General climate and trends
General innovation climate
What is the general state of fintech innovation in your jurisdiction, including any notable trends, innovations, innovators and future prospects?
Switzerland supports innovation, including fintech innovation. This includes more than financial market laws. It has also established an attractive tax model for start-ups and provides financing opportunities for innovative companies. Therefore, fintech innovators find a suitable and supportive hub for the implementation of their business model.
Switzerland has no specific fintech regulation. A technology neutral approach is applied, meaning that the same rules apply to the same businesses, whether they are using traditional or innovative means. It closely monitors new technological developments and the potential need for regulatory adjustments in order to reduce unnecessary administrative burdens.
As a result, the Federal Council recently introduced a sandbox exemption, which is available to all companies. Under the sandbox exemption, the acceptance of public deposits of up to Sfr1 million will no longer trigger a licence requirement under the Banking Act (subject to certain conditions being fulfilled). In addition, the exemption from the licence requirement under the Banking Act for pure payment service providers which only accept deposits for settlement purposes has been expanded. These two exemptions create new business opportunities.
Further, in a February 1 2017 dispatch, the Federal Council suggested introducing a new licence category for companies and accepting deposits from third parties up to a maximum amount of Sfr100 million without granting loans. Facilitated conditions for permits and operational authorisations will apply to such companies. These conditions apply to all companies. The most important points in this regard include:
- substantially reduced minimum capital requirements;
- substantially reduced requirements regarding equity capital and liquidity;
- no deposit guarantees; and
- reduced requirements regarding accounting and auditing.
Parliament will decide on this new licence category in the course of 2018.
Have there been any particular developments – regulatory or commercial – in any of the following fintech sectors?
Distributed ledger technology and digital currencies (eg, blockchain, smart contracts and Bitcoin)?
The Financial Market Supervisory Authority (FINMA) has marked an increase in initial coin offerings (ICOs) conducted or offered in Switzerland (mainly in the Canton of Zug) and has started an initial examination to identify the applicable regulations. At present, ICOs are not governed by any specific regulations. Therefore, each ICO must be reviewed on a case-by-case basis for compliance with general financial market regulations. The FINMA advises examining the following laws:
- The Anti-money Laundering Act, which is potentially applicable where the creation of a token by an ICO vendor involves issuing a payment instrument or if one virtual cryptocurrency is exchanged against another virtual cryptocurrency.
- The Banking Act, which is potentially applicable when accepting public deposits.
- Security trading provisions under the Stock Exchange Act, where there is a general licensing requirement if a company operates as a securities dealer. This may apply where the issued tokens are qualified as securities.
- The Collective Investment Schemes Act, which is potentially applicable when the assets collected as part of the ICO are pooled and managed by a third party in view of a return of profit.
Another area which the regulator is looking at is the use of these technologies and the offering of financial instruments based on cryptocurrencies by supervised financial institutions in Switzerland. The main issue is the understanding and limitation of the risks involved.
The State Secretariat for International Financial Matters (SIF) has established a blockchain/ICO working group, which will review the legal framework and identify any need for action. The SIF stated in its January 18 2018 press release that it aims to:
- increase legal certainty;
- maintain the integrity of the financial centre; and
- ensure technology-neutral regulation.
This clarification of the regulatory framework should help to ensure that Switzerland remains an attractive location in this area. A Federal Council report is expected by the end of 2018.
Alternative lending platforms?
Switzerland continues to see a growth in crowdlending platforms. The recently enacted revision of the Swiss banking ordinance now provides that the acceptance of funds for settlement purposes is allowed for up to 60 days without triggering a banking licence requirement. This exception is particularly important for crowdlending platforms in Switzerland, as most of them collect money from supporters in a separate account on the platform before transferring the total amount to the borrower.
Digital payments, remittances and foreign exchange?
EU member states were required to implement the EU Payment Services Directive (2007/64/EC) by the beginning of 2018. The directive aims to make electronic payment transactions safer, more convenient and more cost effective. However, as it is an EU directive, it does not apply directly in Switzerland.
At present, there is no evidence that Swiss banks will need to consider the EU Payment Services Directive due to their participation in the Single Euro Payment Area. However, EU-based subsidiaries of Swiss banks must comply with the respective national implementation regulations. Further, the EU Payment Services Directive has an indirect effect on Swiss companies due to the fact that EU payment service providers must also adhere to it if:
- only one payment service provider has their seat in the European Union; and
- currencies other than the euro are involved.
For the time being, the Swiss legislature has no plans to implement analogous regulations. The "Swiss Finance Startups" Association has started an initiative for the self-regulation of market participants. As long as there are no analogous regulations to the EU Payment Services Directive in Switzerland, each bank is free to decide whether and how to make their application programming interface (API) accessible to third parties. If APIs are accessible, the bank must ensure compliance with adequate safety requirements.
Alternative financing (including crowdfunding)?
Switzerland continues to see a growth in crowdfunding (including crowdsupporting, crowdsale and crowdlending). The recently enacted revision of the Swiss banking ordinance now provides that the acceptance of funds for settlement purposes is allowed for up to 60 days without triggering a banking licence requirement. This exception is particularly important for crowdfunding platforms in Switzerland, as most of them collect money from supporters in a separate account on the platform before transferring the total amount to the borrower or project initiator. Recently, alternative financing by the issuance of tokens (ICOs) has become popular and has alerted the regulator. It is important to review each business model on a case-by-case basis. At present, ICOs are governed by no specific regulations and, therefore, must be reviewed on a case-by-case basis for compliance with general financial market regulations. This includes the Banking Act, which may be applicable if the ICO includes the acceptance of deposits. The Anti-money Laundering Act may apply where the creation of a token by an ICO vendor involves issuing a payment instrument or if one virtual cryptocurrency is exchanged for another virtual cryptocurrency. The Stock Exchange Act may apply if the tokens qualify as securities. The Collective Investment Schemes Act may apply if the assets collected as part of the ICO are pooled and managed by a third party with a view to a return of profit.
Investment, asset and wealth management?
The legislature has created an area of innovation that may also cover business models in the field of investment, asset and wealth management. The acceptance of public deposits up to Sfr1 million will no longer trigger a banking licence requirement subject to certain conditions being fulfilled. This sandbox exemption does not apply to other financial markets regulations, such as the Collective Investment Schemes Act and the Anti-money Laundering Act, which may also apply in this field. It is therefore important to review each business model on a case-by-case basis.
For the time being, asset managers who manage no collective investment schemes are not subject to FINMA supervision – rather, they are only required to register as a financial intermediary under the Anti-money Laundering Act.
A supervisory regime for all asset managers will be introduced by the proposed Financial Institutions Act, which is being discussed in Parliament. This supervisory regime is not expected to come into force before 2019.
Robo-advice and artificial intelligence?
Switzerland has seen an increase in the use of robo-advice by financial institutions. There are a number of fintech businesses based in Switzerland using artificial intelligence methods which also profit from the Domain of the Swiss Federal Institutes of Technology’s international position.
Any other technologies?
Digitisation increasingly raises cybersecurity issues. Financial institutions must monitor and control risks relating to IT infrastructure (eg, the FINMA circulars on operational risks and outsourcing). One important question is how cybersecurity may be improved while simultaneously improving the customer experience in using online services. A number of fintech businesses focusing on new methods to improve cybersecurity are based in Switzerland and also profit from the Domain of the Swiss Federal Institutes of Technology’s international position.
How would you describe the regulatory policy for fintech products and services in your jurisdiction?
Switzerland takes a liberal and business-orientated approach to regulatory policy for fintech products and services. It has initiated various consultation processes and legislative changes to allow the fintech industry to grow and implement its products and services in the existing business environment. Swiss regulators have successfully recognised that the law was orientated towards big financial institutions whose start-up requirements could not have been met due to a narrower financial standing (eg, net asset requirements).
Have any fintech-specific laws or regulations been enacted in your jurisdiction? Are any envisaged?
Switzerland has no fintech-specific regulations. A technology-neutral approach is applied, meaning that the same rules apply to businesses whether they are using traditional or innovative means. As a result, a sandbox exemption was recently introduced and is available to all companies. Under the sandbox exemption, the acceptance of public funds up to Sfr1 million will no longer trigger a licence requirement under the Banking Act subject to certain conditions being fulfilled. Further, the exemption from the licence requirement under the Banking Act for pure payment service providers that only accept deposits in order to forward them has been expanded. These exemptions help to create new business opportunities.
Further, in a dispatch dated February 1 2017, the Federal Council suggested introducing a new licence category for companies accepting deposits from third parties up to a maximum amount of Sfr100 million without granting loans. Facilitated conditions for permits and operational authorisations will apply to such companies. These conditions apply to all companies. The most important points in this regard are:
- substantially reduced minimum capital requirements;
- substantially reduced equity capital and liquidity requirements;
- no deposit guarantee; and
- lowered accounting and auditing requirements.
Parliament will decide on this new licence category in 2018. The Financial Market Supervisory Authority (FINMA), which is responsible for the implementation of the fintech regulatory framework, supports an innovative and competitive Swiss financial centre. Its regulations adopt an essentially neutral approach to certain business models and technologies
Which government authorities regulate the provision of fintech products and services?
Parliament and the Federal Council are tasked with regulating financial markets laws on a statutory level. FINMA has the authority to further specify the legal requirements in its ordinances and to explain their application in circulars.
Financial regulatory framework
Which laws and regulations governing the provision of financial services apply to fintech businesses?
Frequently, fintech companies offer services or develop technologies, without themselves being subject to financial market laws. However, this requires examination on a case-by-case basis. The relevant Federal Acts include:
- the Banking Act;
- the Collective Investment Schemes Act;
- the Stock Exchange Act;
- the Anti-money Laundering Act;
- the Financial Market Infrastructure and Market Conduct in Securities and Derivatives Trading Act;
- the Financial Market Supervision Act; and
- the Consumer Credit Act.
These acts have been implemented by ordinances enacted by the Federal Council and the regulator. The regulator has issued further guidance. In addition, self-regulation may apply.
Even if financial market laws do not apply directly to fintech companies, they may apply by contractual agreement with a financial institution (eg, outsourcing regulations).
Under what conditions are fintech businesses subject to licensing requirements? Are there any exemptions?
Fintech companies frequently offer services or develop technologies without themselves being subject to financial market laws. However, this requires examination on a case-by-case basis. The general rules are as follows:
- Whoever transfers money from one account to another or brokers insurance must keep in mind the necessary registrations as a financial intermediary in accordance with the Anti-money Laundering Act or as an insurance broker.
- Companies which accept monies from more than 20 persons should verify before operation whether they require a banking licence under the Banking Act or can rely on an exception.
- Whoever intends to insure the risks of other persons should check in advance if a licence is required under the Insurance Oversight Act.
- Whoever pools assets in order to provide investors with a return or manages pooled assets should verify if they require a licence as a collective investment scheme or as an asset manager of a collective investment scheme.
Are any fintech products or services prohibited in your jurisdiction?
Data protection and cybersecurity
What rules and regulations govern the processing and transfer (domestic and cross-border) of data relating to fintech products and services?
The Data Protection Act and corresponding Data Protection Ordinance set the rules and minimal requirements for data security and the processing and transferring of personal data. The Data Protection Act is being revised and major changes are expected.
Further, although Switzerland is not an EU member, the EU General Data Protection Regulation may have implications for Swiss fintech businesses which offer cross-border services.
If a fintech business requires a licence or enters into agreements with regulated financial institutions, additional requirements apply (eg, the FINMA circulars on operational risks and outsourcing).
What cybersecurity regulations or standards apply to fintech businesses?
Switzerland’s numerous cybersecurity laws include the following:
- the Data Protection Act, which primarily settles the minimal requirements for the protection of personal data; and
- the Telecommunications Act and its corresponding ordinances and directive, which serve as a ground to provide a qualitative and competitive cyber infrastructure. The Telecommunications Act aims to limit cyber-risks. The Federal Office for Communication is responsible for the provision and enforcement of a reliable communication environment. The Telecommunications Act also contains a chapter regarding important national interests, including various security-relevant provisions. Communication services must ensure that the communication system functions flawlessly.
If a fintech business requires a licence or enters into agreements with regulated financial institutions, additional requirements apply (eg, the FINMA circulars on operational risks and outsourcing).
There are no particular fintech specific laws, but as fintech solutions regularly affect sensitive data, fintech businesses must adhere to data protection laws and provide the required security measures.
What anti-fraud, anti-money laundering or other financial crime regulations govern the provision of fintech products and services?
Payment service providers and any other persons disposing of financial assets for third parties must, as financial intermediaries, ensure that the necessary registrations in accordance with the Anti-money Laundering Act are in place. Among other duties, financial intermediaries must identify their contractual counterparties and the beneficial owner of the assets. Even if a company does not qualify as a financial intermediary, it must ensure adequate governance to avoid that its services or products are used for money laundering.
There are a number of other financial crime regulations that may come into play in the provision of fintech products and services, including:
- anti-fraud, anti-corruption, misconduct in public procurement procedures; and
- the prohibition of insider trading and market manipulation.
What precautions should fintech businesses take to ensure compliance with these provisions?
Before starting operations, a fintech business should verify whether it qualifies as a financial intermediary under the Anti-money Laundering Act and whether a registration is required. If registration is required, the company may be incorporated, but should not start business before the registration.
Companies should identify the risks involved with their particular business model and should arrange for a suitable internal governance and compliance structure. Under Swiss law, companies may also be fined if they have not prevented financial crimes because of a lack of adequate structures.
What consumer protection laws and regulations apply to the provision of fintech products and services?
Besides the protection of the market, all financial market laws (ie, the Banking Act, the Stock Exchange Act, the Financial Market Infrastructure and Market Conduct in Securities and Derivatives Trading Act and the Collective Scheme Investment Act) aim to protect customers. Therefore, they require that financial institutions and/or products are authorised; they set out specific information duties and the duty to act in good faith.
Further, the Unfair Competition Act protects consumers from fraudulent services and products and allows consumers to take action against such service providers.
Specific rules apply to consumer credits which are set out in the Consumer Credit Act and related ordinance. The legislation is designed to offer borrowers improved protection against over-indebtedness resulting from consumer credit. Therefore, a mandatory check of the borrower's credit capacity must be carried out by the lender. Aggressive advertising for consumer credits is prohibited. The interest rate must not exceed the maximum interest rate set by the Federal Council.
Does the provision of fintech products or services in your jurisdiction raise any particular competition regulatory concerns?
Are there any particular regulatory issues concerning the cross-border provision of fintech products and services (eg, operating jurisdiction rules and currency controls)?
As a general rule, Switzerland takes a liberal stance to the provision of cross-border services. For example, a banking licence may only be required if a fintech company has a physical presence in Switzerland. However, stricter rules apply for certain products (eg, the cross-border distribution of any fund shares to non-qualified investors domiciled in Switzerland requires a licence).
Financing, investment and government support
Does the government provide any incentives or support programmes to promote fintech innovation in your jurisdiction (eg, tax incentives, grants and regulatory sandboxes)?
Regulatory sandbox In order to develop the fintech business model, the Federal Council has created an innovation area. Accordingly, the acceptance of public funds up to Sfr1 million will no longer trigger a licence requirement under the Banking Act (subject to certain conditions being fulfilled). This change will enable firms to test a business model before they are finally required to obtain a bank authorisation from the Financial Market Supervisory Authority (FINMA).
Tax incentives Start-ups profit from a more lenient taxation regime in many parts of Switzerland. Accordingly, start-ups are taxed only on net asset value “until representative business results are available” (see the Financial Directorate on the Valuation of Securities and Balances for Property Tax directive – available in German only). However, the tax office has wide discretion to assess whether and when representative business results are available. According to the tax office, the following points are crucial:
- whether a positive cash flow exists;
- whether the company has established itself in the market; and
- whether it can prove a regular turnover with a marketable product.
Grants Innosuisse, the Swiss Innovation Promotion Agency, promotes science-based innovation in the interests of industry. Accordingly, it supports start-ups in the development of their projects. Moreover, numerous cantons have their own programmes that support fintech start-ups financially, but also in terms of know-how and office space.
However, most of the fintech-specific financial support comes from private associations, which are primarily financed by major financial institutions. Such associations and accelerators provide significant support to the fintech industry and have supported numerous successful and independent start-ups.
Has the government concluded any international cooperation agreements to promote and facilitate the cross-border expansion of fintech businesses?
Yes, with Singapore and Israel, which are also major fintech hubs.
Financing and investment
What private financing and investment schemes are available and commonly used for fintech start-ups in your jurisdiction?
The following private financing and investment schemes are commonly used by fintech start-ups in Switzerland:
- friends and family;
- grants from private fintech incubators and accelerators (eg, F10);
- business angels;
- family offices;
- seed funds; and
- venture funds.
What forms of IP protection are available for fintech innovations?
As a research and innovation location, Switzerland is frequently highly ranked in international studies (eg, the World Economic Forum and the European Commission). The high degree of technological development, labour market efficiency, effective cooperation between industry and research institutions and effective protection of IP rights contribute to this ranking.
Fintech innovations are protected primarily as copyright or patents. Software is typically protected under Swiss copyright law rather than patent law, as computer programs are not considered technical solutions per se. However, computer-implemented inventions that solve a technical problem can be protected through a patent registration. This is one of the key issues to be reviewed.
Design and trademark registrations may provide additional protection. However, contractual safeguards are crucial to protect fintech innovations regardless of whether the above categories of IP rights apply.
Copyright protection is available for literary, scientific and other linguistic works (eg, text, graphics, visuals and code). Copyright protection applies if the work has an individual character and protects the format, not the content. However, copyright protection does not extend to ideas, concepts or instructions (eg, algorithms). The rights holder has the exclusive right to decide whether, when and how the work is used. Swiss law foresees exceptions to copyright, such as copies for private use, and provides for the collective rights management for various remuneration claims. The Federal Copyright Act is under review.
Patents protect inventions that are novel (ie, if the invention does not form part of the prior art at the time of applying for patent protection). The patented solution must be inventive (ie, not obvious in comparison with the state of the art). A person skilled in the art must not readily come up with the same solution if presented with the purpose of the invention. The invention can only be subject to a patent application if it is industrially applicable. The holder of a Swiss patent may prohibit others from using the invention commercially (in particular, from manufacturing, storing, offering, importing or exporting the invention or placing it on the market or carrying it in transit). Various limitations to patent protection include acts undertaken within the private sphere for non-commercial purposes and research or experimental purposes.
Design protection is available for unique two or three-dimensional forms that:
- are new (ie, no identical or similar design has already been protected or made available in Switzerland); and
- have individual character (ie, their overall impression differs sufficiently from existing designs).
Design protection is unavailable for immaterial objects, ideas and concepts. The owner of a protected and registered design can prevent others from using the design for commercial purposes.
Trademark law protects brand names (eg, words, letters and graphics) and differentiates the goods or services of one supplier from other sources. Descriptive, deceptive or simple signs, abbreviations, indications and coats of arms are ineligible for protection as trademarks. Trademark protection grants the rights holder the exclusive right to use the trademark for offered goods and services.
Besides the statutory and registered IP rights, fintech innovations may include manufacturing or trade secrets. Protection of these secrets is subject to a specific statutory or contractual duty. Non-disclosure agreements and corresponding enforcement clauses are key instruments to protect manufacturing and trade secrets alongside or without IP protection.
What rules govern the ownership of IP rights to fintech innovations?
Commercially exploitable innovations start with an original idea in someone’s mind. It is not only the research and development department that can produce such ideas; they can come from any company employee. The creativity of external service providers must also be considered. Further, commercially successful products or services are often the combination of several people’s ideas.
Before entering into licence agreements or incorporating a fintech company, it is important to verify the ownership of IP rights. This is particularly relevant for software. Software is typically protected by copyright rather than as a patent. However, Swiss law does not have an official copyright register. Protection applies to any creative works that satisfy the corresponding legal requirements. The author is the natural person who has created the work. Joint ownership generally applies where two or more persons have contributed as authors to the creation. Copyright is assignable. Where a computer program has been created under an employment contract, under professional duties or fulfilling contractual obligations, the employer is entitled to exercise the exclusive rights. Protection expires 50 years after the death of the author in the case of software and 70 years after the death of the author for all other types of works.
The right to the grant of the patent lies with the inventor, his or her successor in title or a third party owning the invention under any other title. Joint inventions are possible. In the case of identical but independent innovations, the earlier application has the right to a patent grant. Patents can be assigned. Inventions created by the employee alone or in collaboration with others in the course of his or her work for the employer and in performance of his or her contractual obligations belong to the employer. By written agreement, the employer may reserve the right to acquire other inventions created by the employee in the course of his or her work. Patent protection is limited to 20 years.
Designs must be registered to benefit from exclusive rights. Further, design rights can be assigned. For designs created by employees, the same rules apply as for inventions. Designs are protected for up to 25 years.
Trademark registration in Switzerland grants protection on a first come, first served basis. Trademark rights can be assigned and trademark registration is renewable indefinitely for 10 years at a time.
What immigration schemes are available for fintech businesses to recruit skilled staff from abroad? Are there any special regimes specific to the tech or financial sector?
In Switzerland, companies tend to employ foreign workers as well as Swiss nationals. As a rule, foreign nationals engaging in any form of gainful employment in Switzerland require a permit. The specifics of immigration law must be carefully considered in advance to ensure successful staff management. Both foreign employees and the Swiss employer are punishable if they fail to comply with the applicable immigration law. Employees or employers found guilty of having committed such infringements find it difficult to obtain subsequent work permits.
In general, any work performed by a foreign national in Switzerland over eight days per calendar year requires a work permit or is subject to an online registration procedure. Business visits of less than eight days per calendar year are not subject to a work permit.
There is a general distinction in Switzerland between EU, European Free Trade Association (EFTA) and third country nationals. While EU and EFTA nationals benefit from a number of treaties and free movement in the European Union, work permits for well-qualified employees who are third country nationals are subject to federal and national quotas.
Under the Agreement on Free Movement of Persons within the European Union, employees who have an employment contract with a Swiss company are entitled to receive a work permit on the presentation of their employment agreement. Self-employed applicants must present an acceptable business plan and show that their business will generate employment in the local market in order to receive a work permit.
Work permits for third country nationals will be granted only when:
- they are sponsored by an employer;
- quotas are available;
- applications by Swiss nationals and EU and EFTA applicants have been prioritised;
- they have the required qualifications (a master’s degree at least is required); and
- salary or terms and conditions of employment are customary in the particular sector and region.
Employers with a registered seat in an EU or EFTA member state can post their employees to Switzerland for up to 90 days per year without applying for a work permit. Instead, employers must register the posted employees online at least eight days before the start of their work in Switzerland. In contrast, employees who are posted to Switzerland for more than 90 working days per year must apply for a work permit. Employers with a registered seat outside the European Union can post their workers to Switzerland, but must apply for a work permit under the conditions set out above.
There are no special regimes for the tech or financial industry. However, since there is a shortage of specialists in the IT and tech industries, it will be easier to prove the economic need for such work in a third country national's work permit application.
What immigration schemes are available for foreign investors and entrepreneurs wishing to invest in or establish a fintech business in your jurisdiction?
There are no specific immigration schemes for foreign investors and entrepreneurs wishing to invest or establish a fintech business in Switzerland.
A foreign investor in a fintech business in Switzerland on a cross-border basis does not need a work or residence permit. The same applies to an entrepreneur establishing a fintech business in Switzerland on a cross-border basis. However, at least one person with residence in Switzerland must have legal capacity to act on the company’s behalf without any restrictions. This person can be a member of the board of directors, an executive or any other duly empowered person and can have sole authority to sign or be joint signatory with another Swiss resident.
Where an investor or entrepreneur performs work for a fintech business in Switzerland, the investor or entrepreneur needs a work and residence permit.
An entrepreneur establishing a fintech business and working for such fintech business must apply for a work permit as a self-employed applicant. In order to receive a work permit, he or she must present an acceptable business plan and show that his or her business will generate employment and is in the economic interests of the local market.