An extract from The Banking Regulation Review, 11th Edition

Introduction

The Swiss banking industry has a long tradition and has been internationally focused from the outset. Services offered by Swiss banks comprise all banking services.

Currently, there are 251 licensed banks in Switzerland, of which:

  1. two are big banks that are global systemically relevant banks (G-SIBs) (UBS AG and Credit Suisse AG) and three are systemically relevant banks or banking groups (SIBs) (Zurich Cantonal Bank, Raiffeisen Switzerland and PostFinance);
  2. 24 are (partly) state-owned cantonal banks;
  3. 60 are regional banks or savings banks;
  4. 72 are foreign-controlled banks (i.e., controlled by significant foreign shareholders); and
  5. 24 are Swiss branch offices of foreign banks.

Current challenges to the Swiss banking industry include the continued regulatory activity spurred by the 2008 financial crisis. The main focus still is on enhancing the international regulatory framework and cooperation, as well as the stability of the financial industry and its systems in line with the Basel III requirements, generally by reinforcing capital adequacy and solvency requirements, cutting back on incentivising short-term risk-taking, and – as a particular topic for big banks – addressing the too big to fail issue.

With Credit Suisse AG, UBS AG (G-SIBs) and Zurich Cantonal Bank, Raiffeisen Switzerland and PostFinance (SIBs), Switzerland currently has five banks, respectively banking groups, that are viewed as systemically important. Since the financial crisis, notably, Parliament has passed several amendments to the Banking Act that address capital adequacy, leverage ratios and liquidity requirements with specific and more stringent requirements for systemic banks, and the Swiss regulator, the Swiss Financial Market Supervisory Authority (FINMA), has strengthened its stance on risk management (including legal and reputational risk) and corporate governance requirements.

The regulatory regime applicable to banks

i Main statutes

The main statutes governing the Swiss financial markets are:

  1. the Federal Financial Market Supervision Act of 2007;
  2. the Federal Banking Act of 1934 (BA);
  3. the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading of 2015 (FMIA);
  4. the Federal Collective Investment Schemes Act of 2006 (CISA);
  5. the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector of 1997 (AMLA);
  6. the Financial Services Act of 2020 (FinSA); and
  7. the Financial Institutions Act of 2020 (FinIA).

These statutes are supplemented by a number of ordinances enacted either by the government (i.e., the Swiss Federal Council (the Federal Council)) or, as regards more technical aspects, by FINMA; their practical application is further regulated by FINMA circulars.

These regulations are complemented by the Federal Act on the Swiss Financial Market Supervisory Authority, which is a framework law governing the supervisory activities and instruments of FINMA.

ii Banking and securities firms' activities

Under Swiss banking laws, a business entity that solicits or takes deposits from the public (or refinances itself with substantial amounts from other unrelated banks) to provide financing to a large number of persons or entities is considered a bank. The conduct of banking activities in or from Switzerland is subject to a licensing requirement and to supervision by FINMA.

Swiss financial markets law makes no distinction between commercial and investment banks, and banks are not limited in the scope of their activities. As a result, banks may act as securities firms in addition to pursuing deposit-taking and lending activities (i.e., interest operations). FinIA, which entered into force on 1 January 2020, introduced a 'licence cascade', in which the banking licence is considered as the highest ranking licence encompassing the authorisation to operate as a securities firm, asset manager, fund asset manager or trustee without the need to apply for a separate authorisation. This formal simplification, however, does not exempt a licensed bank or securities firm from adapting, as the case may be, its capital, liquidity, organisation or internal policies to comply with the specific requirements applicable to the conduct of another category of regulated activities.

The main statutes governing the securities business of both banking and non-banking intermediaries in Switzerland are FinIA, FMIA and their respective implementing ordinances. The activities of a securities firm are defined broadly. They encompass the activities of securities brokers acting for the account of clients (provided they hold securities deposits or maintain accounts in their books for more than 20 clients), market makers and proprietary brokers (provided they are members of a trading venue or execute trades for a total value exceeding 5 billion Swiss francs per year in Switzerland).

As regards cross-border banking and securities activities, the Swiss regime is rather liberal: foreign-regulated entities that operate on a strict cross-border basis (i.e., by offering banking or securities services to Swiss investors without having a business presence in Switzerland) do not need to be authorised by FINMA. If, however, the activities of a foreign bank or securities firm involve a permanent physical presence in Switzerland, this cross-border exemption is not available. In practice, FINMA considers a foreign entity to have a Swiss presence as soon as employees are hired in Switzerland. That said, FINMA may also look at further criteria to determine whether a foreign bank has a Swiss presence, such as the business volume of that bank in Switzerland or the use of teams specifically targeting the Swiss market.

That said, this liberal stance has somewhat changed with the entry into force of the new FinSA. The FinSA regime indeed represents a major change both for domestic banks and foreign banks providing financial services to Swiss-based clients. The provision of financial services to clients in Switzerland on a cross-border basis falls within the scope of FinSA, which imposes a number of point-of-sale obligations and duties on financial services providers, including non-Swiss providers targeting Swiss-based clients (e.g., client segmentation, compliance with rules of conduct and organisational measures, affiliation with an ombudsman and registration in a client advisers register; see Section VII.i).

The granting of a licence to a foreign bank to establish a Swiss branch, representative office or agency is conditional upon the principle of reciprocity being satisfied in the country in which the foreign bank has its registered office, and if a Swiss bank or securities firm is permitted to establish a representative branch, office or agency in the relevant foreign country without being subject to substantially more restrictive provisions than those imposed in Switzerland, FINMA will deem the reciprocity test met.

The granting of a licence to a Swiss bank or securities firm controlled by foreign shareholders is also made dependent upon the reciprocity requirement by the relevant foreign country of domicile or incorporation of the foreign shareholders (see Section VI.i).

iii Other regulated activities

A Swiss bank may also serve as a custodian for collective investment schemes. This type of activity is subject to the CISA and its implementing ordinances.

Financial intermediaries are further supervised for the purpose of combating money laundering and the financing of terrorism according to the AMLA and its various implementing ordinances.

iv FINMA

The single integrated financial market supervisory authority, FINMA, is responsible for the supervision of banks, securities firms, stock exchanges, collective investment schemes, managers of collective assets, fund management companies and supervisory organisations, as well as the private insurance sector. FINMA also directly monitors certain financial intermediaries such as banks and securities firms with a view to preventing money laundering and the financing of terrorism. Other financial service providers acting as financial intermediaries must be affiliated to a self-regulatory organisation. All financial intermediaries must comply with a range of due diligence and disclosure requirements in relation to combating money laundering.

FINMA is a public institution with separate legal personality. Although it carries out its supervisory activity independently, FINMA has a reporting duty towards the Federal Council, which approves its strategic objectives, as well as its annual report prior to publication, and appoints FINMA's chief executive officer. Parliament is responsible for overseeing FINMA's activities.

FINMA employs approximately 500 full-time equivalent staff. Its operating expenses are covered by fees and duties levied from the supervised entities. FINMA is able to carry out its tasks within a relatively modest organisation mainly as a result of the Swiss financial markets supervision system's strong reliance on external auditors and self-regulatory organisations. Indeed, external auditors carry out direct supervision and on-site audits, whereas FINMA retains responsibility for the overall supervision and enforcement measures (see Section III).

Regulatory duties are delegated to self-regulatory organisations: the Swiss Bankers Association (SBA), for instance, issues self-regulatory guidelines to its members, which FINMA recognises as minimum standards that need to be complied with by all Swiss banks. In particular, the SBA's guidelines governing banks' duty of due diligence in identifying the contracting party and the beneficial owner of accounts, the rules of conduct in securities dealing and portfolio management play an important role in practice.