Overview

If a bank goes bankrupt, deposits of up to CHF 100,000 per client are treated as privileged under bankruptcy law. In case of an financial institute facing bankruptcy, the privileged deposits will be covered by the financial institute’s liquid assets outside of the ordinary collocation method as long as the claims can be settled. Otherwise, the difference up to CHF 100,000 per client will be funded by the deposit protection scheme.

The Federal Act on Banks and Savings Banks obliges banks, among other things, to finance the deposit protection through contributions levied by Esisuisse in the event of the bankruptcy of an institution.

Key changes

Disbursement period 1: Privileged deposits at Swiss branches should still be paid out immediately, and deposits at foreign branches should now be paid out as soon as effectively and legally possible from the liquid assets of the bankrupt institution.

Disbursement period 2: The transfer of secured deposits by Esisuisse to the liquidator has now to take place within 7 working days (instead of the previous 20 working days) since the FINMA notification. In addition, a new deadline is introduced under which the liquidator must pay deposits to depositors within 7 working days since receiving their payment instructions.

Safeguard measures: The safeguard measures should only trigger the deposit protection if they are ordered due to an imminent bankruptcy.

Financing method: Instead of permanently keeping liquid assets which equal a half of their respective contribution obligation, banks should now deposit easily marketable high-quality securities or Swiss francs in cash with a third-party custodian to the same extent.

Preparatory measures: In order to speed up payments to depositors, banks are required to carry out certain preparatory tasks with regard to their data situation, processes and infrastructure. The creation of a list of depositors ("master file") is central which records all depositors with secured deposits. A transition period of 5 years is intended.

Maximum obligation: The upper system limit for deposit protection is now 1.6 percent of deposits secured, but at least six billion Swiss francs.

Expert opinion

The proposed changes are likely to strengthen confidence in the Swiss financial centre and at the same time improve its stability. The new, relatively short deadlines for disbursement to depositors are intended, among other things, to avoid bank-runs at third-party banks and financial bottlenecks of depositors. The adjustment of the maximum obligation to 1.6% ensures that the payment obligations are linked to the amount of secured deposits.

However, banks will also have to make a considerable amount of effort as a result of the planned changes. For example, the requirement to hold liquid securities or cash deposits with third-party institutions will lead to some adjustments. In addition, banks should analyse the requirements for preparatory actions with regard to data quality, processes and infrastructure at an early stage - despite the transition period - and begin with implementation planning.

Overview

The Swiss fund market is of great importance for the economy as a whole and is also internationally known as an asset management and distribution hub, but is less well positioned as a producer. This is mainly due to the fact that foreign legislations have more favourable framework conditions for alternative and innovative fund products. The EU states have already introduced fund categories that do not require prior approval from the respective supervisory authority.

With the partial amendment of the Collective Investment Schemes Act (CISA), the Federal Council intends to promote the innovation and competitiveness of the Swiss fund market.

Key changes

The so-called "Limited Qualified Investor Fund" (L-QIF) is intended to offer a Swiss alternative to similar foreign products. From a taxation standpoint, the L-QIF is treated like a fund without being subject to FINMA approval. For the L-QIF, the regulator has abandoned its previous dual supervision of institution and product, which in fact enables deregulation. Nevertheless, the L-QIF remains embedded in the regulatory framework as the management of the fund has to be transferred to an authorised fund management company.

The L-QIF may be issued without a prospectus and is generally not subject to any external restrictions with respect to investment instruments and risk diversification. This gives market participants the opportunity to set up a fund product much more quickly and cost-effectively.

The provisions of the CISA also in principle apply to an L-QIF - with the exception of the provisions on licensing, approval and supervision by FINMA. Thus, an L-QIF can be established in one of the four legal forms provided for in the CISA (contractual investment fund, SICAV, KmGK or SICAF).

The lack of a licensing and approval requirement does not mean that the investors of an L-QIF remain without protection. For example, the L-QIF is only available to qualified investors under the CISA, such as banks, insurance companies and pension funds, who have been previously approved and supervised by FINMA. The latter are already allowed to invest in unregulated foreign funds.

The opinions expressed during the consultation process were largely very positive. In some cases, even more extensive deregulation was desired, especially with regard to the obligation to transfer the management of the fund to an authorised fund management company.

Expert opinion

We welcome Switzerland’s deregulation for such fund products and hope that innovative Swiss market participants will take advantage of the opportunity to create new products and attract substantial assets.

The simpler and more cost-effective launch is a positive development. Even more valuable though is the freedom with regard to freely selectable investments and risk distribution requirements. These must of course be defined and adhered to for the respective L-QIF, but are not subject to any legal restrictions.

In recent years, Switzerland has positioned itself very well globally as an innovation driver with new financial market participants and investment opportunities. The L-QIF offers great potential in this respect.

Overview

On 1 June 2018, the Federal Council opened the consultation on the amendment of the Anti Money Laundering Act (AMLA ). The aim of the consultation was to implement the most important recommendations from the country report of the Financial Action Task Force (FATF) as part of the fourth country assessment of Switzerland. The planned changes in the AMLA primarily address the weaknesses raised by the FATF (e.g. lack of subordination of lawyers, notaries and trustees to the AMLA in connection with certain non financial activities, too low number of suspicious activity reports in relation to the importance of the Swiss financial center, etc.). On 26 June 2019, the Federal Council adopted the dispatch on the amendment of the AMLA. On the basis of the results of the consultation procedure, the Federal Council adjusted two measures in relation to the consultation draft in the area of the new AMLA subordination of advisors. At the same time, the Federal Council included a new measure in the draft within the scope of reporting. The AMLA is expected to enter into force at the beginning of 2021.

Key changes

New due diligence requirements for advisers: The due diligence and audit duties for advisers should only apply to commercial services in connection with trusts and domiciliary companies (and no longer to all other companies). In addition, the duty to report to the Money Laundering Reporting Office Switzerland (MROS) is to be introduced. However, this only applies if a financial transaction is carried out for the client during the activity and the data to be reported are not covered by professional confidentiality.

Verification of the information on the beneficial owner: The obligation of the financial intermediaries to verify information about the beneficial owner is now explicitly listed as an obligation. The financial intermediary must apply the necessary diligence according to the circumstances to find out the beneficial owner’s identity.

Constant updating of client data: The client data must be periodically checked for up-to-dateness and must be updated if necessary. There is no limitation to the identification of the contracting party and establishing the identity of beneficial owners. The new explicit obligation may also include a more general review of the client profile, such as the nature and purpose of the business relationship, where such information is relevant to the risk classification or monitoring of the business relationship. The duty to periodically check the validity of the client data applies to all business relationships irrespective of the risk. However, the frequency, the scope, the type of review and the constant updating of client data may depend on a risk-based approach.

MROS: Contrary to the original plan of the Federal Council, the duty to report under the AMLA and the right to report under the Criminal Code are to be retained. The term "justified suspicion" is to be explained on the basis of the corresponding jurisprudence of the Federal Supreme Court in the Anti-Money Laundering Ordinance (AMLO). The right of the financial intermediary to terminate a business relationship, which was the subject of a suspicion report, is also proposed as a new measure to enshrine in the AMLA (if the financial intermediary has not received any feedback from the MROS after 40 days have elapsed). This provision is to apply to reports based on duty to report and to the right to report.

Expert opinion

A clarification or specification of the requirements for the "justified suspicion" or a clear definition of this term in the AMLO is absolutely necessary. A clarification/specification is also necessary on the basis of the principle of legality for the protection of financial intermediaries, since both intentional and negligent breaches of the duty to report are still punishable by law (Art. 37 AMLA). According to the Federal Council’s dispatch, the clarification of the concept of "justified suspicion" should take account of jurisprudence of the Federal Supreme Court.

Additionally, the right to report should "in no case" represent competition to the duty to report, or it should be ruled out that a case falls simultaneously under the right to report and the duty to report. It remains to be seen whether, in view of the fact that every potential suspected case is unique and requires an individual assessment, this "black-and-white" approach will be so easy to implement in practice.

Overview

The revised Agreement on the Swiss Banks' Code of Conduct with regard to Due Diligence (CDB 20) was issued by the Swiss Bankers Association (SBA) and will enter into force in parallel to the revised AMLO-FINMA on 1 January 2020. Stricter self regulation is an important element in the fight against money laundering and terrorist financing. The revised Agreement also addresses the need for improvement in combating money laundering identified by the Financial Action Task Force (FATF).

Key changes

Duty to report: An account without complete documentation and information on the contracting party, on the beneficial owner or on the control holder must be blocked after 30 days (instead of the previous 90 days) for all entries and withdrawals. The business relationship must be terminated in any case if the missing information or documents cannot be completed.

Lowering the threshold for cash transactions: The threshold for identifiying the contracting partner in cash transactions will be lowered from CHF 25,000 to CHF 15,000. The financial intermediary is obliged to identify the contracting party at all times when executing transactions involving trading in securities, currencies and precious metals as well as other commodities.

Video and online identification: With the inclusion of FINMA Circular 2016/07 on video and online identification in CDB 20, the identification in the case of a personal interview is treated in the same way as video identification and the identification in the case of a business relationship by correspondence is treated in the same way as online identification.

Abbreviated process by the supervisory board: The rules for the abbreviated process for simple cases as part of the self indictment disclosure were specified. The audit companies are now more closely involved in the process as the bank submits the complete files of the case as well as the report to an audit company for the purpose of self indictment. The audit company's report describes the facts of the case and names the relevant provisions of the Code of Conduct as a minimum.

Adjustments to the forms: There are also clarifications and simplifications for forms A, K, I, S and T.

Expert opinion

The consequences of the current changes for the financial intermediaries affected should not be underestimated, although the core content of the previous CDB remains unchanged.

Due to the shortened deadline for the provision of the documents and other information about the contracting party, the beneficial owner and/or the control holder, the onboarding processes must be adapted with stringent controls regarding the compliance with the deadline as well as the account blocking for entries and withdrawals and the termination of business relationships.

Furthermore, the financial intermediaries affected must train their staff with regard to lowering the threshold for cash transactions and adapt the underlying processes and controls (e.g. forms, transaction monitoring, compliance controls).

Overview

The Financial Services Act - together with the Financial Institutions Act (FinIA) - will enter into force on 1 January 2020. The purpose of FinSA is the cross sector regulation of financial products and financial services as well as their distribution («same rules for same business»). FinSA also intends to improve and standardise client protection and strengthen the reputation and competitiveness of the Swiss financial center.

The law is based on the European MiFID II directive, but is clearly more sector friendly on certain points (e.g. regulations on retrocessions, assessment of suitability etc.). In order to give financial service providers sufficient time to implement the new regulation, a two year transitional period is planned for the fulfilment of most FinSA duties.

Key changes

• Client segmentation (retail clients, professional clients, institutional clients) including options for opting-in/opting-out.
• Assurance of sufficient knowledge of the FinSA Code of Conduct and the necessary expertise for Relationship Managers.
• Comprehensive information and documentation duties towards clients in connection with the onboarding and the provision of the service.
• Provision of a key information document (KID) for investment advice (and execution only) for retail clients. In addition to the type and characteristics of the financial instrument, this KID also contains risk and return profile, tradability, minimum holding period and corresponding costs of the financial instrument.
• Carrying out an appropriateness test (for transaction-related investment advice) and a suitability test (for portfolio-related investment advice and portfolio management)
• Obligation to register investment advisers in the register of advisers. This applies to all advisers who do not require a licence, recognition, authorisation or registration under the Financial Market Supervision Act (FINMASA).
• Affiliation to a professional liability insurance or corresponding securities and affiliation to an Ombudsman.

Expert opinion

The provisions of FinSA will enter into force on 1 January 2020 (a transitional period of two years will apply to various FinSA duties). This poses some potential challenges for Swiss financial service providers, though many of the provisions are already known from the Code of Conduct. In contrast to its European equivalent MiFID II, the FinSA leaves considerably greater scope for entrepreneurial flexibility.

It can be assumed that the FinSA/FinIA will not cause the considerable upheavals once feared in the financial sector. Nevertheless, it is advisable to carefully analyse the new requirements and to make necessary adjustments, e.g. with regard to the organisational setup, client information policy or contractual framework.

Overview

The Federal Council's report on the legal framework for blockchain and distributed ledger technology (DLT) of December 14, 2018 demonstrated that while the Swiss legislative framework is in general already well adapted to the new technologies, there is still a need for adjustments in some areas.

Subsequently, in March 2019, the Federal Council sent a series of amendment to existing laws for consultation. During its meeting on November 27, 2019, the Federal Council adopted the dispatch on the “Federal Act on the Adaptation of Federal Law to Developments in distributed ledger technology”. These include, in particular, amendments in the Code of Obligations and securities law, debt enforcement and bankruptcy (“DEBA"), Banking Act (“BA"), Anti Money Laundering Act (“AMLA”) and Financial Market Infrastructure Act (“FMIA").

Key changes

Securities law: In addition to the existing categories of securities, uncertificated securities and book-entry securities, a new category of so-called DLT-registered uncertificated securities will be introduced. Tokens that represent a legal position (claim, membership) are to fall into this category. DLT-registered uncertificated securities are to be created and transferred by entry in manipulation-resistant electronic registers.

DEBA: Within the DEBA, it is intended to introduce the segregation of cryptobased assets due to bankruptcy, provided that these are either individually assigned to a third party or are assigned to a community asset and that it is clear which share of the community assets the third party is entitled to. In addition, in the sense of segregation, access to data in the custody of the bankrupt's estate is intended.

BA: The segregation of cryptobased assets in the event of bankruptcy has an impact on possible banking licence requirements, as segregatable assets are not considered deposits. Nevertheless, due to reputation reasons, the Federal Council has planned to subject the collective custody of certain cryptobased assets to the banking licence referred to as "Fintech" or "BA 1b“– which will be further defined by the Federal Council, as long as that they are not mixed with bank assets and no lending business is conducted (otherwise a banking licence according to Art. 1a BA may be required).

FMIA: The FMIA provides for the creation of a new authorization category for "DLT trading facilities" to trade with DLT securities multilaterally (register value rights, but not payment tokens/utility tokens) according to non-discretionary rules.

AMLA: The DLT trading facilities will be defined as financial intermediaries and thus are subject to the AMLA obligations.

Expert opinion

The creation of so-called DLT-registered uncertificated securities increases the legal certainty regarding the issuance and transferability of cryptobased assets. The segregation of cryptobased assets is also suitable for promoting the acceptance and dissemination of cryptobased assets. The new “DLT trading facilities” for private customers will enable access to multilateral DLT trading facilities. Trading platforms should therefore review their activities with regard to the definition of the “DLT trading facilities” and the associated FMIA licensing requirements.

Custodians of cryptobased assets should carefully monitor further developments, in particular the list of crypto values to be published by the Federal Council, and if necessary investigate whether their activities require a licence under the Banking Act.

It will be interesting to see which additional adjustments are planned in the area of insurance and collective investment schemes.

Overview

Since the new EU data protection basic regulation ("GDPR") is applicable, a more stringent data protection applies in European Economic Area (EU incl. EEA countries) than in Switzerland. The first fines in the EU/EEA based on the GDPR have already been imposed.

In the meantime, most of the Swiss financial service providers have at least considered the basic principles of GDPR and have laid down certain minimum requirements in writing in directives and/or process descriptions. It is considered to be certain that the documentation- and process-focused GDPR regulations are mapped analogously in the totally revised CH-DSG and that financial service providers in Switzerland fall under the new European data protection regulations anyway due to broad geographical scope of the GDPR.

Key changes

• The total revision of the Federal Data Protection Act ("DPA") will take place in two stages. With a focus on the criminal law area of personal data, the Federal Council put the data protection provisions for Schengen cooperation in criminal matters into force on 1 March 2019.
• The draft of the other part of the totally revised DPA is currently being discussed by Parliament and in particular aims to improve the protection of our personal data and the position of citizens and to adapt data protection to technological and international legal developments. The adaptation of the legislation to the European law is intended to ensure that cross-border data transmission between Switzerland and the EU/EEA states remains possible without additional obstacles. However, Switzerland does not introduce any rules that are stricter than necessary.
• The draft is risk-based, technology-neutral and enables to act in the important European market. For example, in the case of profiling, explicit consent should only be required if profiling is associated with a high risk for the personality or fundamental rights of the person concerned. Furthermore, the appointment of an internal data protection officer should be voluntary and strengthen the possibility of self-regulation.
• Swiss companies are affected by the GDPR if they "obviously intend" to offer their services to persons concerned in an EU/EEA member state. For example, when using a language, currency or telephone number with an international prefix used in the EU/EEA Member State. But the use of a top-level domain from another EU/EEA country for distribution from Switzerland to the EU would also be such an indication.
• First judgements from the EU/EEA show that data protection authorities and data subjects are filing claims for damages from the data processor in accordance with the GDPR and that courts agree with these claims.

Expert opinion

The GDPR shapes the revision of the Swiss Data Protection Act. If Swiss financial service providers are not already impacted by the GDPR, the same requirements must be met under the revised DPA with few exceptions.

Therefore, the current state should be analysed in order to know, where, by whom, which data, for what purpose and how long the data will be processed. This process must be described and all information must be summarized in a central register. This enables proof of lawful processing and the acquisition of any gaps.

Overview

The UK’s Financial Conduct Authority (FCA), which is responsible for monitoring the LIBOR reference rate, has announced on 27 July 2017 its intention not to require banks contributing to the calculation of LIBOR to participate in the LIBOR benchmark interest rate from 2021 onwards. The FCA bases its decision on the fact that LIBOR is based on inadequately executed transactions and is also susceptible to manipulation. As an alternative to LIBOR, reference rates have been and are being developed worldwide at the national level. The starting value for the Swiss franc rate curve and thus a replacement for CHF LIBOR is SARON.

Key changes

The Swiss Average Rate Overnight (SARON) reflects the conditions for overnight money transactions in the secured CHF money market and is administered by SIX Swiss Exchange.

The SARON is a volume-weighted average based on completed transactions and binding quotes in the order book of the SIX Swiss Exchange electronic trading platform. Outliers are adjusted by applying a quote filter. The calculation methode was developed in cooperation with the SNB and is publicly accessible and transparent.

The SARON is calculated immediately after the close of trading (18:00), with additional fixings during the trading day at 12:00 and 16:00.

The SARON has a clear governance structure and meets the requirements of international benchmark standards. At the beginning of 2017, the SIX also established the SRR Index Commission, which regularly reviews all aspects of SARON.

Based on these properties, the National Working Group recommended SARON as an alternative to CHF LIBOR in October 2017.

The operational challenges of the changeover are manifold. Examples include:

• Designing new products
• Identification of internal and external IT dependencies
• Adaptation of collateral management
• Adaptation of back-office processes
• Adaptation of valvation & risk models
• Adaptation of new and old contracts
• Internal and external communication
• Etc.

Expert opinion

The end of LIBOR is foreseeable. The SARON seems to be a representative and robust substitute for CHF LIBOR.

The first step in the transition from LIBOR to SARON should be to determine as quickly as possible to what extent you are actually affected. Which products, values and processes depend on LIBOR? It is also important to address the operational challenges in time and to make a conscious decision as to whether it might you need to act or can wait for the moment.