. Registration bodies maintain a register of advisers as defined in FinSA and will check that the client advisers have completed the necessary training and further education measures.

The granting of credits to individuals for purposes other than business or commercial activities (consumer credit) is regulated by the Swiss Consumer Credit Act (SCCA). Financial service providers contemplating consumer credit activities falling under the SCCA must register with the canton in which they are established and obtain a licence from the canton upon fulfilment of certain prerequisites. Exemptions from this registration requirement are, however, available for Swiss banks licensed by FINMA and for certain lending services that are ancillary to the commercial banking activities of a provider.

May foreign institutions offer Islamic banking and capital markets services in your jurisdiction? Under what conditions?

Islamic banking and capital market services are not governed by a specific set of rules. Hence, foreign institutions may offer Islamic banking and finance products in Switzerland, provided that they comply with the applicable Swiss law provisions, including obtaining all licences required to conduct their business or to distribute the products in question.

According to FinSA, which entered into force on 1 January 2020, client advisers of foreign financial institutions that are not subject in their home jurisdiction to a supervision similar to the one they would be subject to in Switzerland or – although they are supervised in their home jurisdiction- target Swiss retail clients and opt-out professional clients (ie, high net worth individuals), must register with a client advisory register. Registration bodies maintain a register of advisers as defined in FinSA and will check that the client advisers have completed the necessary training and further education measures.

A financial institutions based outside Switzerland that want to be a participant to a Swiss trading venue must be approved by FINMA.

Any other licencing requirements, such as banking or securities dealers’ licences, are usually only triggered if the foreign institutions maintain a physical presence in Switzerland (eg, because of employees working in Switzerland or other persons domiciled in Switzerland representing the foreign institution) permanently. Further, offering collective investment schemes or structured products to Swiss retail investors may trigger further regulatory requirements. In particular, foreign collective investment schemes that are advertised or offered to retail investors must be approved and registered with FINMA. The advertisement and offering of foreign collective investment schemes to opt-out professional clients (ie, high-net-worth individuals) require the appointment of a Swiss representative and a Swiss paying agent.

Finally, the Swiss prospectus regime according to FinSA applies if securities are offered publicly in Switzerland regardless of the issuer’s place of domicile.

What are the requirements for takaful and retakaful operators to gain admission to do business in your jurisdiction?

Takaful and retakaful operations fall within the definition of insurance business under Swiss law regulations and are, therefore, subject to the licensing requirements. Hence, such operators must fulfil the respective ISA requirements and comply with the constraints imposed on any insurance or reinsurance provider.

Any takaful or retakaful operator having its domicile in Switzerland must, therefore, obtain a licence from FINMA before engaging in takaful or retakaful activities. It must apply to FINMA, and the application consists, among other things, of a formalised business plan and ancillary documentation on:

• financial aspects;
• management aspects;
• organisational aspects; and
• business rationale, material shareholders, insurance classes and products.

For regulatory purposes, the company must have the legal form of a corporation or cooperative, whereby the predominant legal form is the corporation.

How can foreign takaful operators become admitted? Can foreign takaful or retakaful operators carry out business in your jurisdiction as non-admitted insurers? Is fronting a possibility?

Takaful operators whose domicile is abroad must obtain a licence from FINMA in respect of insurance activities conducted in or from Switzerland. If one of the policyholders or insured persons or the insured risk is located in Switzerland, an insurance activity is deemed to be conducted in Switzerland. A FINMA licence is not required for mere reinsurance or retakaful activities conducted in Switzerland by operators domiciled abroad. Further, certain exemptions apply in respect of specific insurance products or risks (eg, marine, air transportation, international transport and war).

When obtaining the relevant licence in Switzerland, foreign takaful providers, in particular, must set up a branch in Switzerland, demonstrate that they are duly licensed and adequately capitalised in their home jurisdiction, have an adequate organisational fund in Switzerland and deposit collateral with the Swiss National bank.

Are there any specific disclosure or reporting requirements for takaful, sukuk and Islamic funds?

There are no specific disclosure or reporting requirements for takaful, sukuk or Islamic funds that differ from conventional products under applicable federal or state banking, insurance and securities law. Therefore, they only need to comply with the regulations applicable to any operator in the relevant sector.

What are the sanctions and remedies available when products have been falsely marketed as sharia-compliant?

If financial products (in general) have been falsely marketed as sharia-compliant, investors would, in theory, be able to seek damages arising from such misstatements.

By the same token, if a securities offering is made through a public offering involving statutory disclosure documents (such as a prospectus) and those disclosure documents describe the products in question as sharia-compliant, and this constitutes a material misstatement, it might be possible that the issuer, its directors, underwriters and certain other parties could be held liable by investors who acquired the products at the offering.

However, in any event, the amount of damages would be calculated based on the economic loss incurred by the relevant investor, which might be difficult to establish or link to a misstatement on sharia compliance.

Which courts, tribunals or other bodies have jurisdiction to hear Islamic finance disputes?

There is only one court system in Switzerland, consisting of, among others, the Supreme Court of Switzerland, (cantonal) high courts and commercial courts and (cantonal) district courts. These courts have jurisdiction to hear Islamic finance disputes as well as conventional (financial) disputes. It must be considered that a Swiss court will generally not examine whether any contractual relationships in dispute are sharia-compliant or not. Alternatively, the contracting parties may opt to settle their disputes by arbitration.