The New FinTech License – the Last Pillar of Switzerland's New Legal Framework for FinTech Companies
On 15 June 2018, the Swiss Parliament passed the Swiss Financial Services Act (FinSA) and the Swiss Financial Institutions Act (FinIA). The related vote encompassed an amendment of the Swiss Banking Act (BankA), namely the introduction of a new article 1b BankA. Such provision sets the base for a new license category, the so-called FinTech license. The requirements for obtaining a FinTech license are less restrictive compared to the conventional banking license. On 30 November 2018, the Federal Council published the corresponding amendments to the Swiss Banking Ordinance (BankO). The amendments to the BankA and the BankO introducing the FinTech license entered into force on 1 January 2019.
In addition, the provisions of the BankO regarding the so-called Sandbox have been amended. The Sandbox was introduced in 2017 and creates an innovation area where neither a banking nor a FinTech license is required. The recent amendments aim at making the Sandbox more accessible and will enter into force on 1 April 2019.
Switzerland's New Legal Framework for FinTech Companies
In 2017, the Swiss Federal Council started a consultation on three measures to promote innovation in the financial sector and remove market entry barriers for FinTech companies. The measures consisted of (i) the extension of the holding period for settlement accounts up to 60 days, (ii) the introduction of a license free innovation area (Sandbox) and (iii) a new license category, the so-called FinTech license.
The first and second measure, the extended holding period and the Sandbox, became effective with an amendment to the BankO in 2017. The provisions regarding the Sandbox were, however, amended with the most recent BankO revision, which makes the Sandbox more accessible. The third measure, the FinTech license, was just introduced on 1 January 2019 after the most recent revisions to BankA and BankO.
The Sandbox is available to companies accepting deposits from the public of up to CHF 1 million and the FinTech license to companies accepting deposits from the public of up to CHF 100 million. If a business accepts deposits from the public of more than CHF 100 million, the conventional banking license is – in principle – still the only option. Neither a banking nor a FinTech license is required if one of the exceptions provided for in the BankO applies, such as (apart from the above mentioned 60-day holding period and the Sandbox) if customers are only institutional investors, if deposits are accepted as consideration for goods and services, or if bonds or similar debt instruments are issued on the basis of a prospectus.
Scope of the FinTech License
The new FinTech license applies to companies which, on a professional basis, (1.) accept deposits from the public of up to CHF 100 million (or publicly offer such financial services), provided that they (2.) do not invest or pay interest on these deposits. These prerequisites may be further detailed as follows:
- The CHF 100 million threshold must be permanently respected. Moreover, if several legal entities accepting deposits from the public form a group, the threshold must be calculated on a consolidated basis. The Swiss Financial Market Supervisory Authority (FINMA) could, however, grant an exception from such consolidated treatment of groups if the individual companies are to be considered clearly independent from each other. In particular, this may be the case if the individual companies pursue different business models with different inherent risks. Moreover, FINMA may raise the threshold to an amount above CHF 100 million if a company implements specific measures to protect the clients and their deposits that justify such an exception.
- The funds which are accepted from the public must, first of all, be dedicated to the pur-pose agreed upon with the customer (e.g. transferred to a third party or invested on behalf of the customer). Alternatively, the funds may be kept in deposit. In this case, they can neither be invested nor can interest be paid on the funds. The pursuit of interest margin-based activities (Zinsdifferenzgeschäft) is, hence, not possible for companies holding a FinTech license. If the funds are kept in deposit, they must be held as sight deposits with a bank or another company holding a FinTech license, or as high quality assets according to a specific category defined in the Swiss Liquidity Ordinance. Moreover, the funds must be kept in the currency in which the client is entitled to claim repayment. Cryptocurrencies qualifying as deposits from the public must be kept in the same way they were received. Finally, the funds must be separated from company assets or, at least, be recorded separately in the books of the company (in which case more restrictive auditing requirements apply).
Lastly, it is not necessary that a company be active in the FinTech field to fall within the scope of a Fintech license. Any company can apply for a license if it has fulfilled the pertinent requirements.
Less Restrictive Licensing Requirements
When applying for a FinTech license and after such a license is granted, companies must comply with licensing requirements. Compliance will be monitored by FINMA on an ongoing basis. The BankO clarifies the individual requirements that are also relevant to holders of a FinTech license and how these requirements differ from those for banks.
Unlike banks, FinTech license holders do not need to comply with the preferential deposit protection regime. They must, however, inform their clients accordingly. Clients must also be informed about the business model and services as well as any risks related to technology used by the companies. The BankO provides for several modalities that must be adhered to regarding the transmission of this information. Further requirements that need to be fulfilled by banks, but not by holders of a FinTech license, relate to dormant accounts, and capital adequacy and liquidity requirements (outlined in separate ordinances).
Other requirements apply also to companies with a FinTech license. Generally, they are less restrictive than for banks. The most important requirements include:
- FINMA must be notified of any change of circumstances the license is based on (e.g. changes of the members of the governing bodies or of specific services). Essential changes (e.g. regarding the business model or the service offering, or the legal form of the company) must be submitted to FINMA for approval.
- Companies with a FinTech license are subject to a regulatory audit by an authorised auditing firm.
- The companies must have a registered office and its effective management in Switzerland and must be organised as a stock corporation, a stock corporation with unlimited partners or a limited liability company.
- Various organisational requirements must be adhered to concerning the governing bodies, compliance, risk management and conflicts of interests. However, the BankO provides FINMA with considerable discretion about implementing these requirements, which can be particularly beneficial to companies in their early stages. Outsourcing of compliance monitoring and risk management activities are also permitted.
- Companies with a FinTech license must fulfil minimal capital requirements. They must permanently have fully paid-in capital of 3% of the public deposits (e.g. for CHF 100 million in deposits, CHF 3 million), but in any case no less than CHF 300,000.
For the rest, companies with a FinTech license must also comply with any other applicable Swiss financial market law provisions. In particular, they are subject to the Swiss anti-money laundering regulations. For such purposes, FINMA has revised the FINMA Anti-Money Laundering Ordinance, which sets forth due diligence requirements. FINMA specifically introduced less restrictive organisational requirements for FinTech companies than for banks. These revised provisions entered into force on 1 January 2019.
Amendments to the Sandbox
Considering the recent amendments to the BankO, the Swiss Federal Council seized the op-portunity to revise the provisions for the Sandbox (i.e. the innovation area that does not re-quire a banking or FinTech license).
Until now, the Sandbox was only available to companies, which do not invest or pay interest on deposits from the public. An exception was made if the use of the funds served a "com-mercial-industrial" activity. This requirement unduly restricted the access of FinTech compa-nies to the Sandbox.
Against that background, the Federal Council now dropped the requirement that deposits should not be invested or be paid interest on. Instead, the Federal Council has introduced a requirement prohibiting interest margin-based activities.
The amendments of the BankO in relation to the Sandbox will enter into force on 1 April 2019. As of this date, no banking or FinTech license will be required if:
- The deposits accepted from the public do not exceed the total amount of CHF 1 million;
- The company does not engage in interest margin-based activities; and
- Customers are informed that there is no FINMA supervision and that the preferential deposit protection regime does not apply.
In addition to the BankO provisions on the Sandbox, the Consumer Credit Act (CCA) and the Consumer Credit Ordinance (CCO) have been revised. The revision targets crowdlending platforms for consumers. According to the amended CCA, credits obtained by consumers through a crowdlending platform must comply with the same requirements as if granted by a professional lender. These requirements relate, for instance, to the form and content of the consumer credit contract, the assessment of the creditworthiness of the consumer and the permissible maximum interest rate. The amended CCO reforms the consumer credit information system and provides for professional indemnity insurance requirements for crowdlending platforms. The amendments to CCA and CCO will enter into force on 1 April 2019.
New Opportunities for FinTech Companies in Switzerland
The FinTech license offers interesting opportunities for FinTech companies, which accept deposits from the public. Depending on the company's business model, the FinTech license could be a permanent solution or a first step towards receiving a banking license for the period when public deposits below the threshold of CHF 100 million are accepted. In the very initial stages, when deposits do not exceed the threshold of CHF 1 million, the license-free Sandbox may be another opportunity. An important caveat is that the business model cannot involve interest margin-based activities. If this is the case, a banking license is required. On the other hand, it is always worthwhile to consider the exceptions by the BankO in order to determine whether a banking or FinTech license must be obtained at all.
To simplify the process of application for a FinTech license, FINMA has recently published guidelines, and clarified that interested companies can informally present their project to FINMA before submitting an application. This offer – together with the new legal framework for FinTech companies introduced by the Swiss Parliament and the Federal Council – demonstrates that Switzerland holds tremendous opportunities for FinTech companies.