the banking regulation review - lenz & staehelin - … banking regulation review reproduced with...

Contents

i

The BankingRegulation

Review

Law Business Research

Third Edition

Editor

Jan Putnis

ii

The Banking Regulation Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Banking Regulation Review,3rd edition (published in May 2012 – editor Jan Putnis).

For further information please email [email protected]

THE BAnking REguLATion

REViEW

Third Edition

EditorJan Putnis

Law Business Research Ltd

PuBLiSHER gideon Roberton

BuSinESS dEVELoPMEnT MAnAgER Adam Sargent

MARkETing MAnAgERS nick Barette, katherine Jablonowska

MARkETing ASSiSTAnT Robin Andrews

EdiToRiAL ASSiSTAnT Lydia gerges

PRoducTion MAnAgER Adam Myers

PRoducTion EdiToR caroline Rawson

SuBEdiToR charlotte Stretch

EdiToR-in-cHiEF callum campbell

MAnAging diREcToR Richard davey

Published in the united kingdom by Law Business Research Ltd, London

87 Lancaster Road, London, W11 1QQ, uk© 2012 Law Business Research Ltd

www.TheLawReviews.co.ukno photocopying: copyright licences do not apply.

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or

omissions contained herein. Although the information provided is accurate as of April 2012, be advised that this is a developing area.

Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed

to the Publisher – [email protected]

iSBn: 978-1-907606-30-4

Printed in great Britain by Encompass Print Solutions, derbyshire

Tel: +44 870 897 3239

v

AcknoWLEdgEMEnTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

ABduLAziz ALgASiM LAW FiRM in association with ALLEn & oVERy LLP

AFRidi & AngELL

ALi BudiARdJo, nugRoHo, REkSodiPuTRo

AndERSon MōRi & ToMoTSunE

ARTHuR cox

BonELLi EREdE PAPPALARdo

BREdin PRAT

BuggE, AREnTz-HAnSEn & RASMuSSEn

Bun & ASSociATES

cHAncERy cHAMBERS

cLAyTon uTz

conSoRTiuM cEnTRo AMéRicA ABogAdoS

conSoRTiuM – TABoAdA & ASociAdoS

dAVid gRiScTi & ASSociATES

dAViES WARd PHiLLiPS & VinEBERg LLP

vi

Acknowledgements

dAViS PoLk & WARdWELL LLP

dE BRAuW BLAckSTonE WESTBRoEk

dLA PiPER WEiSS-TESSBAcH REcHTSAnWäLTE gMBH

ELVingER, HoSS & PRuSSEn

F.o. AkinRELE & co

FoRMoSA TRAnSnATionAL ATToRnEyS AT LAW

gERnAndT & dAniELSSon

gidE LoyRETTE nouEL AARPi

goRRiSSEn FEdERSPiEL

HEngELER MuELLER

kAdiR AndRi & PARTnERS

kiM & cHAng

LEnz & STAEHELin

LS HoRizon LiMiTEd

MARVAL, o’FARRELL & MAiRAL

MATToS FiLHo AdVogAdoS

MAyoRA & MAyoRA, Sc

MoRATiS PASSAS LAW FiRM

MouRAnT ozAnnES

vii

MuLLA & MuLLA & cRAigiE BLunT & cARoE

Muñoz TAMAyo & ASociAdoS ABogAdoS SA

nAgy éS TRócSányi ÜgyVédi iRodA

nAuTAduTiLH

PAkSoy

RuSSELL McVEAgH

RužičkA cSEkES SRo

ScHoEnHERR şi ASociAţii ScA

SkudRA & udRiS

SLAugHTER And MAy

SyciP SALAzAR HERnAndEz & gATMAiTAn

T STudnicki, k PłESzkA, z ĆWiąkALSki, J góRSki SPk

uRíA MEnéndEz

ViEiRA dE ALMEidA & ASSociAdoS

WASELiuS & WiST

WEBBER WEnTzEL

WongPARTnERSHiP LLP

zHong Lun LAW FiRM

Acknowledgements

Contents

viii

Editor’s Preface ��xviiJan Putnis

Chapter 1 International Initiatives �� 1Jan Putnis and Tolek Petch

Chapter 2 Argentina ��29Santiago Carregal, Martín G Vázquez Acuña and Josefina Tobias

Chapter 3 Australia ��41Louise McCoach and David Landy

Chapter 4 Austria ��76Wolfgang Freund

Chapter 5 Barbados ��86Trevor A Carmichael QC

Chapter 6 Belgium ��95Anne Fontaine

Chapter 7 Brazil ��107José Eduardo Carneiro Queiroz

Chapter 8 Cambodia ��113Bun Youdy

conTEnTS

Contents

ix

Chapter 9 Canada ��127Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams

Chapter 10 Cayman Islands ��143Richard de Basto

Chapter 11 China ��154Wantao Yang, Emily Xiaoqian Wang and Carol Dongping Cao

Chapter 12 Colombia ��175Diego Muñoz-Tamayo

Chapter 13 Denmark ��191Tomas Haagen Jensen and Tobias Linde

Chapter 14 El Salvador ��203Aquiles A Delgado and Oscar Samour

Chapter 15 European Union ��214Jan Putnis and Benjamin Hammond

Chapter 16 Finland ��236Tarja Wist and Jussi Salo

Chapter 17 France ��247Olivier Saba, Samuel Pariente, Jennifer Downing, Jessica Chartier and Hubert Yu Zhang

Chapter 18 Germany ��278Thomas Paul and Sven H Schneider

Chapter 19 Greece ��292Dimitris Passas and Vassilis Saliaris

Contents

x

Chapter 20 Guatemala ��312María Fernanda Morales Pellecer

Chapter 21 Guernsey ��325John Lewis and Jeremy Berchem

Chapter 22 Hong Kong ��337Laurence Rudge and Peter Lake

Chapter 23 Hungary ��353Zoltán Varga and Tamás Pásztor

Chapter 24 India ��366Shardul Thacker

Chapter 25 Indonesia ��379Ferry P Madian and Yanny Meuthia S

Chapter 26 Ireland ��398Carl O’Sullivan, William Johnston, Robert Cain and Eoin O’Connor

Chapter 27 Italy ��410Giuseppe Rumi and Andrea Savigliano

Chapter 28 Japan ��421Hirohito Akagami, Toshinori Yagi and Wataru Ishii

Chapter 29 Jersey ��432Simon Gould and Sarah Huelin

Chapter 30 Korea ��444Sang Hwan Lee, Chan Moon Park and Hoin Lee

Contents

Contents

xi

Chapter 31 Latvia ��457Armands Skudra

Chapter 32 Luxembourg ��468Franz Fayot

Chapter 33 Malaysia ��485Andri Aidham bin Dato’ Ahmad Badri, Julian Mahmud Hashim and Tan Kong Yam

Chapter 34 Malta ��495David Griscti and Clint Bennetti

Chapter 35 Netherlands ��506Joost Schutte, Annick Houben and Mariken van Loopik

Chapter 36 New Zealand ��519Debbie Booth and Guy Lethbridge

Chapter 37 Nicaragua ��533Rodrigo Taboada R

Chapter 38 Nigeria ��545Adamu M Usman and Jumoke Onigbogi

Chapter 39 Norway ��560Terje Sommer, Markus Nilssen and Mats Nygaard Johnsen

Chapter 40 Philippines ��571Rafael A Morales

Chapter 41 Poland ��586Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński

Contents

xii

Chapter 42 Portugal ��600Pedro Cassiano Santos

Chapter 43 Romania ��615Adela-Ioana Florescu and Diana-Maria Moroianu

Chapter 44 Saudi Arabia ��626Johannes Bruski and Julian Johansen

Chapter 45 Singapore ��635Elaine Chan

Chapter 46 Slovakia ��649Sylvia Szabó

Chapter 47 South Africa ��663Johan de Lange and Matthew Gibson

Chapter 48 Spain ��677Juan Carlos Machuca

Chapter 49 Sweden ��699Niclas Rockborn and Nils Unckel

Chapter 50 Switzerland ��715Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and Valérie Menoud

Chapter 51 Taiwan ��736Chun-yih Cheng

Chapter 52 Thailand ��749Montien Bunjarnondha and Rahat Alikhan

Contents

xiii

Chapter 53 Turkey ��763Serdar Paksoy and Nazlı Bezirci

Chapter 54 United Arab Emirates ��775Amjad Ali Khan and Stuart Walker

Chapter 55 United Kingdom ��783Jan Putnis, Michael Sholem and Nick Bonsall

Chapter 56 United States��821Luigi L De Ghenghi and Reena Agrawal Sahni

Chapter 57 Vietnam ��887Samantha Campbell, Pham Bach Duong and Nguyen Thi Tinh Tam

Appendix 1 About the Authors ��907

Appendix 2 Contributing Law Firms’ Contact Details ��942

xvii

Editor’s PrEfacE

Jan Putnis

When the first edition of this book was published in mid-2010, banking regulation seemed to be undergoing a transformation driven by a reasonably coherent international agenda. There were questions about how long it would be before nationalist and protectionist tendencies fractured the broad consensus that seemed to have built up on such issues as the need for more and better quality capital resources, liquidity requirements and the strengthening and reform of vital market infrastructure. However, there appeared to be a reasonable degree of certainty about the direction and speed of reform, at least among the G20 countries.

Events, as they always do, have since conspired to make the position considerably more complicated, in two separate ways. first, achieving many of the regulatory reforms agreed in principle at the meeting of G20 leaders in London in 2009 has proved to be a far more complex and difficult task than even those expert in the field of banking regulation had expected. secondly, as concerns about solvency have spread to governments, sovereign debt has assumed centre stage. The eurozone crisis, as it has come to be known, rumbles on with no obvious short-term solution that would avoid significant economic and social upheaval in parts of the European Union. There is also the potential existential threat that sovereign defaults of eurozone countries would pose to banks that are either established in those countries or have significant exposure to banks or assets in those countries. Events in the eurozone have given the frenetic activity in the area of financial regulatory reform in the European Union a slightly surreal quality against the backdrop of the consequences of potential economic and financial upheaval in one or more eurozone countries. Meanwhile, in the United states, the rule-making process under the dodd-frank act has continued, behind its original schedule, and banks continue to digest the consequences of the Volcker rule.

on both sides of the atlantic the volume and complexity of new and proposed rules has continued to be a cause of criticism and frustration. a banking sector that was roundly blamed for creating the complexity in products, markets and business structures that exacerbated aspects of the financial crisis is facing the irony of a wall of

Editor’s Preface

xviii

new regulation of such complexity that the complexity itself might end up being the main reason that the new regulation fails to achieve its objectives.

separately, in many asian financial centres reforms are underway but are, in general, far behind those proposed and enacted in the United states and the European Union. Many governments, regulators and bankers in asia saw (and continue to see) the western financial crisis of 2007–2009 as exactly that, a western financial crisis, and view the gradual liberalisation of the chinese banking system and greater convertibility of the renminbi as the greater challenge and opportunity.

if we set ourselves the task of summarising the positive things that have emerged for banking regulation from that western financial crisis, what would we say now, three years on? There is little doubt that there is now much greater awareness among policymakers and regulators in all major jurisdictions of two important factors that will probably dominate any future international banking crisis:a Banks, however well capitalised, risk collapse in sufficiently extreme circumstances

and the crisis demonstrated that those circumstances should never be regarded as too extreme to contemplate. assumptions about the credit quality and liquidity of assets, and about withdrawal of sources of funding (including deposits), may cease to apply in stressed market conditions. That means that the maturity transformation role of banks (‘borrowing short term and lending long term’, as it is often simplistically described) makes them subject to existential threats that are, by their very nature, difficult to anticipate and address accurately.

b contagion can spread through financial systems in unexpected ways, or at least in ways that are unexpected by governments and regulators. studying the potential routes of contagion and considering whether there are ways of closing down those routes without adverse unintended consequences for economies that are recovering from recession is therefore an important aspect of regulatory endeavour.

it might seem incredible now that these points were not appreciated sufficiently by governments and regulators before the financial crisis first erupted in the United states in 2007 and then spread to Europe in the following year. But that was undoubtedly the case.

The past year has seen international banking groups grappling with the practical realities of regulatory reform. doubts about the ability of some banks to raise the additional capital (particularly tier i capital) that they will require in order to meet the gradually increasing capital requirements set out in the Basel iii agreement are feeding concerns about the long-term viability of some banks’ business models and, more generally, about previously long-held expectations as to returns on equity of banking groups. Banks have begun to respond to actual and prospective higher capital requirements, in some cases by raising equity with varying degrees of success (which has been difficult in the market conditions prevailing in most of the world in the past year) and in other cases by selling or preparing to sell assets and business units, or simply by closing down business lines.

Politics have intervened in banking in the past year in ways that have made the debate about the direction of regulatory reform in the banking sector more complicated. in some countries, concern about the remuneration of senior management of banking groups has reached fever pitch in the media while, at the same time, a less emotive and

Editor’s Preface

xix

generally more thoughtful debate has continued on the need for more financing for businesses, particularly small and medium-sized enterprises.

The apparent shortage of finance for businesses in many economies, coupled with expected further pressure on the ability of banks to provide that finance as their capital requirements continue to increase, has led to concerns about the development of other sources of finance. is credit risk, and the contagion to which it can give rise if borrowers default, shifting in dangerous ways out of the banking sector into the so-called ‘shadow banking sector’? The European commission looks set to start investigating this topic in earnest in 2012. The consequences of regulatory intervention in this area are currently very difficult to predict, not least because any attempt to regulate non-bank sources of finance more heavily is bound to attract criticism from those who claim that it will only reduce further the sources of finance available to the ‘real’ economy.

another area of regulatory reform that banking groups continue to grapple with in 2012 is transparency with regulators. There are various examples of the ways in which this is starting to affect the sector. The most immediate and relevant example concerns the work that many of the largest banking groups in the United states and Europe are currently involved in to draw up ‘recovery plans’ and to draw up, or to assist their regulators in drawing up, ‘resolution plans’, those plans being collectively (and somewhat misleadingly) referred to as ‘living wills’. The phrase of the moment is ‘barriers to resolution’, describing factors that would prevent or inhibit the orderly resolution of a bank at or close to its collapse. Plenty of barriers to resolution are being identified as recovery and resolution plans are prepared. The second half of 2012 and 2013 will likely be an interesting period in which regulators ponder these barriers and deepen their discussions with banking groups as to what might be done about them.

fears of enforced structural reorganisations and changes to business models have led some banking groups to spend considerable amounts of time and resources developing their own solutions to perceived barriers to resolution. More immediately, the process of preparing recovery and resolution plans has proved difficult, the main challenges including how to reconcile differences between the statutory resolution and insolvency procedures for banks in different jurisdictions and to understand the cross-border elements of those procedures. fundamental questions about the availability of cross-border services to banking operations in a crisis, the treatment of banks’ global hedging arrangements, and ultimately the resolvability of banking groups, are at stake. it seems likely that we are many years away from having recovery and resolution plans that carry the benefit of clarity around how regulators would operate them on a cross-border basis in a crisis. it also remains to be seen whether cross-border cooperation between regulators would work in such circumstances given the significant differences between national resolution and insolvency procedures and the desire in many jurisdictions to protect local depositors. another major area of uncertainty concerns the proposals by some regulators that debt issued by banking groups be ‘bailed in’ (i.e., written off or converted into equity) in a crisis and how that could happen without spreading contagion through the banking system and the wider economy via the holders of that debt.

Meanwhile, scrutiny of the structure of banks themselves has continued in some countries. The likely implementation in the United Kingdom of proposals to require the ‘ring-fencing’ of retail banking activities within banking groups may be the start of a trend that spreads to other countries. despite the prevalence of ‘universal’ banks,

Editor’s Preface

xx

combining retail and investment banking activities in single legal entities in many of the other Member states of the European Union, the European commissioner for the internal Market has commissioned a study into the structure of banks with a remit to consider ring-fencing of retail banking.

Liquidity has remained a central concern for many banking groups in the past year. short-term liquidity problems at banks (arising, in particular, from concerns about the strength of some banks as counterparties) have resulted in an increase in the range of funding for which banks generally are now expected to provide collateral. This trend is expected to be exacerbated by longer-term developments such as the Basel iii requirements on liquidity and the proposed introduction of depositor preference in some countries for the first time. Liquidity pressures have led to many banks engaging in new types of transactions, such as so-called ‘liquidity swaps’, to increase the amount of high-quality collateral that they have available for their funding operations. This ongoing search for liquidity, and for the collateral required to obtain liquidity, has made some financial regulators concerned about the potential spread of contagion within the banking sector and from the banking sector to other sectors. for example, some liquidity swap transactions have involved banks receiving liquid assets from insurers in return for assets that are less liquid.

This third edition of The Banking Regulation Review updates the position on important aspects of banking regulation in the countries covered, in most cases to february 2012. While the book is aimed principally at staff in the legal and compliance departments of banks, it is to be hoped that senior management also find it helpful. The book focuses most closely on the deposit-taking activities of banks. The constraints of space and time mean that it will never be possible to do full justice to all of the subjects covered in each chapter, but readers are of course welcome to contact me if they have any suggestions for future editions.

Preparing successive editions of this book continues to be an onerous task for the busy lawyers who contribute the chapters and who are otherwise much in demand. My thanks go to them for their dedication to the task. significant changes to a book such as this also mean much more work than would otherwise be the case for the publisher. i am therefore very grateful to the publisher’s team for their understanding, hard work and patience with a group of authors who often have many other commitments.

finally, i would like to thank the partners and staff of the financial regulation group at slaughter and May for appreciating this book’s value and for encouraging our involvement in it for a third successive year.

Jan Putnisslaughter and MayLondonapril 2012

715

Chapter 50

Switzerland

Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and Valérie Menoud1

I INTRODUCTION

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

There are now some 344 licensed banks in Switzerland, of which two are ‘big banks’ (UBS aG and Credit Suisse aG), that are active globally and subject to a special supervisory regime. twenty-four are (partly) state-owned cantonal banks, 66 are regional banks and savings banks, 107 are foreign controlled banks (i.e., banks controlled by significant foreign shareholders) and 26 are Swiss branch offices of foreign banks.

Present challenges to the Swiss banking industry include, inter alia, the continued international debate on the future of the Swiss banking secrecy, perceived as a cornerstone of Swiss banking, albeit often misunderstood or reduced to its potential for abuse. Other challenges are shared with the global banking industry, namely a wave of new regulatory activity spurred by the recent financial crisis. The main focus being enhancing the international regulatory framework and cooperation, as well as the stability of the financial industry and its systems 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 and UBS aG, Switzerland has two such global banks. in terms of their balance sheet, both are not only big in absolute but also in relative terms as a percentage of Switzerland’s GdP. The Swiss national Bank and the Swiss Financial Market Supervisory authority (‘FinMa’) have joined efforts to look into adequate approaches and measures compatible with international initiatives to address this issue and, based on the final report of its ‘too big to fail’ expert commission issued in October 2010, the Federal Council has submitted a proposal for an amendment of the Banking act to address the systemically important

1 Shelby r du Pasquier, Patrick Hünerwadel and Marcel tranchet are partners and Valérie Menoud is an associate at lenz & Staehelin.

Switzerland

716

financial institutions (‘SiFis’) at the end of 2010. These amendments were approved by Parliament on 30 September 2011 and are expected to come into force in 2012 (see Section Vii, infra).

II THE REGULATORY REGIME APPLICABLE TO BANKS

i Main statutes

The main statutes governing the Swiss financial markets are:a the Federal Banking act of 1934 (‘Ba’);b the Federal Stock exchanges and Securities trading act of 1995 (‘SeSta’);c the Federal Collective investment Schemes act of 2006 (‘CiSa’); andd the Federal act on Combating Money laundering and terrorist Financing in the

Financial Sector of 1997 (‘aMla’).

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

Since January 2009, these regulations are complemented by the Federal act on the Swiss Financial Market Supervisory authority (‘FinMaSa’), which can be considered as a framework law governing the supervisory activities and instruments of FinMa.

ii Banking and securities dealing activities

From a Swiss perspective, a business entity that solicits or takes deposits from the public (or refinances itself with substantial amounts from other unrelated banks) in order 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 ongoing FinMa supervision.

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 broker-dealers in securities, in addition to pursuing deposit-taking and lending activities (i.e., interest operations). in order to conduct securities trading activities, however, banks need to apply for an additional authorisation as a ‘securities dealer’. The main statute governing the securities business of both banking and non-banking intermediaries in Switzerland is the SeSta.

Under Swiss law, securities dealing activities are broadly defined. They encompass the activities of securities dealers, issuing houses, market makers, derivative houses and brokers maintaining accounts in their books or holding securities deposits for more than 20 clients.

although banking and securities dealing licences are two separate authorisations, most requirements in terms of minimum substance and documentation overlap. From a practical perspective, both banking and securities dealing licensing requirements are thus usually assessed within the same FinMa process. in a nutshell, the conditions for the granting of a licence to conduct banking or securities dealing activities encompass financial and organisational requirements (see Section iii and Section iV, infra), as well as ‘fit and proper’ tests imposed on managers and qualified shareholders (see Section iii,

Switzerland

717

Section iV and Section Vi.i, infra). FinMa grants a licence to the legal entity pursuing the banking activities, not to its managers or shareholders. it then monitors compliance with licensing criteria (and other regulatory obligations) on an ongoing basis. if, at a later stage, any of the licence requirements cease to be fulfilled, FinMa may take administrative measures, including, in extreme cases, the withdrawal of the licence.

The Swiss regime for cross-border banking and securities activities has to date been 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 dealer involve a physical presence in Switzerland on a permanent basis, this cross-border exemption is not available. in practice, FinMa considers a foreign entity to have such Swiss presence as soon as employees are hired in Switzerland. More recently, though, FinMa seems to look at further criteria to determine whether a foreign bank has a Swiss presence, such as the business volume of such bank in Switzerland or the use of teams specifically targeted to the Swiss market.

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. in other words, if a Swiss bank or securities dealer 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 to be met.

The granting of a licence to a Swiss bank or securities dealer 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, infra).

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 supervised for the purpose of combating money laundering and the financing of terrorism according to the anti-Money laundering act and its various implementing ordinances.

iv FINMA

Before the entry into force of the FinMaSa in January 2009, the supervision of Swiss financial markets was mainly carried out by three authorities: the Swiss Federal Banking Commission, the Federal Office of Private insurance and the anti-Money laundering Control authority. Since January 2009, Switzerland has a single integrated financial market supervisory authority, FinMa, which is responsible for the supervision of banks, securities dealers, stock exchanges and collective investment schemes, as well as the private insurance sector. FinMa also monitors financial intermediaries with a view to preventing money laundering and the financing of terrorism.

FinMa is set up as a public institution with separate legal personality. although it carries out its supervisory activity independently and autonomously, it has links to the

Switzerland

718

government; 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. The Parliament is responsible for overseeing FinMa’s activities.

FinMa employs approximately 400 people. its operating expenses, which are covered by fees and duties levied from the supervised entities, approached 92 million Swiss francs in 2010. FinMa is able to carry out its tasks with 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, infra).

Self-regulatory organisations are being delegated certain regulatory duties: the Swiss Bankers association and the Swiss Funds association, for instance, issue self-regulatory guidelines to their members, which FinMa recognises as minimum standards that need to be complied with by all Swiss banks. in particular, the Swiss Bankers association’s guidelines governing the banks’ duty of due diligence in identifying the contracting party and the beneficial owner of accounts,2 the rules of conduct in securities dealing3 and portfolio management4 play an important role in practice.

III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

as indicated above, the Swiss banking supervision system is based on an ‘indirect’ (or dual) supervision model. Banks, foreign banks’ branches and financial groups (or conglomerates) subject to Swiss supervision have to appoint an external audit company licensed by FinMa. The auditor assists FinMa in its supervisory functions: it examines the annual financial statements and reviews whether the regulated entity complies with its by-laws and with Swiss financial markets regulation and self-regulatory provisions. The results of its audit are detailed in an annual audit report (‘long-form report’), which is to be handed over to the supervised entity and to FinMa. FinMa exercises its oversight and ascertains whether the various regulatory requirements are complied with largely based on these reports.

in addition, auditors are obliged to inform FinMa if they suspect any breach of law or uncover other serious irregularities. Supervised entities further have a general duty to inform FinMa of any event or incident, which may be of relevance from a supervisory perspective. Furthermore, banks have special reporting duties, for instance, in case of changes in the foreign controlling persons (or entities), changes in the qualified shareholders, on the status of statutory equity capital, liquidity ratios or risk concentrations. Based on such informational tools, FinMa initiates investigations

2 agreement on the Swiss Banks’ Code of Conduct with regard to the exercise of due diligence of april 2008.

3 Code of Conduct for Securities dealers governing Securities transactions of May 2009.4 Portfolio Management Guidelines of april 2010.

Switzerland

719

(if necessary through an appointed investigator) and, in case a breach is ascertained, takes administrative measures aimed at restoring compliance. in case of serious breach, FinMa can ultimately decide to withdraw the licence. in practice, the most common sanctions that FinMa takes relate to the forced liquidations of unauthorised securities dealers, insolvency procedures, and sanctions following non-compliance with Swiss know-your-customer rules.

Following the recent crisis, a more rigorous supervisory regime has been put in place for UBS aG and Credit Suisse aG, as the size and complexity of these institutions raise significant systemic risks. accordingly, FinMa does not rely exclusively on the reports of the banks’ auditors, but carries out its own investigations and maintains close contacts with the two banks. in addition, UBS aG and Credit Suisse aG are required to comply with new capital adequacy ratios in a range between 50 per cent and 100 per cent above Basel ii minimum requirements by 2013. They will also have to comply with a maximum leverage ratio (i.e., a nominal cap on debts levels, regardless of the risks involved) defining the proportion of core capital to total assets set at a minimum of 3 per cent at group level and 4 per cent for the individual institution.

FinMa has generally been more active and interventionist than was previously the case with the two large Swiss banks. Since 2009, the supervisor has started carrying out extensive stress tests at Credit Suisse aG and UBS aG aiming at periodically and systematically assessing the resilience of the two banks to sharp deteriorations in economic conditions (on the analysis of the systemic risks raised by such large financial institutions, see Section Vii, infra). in 2010, FinMa has further intensified its analysis and developed, in conjunction with the Swiss national Bank, severe stress scenarios, which have been lately complemented to assume particular shocks from some european countries. FinMa requires UBS aG and Credit Suisse aG to have a tier i ratio of at least 8 per cent under the stress events tested. in addition, as of 30 June 2010, FinMa requires both large banks to hold sufficient first-class liquid assets to cover the amount of estimated outflows during a period of at least 30 days under a stress scenario.

ii Management of banks

The granting of a banking or securities dealer licence is conditional upon the fulfilment of certain organisational requirements. in particular, the articles of incorporation and internal regulations of the bank must define the exact scope of business and the internal organisation, which must be adequate to the activities of the bank. as a general rule, two separate corporate bodies must be in place:a board of directors: the board of directors is primarily in charge of the strategic

management of the bank and the establishment, maintenance, monitoring and control of the bank’s internal organisation. The board has to comprise at least three members, who meet professional qualifications, enjoy a good reputation and offer every guarantee of proper business conduct. in practice, FinMa expects that the chairman or vice chairman of the board be domiciled in Switzerland. as a matter of principle, the board of directors must be free of any conflicts of interest with the management or with the bank itself. Swiss banking law further strictly prohibits the exercise of a double mandate as a director and manager.

Switzerland

720

b executive management: The bank’s management carries out the executive management of the bank and implements the instructions of the board of directors. its members must meet the various professional qualifications and ‘fit and proper’ tests. as a rule, FinMa requires that a Swiss bank be managed from Switzerland and senior management is typically expected to be domiciled in Switzerland.

Under FinMa practice, the strategic management, supervision and control by the board of directors, the central management tasks of the management, as well as decisions concerning the establishment or discontinuation of business relationships, may not be delegated to another affiliated or non-affiliated entity. as a result, a Swiss bank that is a subsidiary of a foreign group must be granted a certain degree of independence in its decision-making process; general instructions and decisions from a foreign parent entity are, however, permitted. For the rest, as a general rule, outsourcing of other functions within a Swiss bank to affiliated or non-affiliated service providers both in Switzerland and abroad is generally permitted, subject to the satisfaction of certain requirements, in particular in relation to Swiss banking secrecy and data protection rules.5

Specific constraints and requirements regarding the organisation of a Swiss bank (e.g., with respect to internal audit, controls, compliance and reporting, segregation between trading, asset management and execution function, etc.) vary depending on the actual business and size of the bank.

in January 2010, the FinMa Circular on remuneration schemes entered into force. This document states 10 principles, which are largely based on the standards and recommendations issued by the Financial Stability Board on Sound Compensation Practices in September 2009. it aims at increasing the transparency and risk orientation of compensation schemes in the financial sector. These rules do not impose any absolute or relative cap on remunerations. FinMa mainly requires that variable compensations (i.e., any part of the remuneration, which is at the discretion of the employer or contingent upon performance criteria) be dependent on long-term sustainable business performance, taking into account assumed risks and costs of capital. FinMa thus expects a significant portion of such remuneration to be payable under deferral arrangements. Furthermore, the compensation policy is to be disclosed annually to FinMa. These rules are mandatory for banks, securities dealers, financial groups (or conglomerates), insurance companies, insurance groups and conglomerates, with capital or solvency requirements in excess of 2 billion Swiss francs. as a result, the seven largest Swiss banks and the five largest insurance companies currently fall under the scope of the Circular. For other financial institutions, the FinMa Circular represents guidelines for adequate remuneration policies. The financial institutions falling within the scope of the FinMa Circular had until 1 January 2011 to implement and fully comply with its provisions. However, the characteristics and functioning of their remuneration schemes had to be disclosed to FinMa within their 2010 annual report already. On this basis, it is likely

5 See FinMa Circular 2008/7 on outsourcing.

Switzerland

721

that FinMa will comment on progress made and issue further recommendations in this respect during the course of 2012.

iii Regulatory capital

The Swiss regulatory capital regime to date implements the recommendations and the three-pillar approach of the Basel ii framework (i.e., minimum capital requirements, prudential supervision and disclosure and transparency) but will in due course be adapted to the Basel iii recommendations.6 Capital adequacy and measurement rules are embedded in a separate implementing ordinance to the Ba, the Capital adequacy Ordinance (‘CaO’).

Having said this, while the approach is harmonised, Swiss minimum capital requirements are set significantly above the minimum capital requirements in international comparison. This is often referred to as the ‘Swiss Finish’.

Calculation of capital requirementsas regards credit risks, Swiss banks can choose between a standard approach (Swiss or international standard) and an internal ratings-based approach (irB in its two variations, foundation irB or advanced irB).

as regards operational risks, Swiss banks can choose between the basic indicator (‘Bia’) and the standard approach as simple methods. a Swiss bank having the necessary resources may also choose the advanced measurement approach (‘aMa’) and thereby use a tailor-made proprietary risk model approved by FinMa.

as regards market risks, the CaO implements the respective Basel ii rules, developed by the Basel Committee in cooperation with the international Organization of Securities Commissions (‘iOSCO’).

in offering all these options, the legislator aimed at allowing domestic and regional banks to continue using relatively simple methods following the implementation of Basel ii (Swiss standard). The more sophisticated approaches (advanced irB for credit risks and aMa for operational risks) are intended for, and used by, the large banks and one cantonal bank. Previously, international banks calculated capital requirements both under applicable Swiss law and under Basel rules for international comparison purposes, whereas now, they only need to measure capital requirements according to internationally comparable standards (international standard).

Swiss standard (‘SA-CH’)The Swiss standard implements all changes of Basel ii, but maintains certain well established Swiss rules, which either take into account specifics of the Swiss market or are viewed as being more adequate to address particular risks. as a result, Swiss capital

6 The Basel iii requirements will be implemented in due time, and it is currently proposed to amend the CaO by 2013. One element of the proposed amendment of the Ba to address SiFis is to impose much stricter requirements. The proposed amendments to the CaO have been submitted for comments by the industry and other interested persons which were due by 16 January 2012 (see Section Vii, infra).

Switzerland

722

adequacy rules provide for more differentiated risk-weighting factors, different weighting of interbank receivables for three time bands, a flat factor for lombard credits, or lower risk-weighting factor for assets secured on real estate.

International standard (‘SA-BIS’)The aim of the international standard is to show as few discrepancies as possible compared to international regulation (other than the Swiss Finish concept mentioned above), bearing in mind, though, that Basel ii leaves quite some freedom to the regulator whether or not to implement certain rules.

Internal ratings-based approach (‘IRB’)The determination of risk weightings under both irB (F-irB and a-irB) approaches pursuant to the CaO follows the formula established under Basel ii and thereby corresponds to the Basel ii credit-risk model.

as provided for under Basel ii, the use of an irB model is subject to FinMa approval in accordance with the detailed criteria established under Basel ii. Switzerland has thereby opted for a risk weighting of certain assets based on their remaining term.

in three instances, though, the CaO deviates from the Basel ii minimum standards. The capital requirements for participations and retail assets secured on real estate are based on the respective eU regulation. More importantly, the CaO provides for a bank-specific multiple. This multiple can be applied should the irB result in a capital ratio that is viewed as being too low compared to the targeted Swiss minimum capital requirements. This compensation allows for a pragmatic approval of a bank specific irB model, including an irB of a foreign bank parent for its Swiss subsidiary.

Capital requirements must be met both at the level of the individual institution and at the level of the financial group or conglomerate. Stand-alone reporting is required on a quarterly basis and consolidated reporting on a semi-annual basis.

Minimum capital requirements The minimum capital requirements are calculated as the sum of and on the basis of the following:7

a 8 per cent of credit-risk weighted assets adjusted for open positions;b 8 per cent of weighted non-counterparty-related risks;c capital requirements for market risks, which correspond to different percentages

per class of assets applied to the net positions in such assets, in accordance with the de minimis standard; under a model approach (subject to approval by FinMa) the requirements are based on the higher of the value-at-risk of the preceding trading day or the average value at risk over a 60-trading-day period as adjusted by a bank-specific multiple (with a minimum multiple of three); and

d capital requirements for operational risks, which are set at 15 per cent of the relevant (positive) earning indicators over a three-year period, in accordance with the base indicator approach; under the standard approach, the percentages vary,

7 These requirements form the first pillar of the bank’s regulatory capital base.

Switzerland

723

depending on the eight particular banking segments tested, between 12 per cent, 15 per cent or 18 per cent on a weighted basis over three years; subject to FinMa approval, capital requirements may also be determined under a bank specific model approach (aMa).

The capital requirements determined under the above first-pillar rules are minimum requirements. each bank is expected to have qualifying capital in excess of these requirements in order to cope with risks that are not captured by the above-mentioned rules or with adverse conditions.8

iv The qualifying capital

The qualifying capital consists of tier i capital, tier ii capital (subdivided into upper and lower tier ii capital) and tier iii capital.

tier i capital consists of the paid-in capital, disclosed reserves, profit carried forward and, with certain limitations, profits for the current business year as shown on audited interim financial statements, and innovative capital with certain restrictions.

tier i capital must be adjusted by deducting: a losses carried forward and losses for the current financial year; b any unfunded valuation adjustments or provisions required for the current

financial year;c goodwill and intangible assets (excluding software);d deductions envisaged in connection with securitisation transactions according to

the Basel ii minimum standards;e net long positions of equity securities not held in the trading book; and f innovative capital instruments directly or indirectly held by the bank.

tier ii capital is subdivided in upper tier ii capital and lower tier ii capital. The upper tier ii capital consists of (1) hybrid instruments, with restrictions; (2) certain undisclosed reserves, subject to certain limitations and confirmation by the bank’s auditors; and (3) innovative capital exceeding the maximum allocable to the tier i capital. lower tier ii capital consists of debt instruments issued by and loans made to the bank that comply with the requirements of article 16 of the CaO and have a term of at least five years.

tier iii capital consists of the bank’s liabilities that (1) comply with the requirements of article 16 of the CaO; (2) have a term of at least two years and may not be repaid prior to their stated term without FinMa’s consent; and (3) preclude payments of interest and principal even on maturity, if such payments would otherwise cause the eligible capital to fall below the minimum required capital or to remain below that limit.

8 This requirement forms the second pillar. in practice FinMa so far applied a 20 per cent additional cushion for all banks other than Credit Suisse aG and UBS aG for which the additional cushion is 100 per cent. today FinMa differentiates the additional cushion depending on the risk profile of a particular bank.

Switzerland

724

tier ii and tier iii capital are limited to 100 per cent of the adjusted tier i capital. lower tier ii capital is limited to 50 per cent of the adjusted tier i capital, whereas tier iii capital is only eligible to cover market risks and is limited to 250 per cent of the tier i capital used to cover market risks. lower tier ii capital in excess of the above limit or that becomes ineligible due to the theoretical amortisation previously discussed qualifies as tier iii capital.

as a consequence of the financial crisis, FinMa has ordered enhanced capital requirements for Credit Suisse aG and UBS aG that in effect have doubled the capital requirements relating to risk-weighted assets. in addition, FinMa has introduced a leverage ratio for these two banks and expects them to have a capital asset ratio considerably above 3 per cent on a consolidated and 4 per cent on a stand-alone basis by 2013 and imposed a much stricter stress-test-based liquidity regime for these two banks last year. FinMa proposes to revise the liquidity requirements and to introduce a leverage ratio for all banks.9

IV CONDUCT OF BUSINESS

The obligations imposed by anti-money laundering regulations have a material impact on how banks conduct their activities. in a nutshell, financial intermediaries are obliged to verify the identity of their contracting partners as well as the beneficial owner of accounts. Furthermore, if reasons for suspicion of money laundering exist, banks must notify the Money laundering reporting Office (‘the MrO’) of the Swiss Federal Office of Police and freeze the concerned assets for five days. The MrO examines the case and, as the case may be, communicates the matter to the competent criminal prosecution authorities. The rules of conduct of Swiss banks in relation to the prevention of money laundering and terrorism financing are further detailed by the Swiss Bankers association’s agreement on the Swiss Banks’ Code of Conduct with regard to the exercise of due diligence of april 2008, which represent minimum standards. a breach by a bank of its duty to communicate is subject to a fine of up to 500,000 Swiss francs. in addition, certain behaviours may constitute a criminal offence of money laundering, as the case may be, by negligence.

with respect to its customer relationship, a bank is primarily bound by the duties and obligations stated in the relevant contractual documentation. in addition, banks licensed as securities dealers are bound by qualified duties of information, diligence, and loyalty towards their clients under article 11 of the SeSta. among other things, a bank must draw the client’s attention to the risks involved in the relevant securities transactions, ensure that its client is granted the best possible terms of execution for its transactions and that it is not disadvantaged by any conflicts of interests. These rules of conduct have been further defined by case law and supervisory practice and are detailed by a number of self-regulation guidelines (see Section ii.iv, supra). a breach of the duties of information, diligence and loyalty may give rise to civil liability as well as regulatory consequences, to the extent that FinMa is of the view that a bank no longer meets the

9 implementation thereof will address the requirements of Basel iii.

Switzerland

725

requirements of good reputation and proper business conduct. against the backdrop of the recent crisis, FinMa has questioned the adequacy of these requirements and proposed new measures to improve customer protection (see Section Vii, infra). These rules of conduct are thus likely to be further strengthened in the coming years.

One of the most highly publicised aspects of banking regulation in Switzerland is the Swiss banking secrecy. a Swiss bank is bound by a statutory duty of confidentiality towards its clients. a breach of the bank’s duty of confidentiality is considered a breach of the client–bank contractual relationship and may give rise to civil and criminal liability. as a general rule, any disclosure of client data to a third party, including the parent company, its supervisory authority or an affiliated entity, is prohibited. exceptions apply under certain circumstances, such as in the context of consolidated supervision, following a request of international judicial or administrative assistance issued by a public authority, or if the client has given its consent to a disclosure. during these last years, the importance and scope of Swiss banking secrecy has been subject to intense legal discussion in Switzerland, as the pressure of foreign countries in the field of administrative tax assistance grew stronger and the UBS case in the United States took unexpected turns (see Section Vii, infra).

V FUNDING

Swiss banks’ main funding sources are money market instruments (91 billion Swiss francs), interbank funding (500 billion Swiss francs), customer savings accounts (460 billion Swiss francs), other customers’ deposits (940 billion Swiss francs) cash bonds (36 billion Swiss francs) and bonds (360 billion).

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Control regime

For purposes of the Ba, a participation is deemed to be qualified if it amounts to at least 10 per cent of the capital or voting rights of the bank or if the holder of the participation is otherwise in a position to significantly influence the business activities of the bank (a ‘qualified participation’). it should be noted that, in practice, FinMa often requires disclosure of participations of 5 per cent and more for its assessment whether the requirements of a banking licence are continuously met.

The Ba does not set any restrictions on the type of entities or individuals holding a controlling stake in a bank. However, one of the general licensing conditions is that individuals or legal entities that directly or indirectly hold a qualified participation in a bank must ensure that their influence will not have a negative impact on the prudent and reliable business activities of the bank. Thus, the bank’s shareholders and their activities may be of relevance for the granting and the maintenance of a banking licence. Shareholders with a qualified participation may be deemed to have a negative influence on the bank; for instance, in case of lack of transparency, unclear organisation or financial difficulties of financial groups or conglomerates, as well as influence of a criminal organisation on the shareholders. Should FinMa take the view that the conditions for the banking

Switzerland

726

licence are no longer met because of a shareholder with a qualified participation, it may suspend the voting rights in relation to such qualified participation or, if appropriate and as a last measure, withdraw the licence.

if foreign nationals with qualified participations directly or indirectly hold more than half of the voting rights of, or otherwise have a controlling influence on, a bank incorporated under the laws of Switzerland, the granting of the banking licence is subject to additional requirements. in particular, the corporate name of a foreign-controlled Swiss bank must not indicate or suggest that the bank is controlled by Swiss individuals or entities and the countries where the owners of a qualified participation in a bank have their registered office or their domicile must grant ‘reciprocity’, that is Swiss residents and Swiss entities must have the possibility to operate a bank in the respective country and such banks operated by Swiss residents are not subject to more restrictive provisions compared to foreign banks in Switzerland. in practice, the reciprocity requirement no longer applies as regards foreign holders of ‘qualified participations’ domiciled or incorporated in Member States of the world trade Organization, signatories of the General agreement on trade and Services (‘GatS’).

Furthermore, FinMa may request that the bank is subject to adequate consolidated supervision by a foreign supervisory authority, if the bank forms part of a financial group or conglomerate.

if a Swiss bank falls under foreign control, as described above, or if a foreign-controlled bank experiences changes in its foreign shareholders holding directly or indirectly a qualified participation, a new special licence for foreign-controlled banks must be obtained prior to such events. Under the Ba, a ‘foreigner’ is (1) an individual who is not a Swiss citizen and has no permanent residence permit for Switzerland; or (2) a legal entity or partnership that has its registered office outside Switzerland or, if it has its registered office within Switzerland, is controlled by individuals as defined in (1).

as a matter of Swiss law, there are no restrictions as to the business activities of the entities holding qualified participations in a bank, as long as the conditions for the granting and maintenance of the licence are complied with. Generally, transactions between the (controlling) shareholders of a bank and the bank itself may be subject to specific requirements (e.g., the granting of loans to significant shareholders must be in compliance with generally recognised banking principles).

each controlling shareholder has the duty to notify of the acquisition or disposal of a qualified participation, as well as the fact that its participation reaches, exceeds or falls below certain thresholds. Further, as mentioned above, the holder of a qualified participation is required not to negatively influence the prudent and reliable business activities of the bank.

even though the acquisition of a qualified participation in a bank by a Swiss individual or a Swiss entity in theory only triggers notification obligations, it is necessary to seek a letter of no objection from FinMa for the account of the bank prior to an envisaged transfer of a controlling stake in a Swiss bank, since FinMa controls the continuing compliance with the conditions of a banking licence. FinMa will examine whether the influence of the new shareholder with a qualified participation would be detrimental to the prudent and reliable business activities of the bank.

Switzerland

727

wii Transfers of banking business

The vast majority of acquisition transactions in the Swiss banking industry are structured as share deals. There are very few examples only of transactions structured as asset deals and such transactions require the consent of the customers concerned. ‘no consent’ structures are not viewed as feasible from a Swiss law perspective, in particular due to Swiss banking secrecy restrictions.

VII THE YEAR IN REVIEW

in their continued effort to adapt financial regulation after the recent crisis, both FinMa and the Swiss government have enacted several regulatory amendments and have examined potential revisions concerning key aspects of banking regulation and supervision. during 2011, the regulatory work launched and developed in 2009 and 2010, in the wake of the crisis, was pursued. Hence, 2011 follows a series of eventful years for Swiss financial regulation.

i Regulatory developments

in addition to the issues addressed in the above sections, the following regulatory developments can be outlined.

Deposit protection schemeFollowing the recent crisis and political discussion launched at european level, the Swiss government has revised the privileged deposit scheme provided for under the Ba in december 2008. as a matter of Swiss law, following a bankruptcy of a Swiss bank, FinMa will determine on a case-by-case basis the amount of small cash deposits, which are to be paid out as soon as possible to each depositor. These repayments are set aside and will not be taken into account during the bank’s liquidation procedure. within the liquidation procedure, cash deposits of up to 100,000 Swiss francs (30,000 Swiss francs before december 2008) per depositor are ranked in a privileged class in the bankruptcy estate. The payment of these ‘preferential deposits’ is secured by a deposit protection system, which is, however, limited to an aggregate amount of 6 billion Swiss francs (4 billion Swiss francs before december 2008). all banks are obliged to participate in the deposit protection system and will be called upon to contribute up to 6 billion Swiss francs, in case the relevant bankruptcy estate does not have sufficient assets to repay preferential deposits. in addition, since december 2008, Swiss banks have been required to secure collateral for a total amount corresponding to at least 125 per cent of the preferential deposits they hold. as a general rule, only claims against third parties secured in Switzerland or assets in Switzerland are eligible as collateral for the purpose of the deposit protection system. FinMa may grant derogations or increase the amount of the collateral.

The december 2008 revision of the Swiss deposit protection system had been enacted as a reaction to the crisis in the form of an urgent law, whose validity was limited to the end of 2010. Shortly afterwards, the Swiss government had started working on a comprehensive revision of the Swiss depositor protection system and proposed a draft for consultation in the course of 2009. The draft law, however, encountered severe criticism

Switzerland

728

during the consultation process and thus had to be rethought. as a result, the Swiss parliament decided, with effect as of 1 January 2011, to prolong the validity of the 2008 transitional amendments, which were well received provisions, until a law on depositor protection could be enacted. in the meantime, the Swiss government worked on a revised draft law on depositor protection based on the provisions which were positively received during the consultation. The draft law, formulated as amendments to the Banking act, provides, inter alia, for the streamlining of reorganisation procedures, prompter repayment of preferential deposits and the continuation of basic banking services during insolvency proceedings. These amendments were voted by Parliament on 18 March 2011 and entered into force on 1 September 2011.

Bank reorganisation proceedingsThe above-mentioned amendments of the Banking act of 18 March 2011 also changed the reorganisation proceedings applicable to banks. These changes enhance the flexibility of such proceedings and confer additional instruments and powers to FinMa with a view to increasing the likelihood of a successful reorganisation. Under the revised provisions, the supervisor is empowered to order a transfer of all or part of a failing bank’s activities to a ‘bridge bank’, the conversion of certain convertible debt instruments issued by the bank (‘CoCos’ or ‘Convertibles’) as well as the reduction or cancellation of the bank’s equity capital and, as an ultima ratio, the conversion of the bank’s obligations into equity. On this basis, FinMa has submitted a complete overhaul of the FinMa-Bank insolvency Ordinance for comments to the industry and other interested persons. The consultation ends on 2 March 2012. The proposed amendments reflect a quite extensive interpretation by FinMa of what already seems to be broad and far-reaching new instruments and powers compared to the regime applicable in other jurisdictions. The draft ordinance is therefore likely to spur some debate before it can be finalised. For instance, the draft FinMa-Bank insolvency Ordinance allows the supervisor to order a temporary stay of a counterparty’s right to terminate agreements with a bank in the context of a transfer of all or part of such bank’s activities to a bridge bank, a power that was part of the amendment to the Banking act proposed to Parliament, but which was much debated and eventually dropped by the Swiss legislators.

Anti-money launderingThe backbone of the Swiss anti-money laundering framework is the 1997 anti-Money laundering act (as revised, ‘aMla’). aMla was implemented by three implementing ordinances, the first addressing banks, securities traders and collective investment schemes, the second addressing insurance companies and the third addressing other financial intermediaries. during 2010, FinMa revised these three implementing ordinances and combined them into one single text, the new Ordinance of the Swiss Financial Market Supervisory authority on the Prevention of Money laundering and the Financing of terrorism of 8 december 2010 (‘aMlO-FinMa’), which entered into force on 1 January 2011. The new Ordinance simplifies and harmonises the provisions that were previously entailed in the three different ordinances mentioned above. among the few material changes introduced by the aMlO-FinMa, three are worth mentioning: the aMlO-FinMa introduces a waiver of the general duty to perform due diligence for certain low-value assets in the field of electronic payments, credit card operations and leasing

Switzerland

729

operations; it further provides for a possibility to delegate, under certain conditions, to third parties the verification of the identity of contracting parties, beneficial owners and the economic background of transactions; and, finally, the aMlO-FinMa increases clarification and verification duties in correspondent banking relationships.

in parallel, the FinMa Circular 2011/1 of 20 October 2010 on Financial intermediation under the anti-Money laundering act entered into force on 1 January 2011. This circular embodies the practice of the supervisor as to which financial intermediation activities of the para-banking sector fall under the scope of aMla. The circular, for instance, specifies in which cases financial intermediation should be construed as a professional activity triggering specific due diligence duties or when such activities should, by contrast, be construed as primarily accessory activities falling outside the scope of aMla.

The political events that took place in 2011 in tunisia, egypt and libya prompted the Swiss government to order the freezing of assets of a number of former political figures from these countries, most of whom were listed as politically exposed persons (‘PePs’) as such as subject to anti-money laundering monitoring. Several Swiss banks reported holding assets of such persons. FinMa therefore initiated an investigation on how financial institutions had applied their anti-money laundering due diligence duties in relation to PePs in general and in the particular situations at hand. The supervisor published its findings in november 2011. The report notes that the current Swiss anti-money laundering framework applicable to PePs goes beyond the international recommendations formulated by the FatF and is satisfactory. in the majority of cases anti-money laundering obligations in relation to PePs relationships had been correctly implemented. However, in connection with PePs from tunisia, egypt and libya, FinMa identified certain minor shortcomings and in a small number of cases suspected more serious lapses in relation to the identification of PePs, the necessary clarifications in the course of the business relationship and the documentation to hold on file. FinMa initiated administrative proceedings against the relevant banks.

Banking secrecywith respect to international administrative assistance in tax matters, 2009 had led to the abolition of the historical distinction made by Switzerland between tax fraud and tax evasion. in March 2009, Switzerland announced that it would adopt the standard set by article 26 of the OeCd Model tax Convention. in June 2010, the Swiss parliament approved the first 10 double taxation treaties reflecting this change; these entered into force at the end of 2010. a number of revised double taxation treaties integrating article 26 of the OeCd Model tax Convention were further initialled or signed by the Swiss government in 2010 and await ratification by the Parliament. with the entry into force of these revised double taxation treaties, the banking secrecy will be lifted and the transfer of bank account data will be allowed in situations where suspicions of tax offences exist. 2011 has been a key year for the renegotiation of other important double taxation treaties. For instance, double taxation treaties incorporating a withholding tax mechanism have been signed with Germany and the UK in the autumn of 2011. The renegotiation of Switzerland’s entire network of treaties will continue in 2012 and is expected to take several years.

Switzerland

730

in parallel, the Swiss government worked on a draft law and ordinance that would govern the practical aspects of the implementation of administrative assistance within the scope of the revised double taxation treaties. The draft law was issued in July 2011 and will be discussed by Parliament in the course of 2012. By contrast to the current framework applicable to the conditions and modalities of international administrative assistance in tax matters, the draft law is more restrictive as regards procedural rights of affected parties. in particular, the right to be informed of the initiation of proceedings and the right to consult files may be restricted or suppressed for valid reasons, such as reasonable risks of collusion or destruction of evidence. However, the proposed draft adds a layer of judicial review to the current process: decisions taken by the Swiss Federal tax administration on administrative proceedings can be appealed against before the Swiss Federal administrative and before the Swiss Federal Supreme Court in second instance.

Credit rating agenciesas a matter of Swiss law, rating agencies are not directly supervised by FinMa. They may, however, be recognised by the Swiss regulator. Once a rating agency is recognised, supervised entities, such as banks, insurance companies and collective investment schemes, are allowed to rely on its ratings for supervisory purposes. The use of ratings by financial institutions and the recognition requirements to be fulfilled by rating agencies were revised in 2011 and are now regulated in a new FinMa Circular 2012/1 on Credit rating agencies, which entered into force on 1 January 2012. The revised Circular redefines the requirements for the recognition of credit rating agencies. The revision mainly aims at ensuring that Swiss regulatory requirements are adapted to international developments, in particular the 2008 revision of iOSCO’s Code of Conduct Fundamentals for Credit rating agencies. in line with these international standards, greater emphasis is placed on independence and conflicts-of-interest measures in the recognition process. as regards objectivity requirements, the rating agencies will have to adapt their codes of conduct to the revised iOSCO standards. Furthermore, rating agencies will have to disclose more information and background on their rating procedure, methodologies and assumptions to ensure increased transparency in the rating process. The fulfilment of recognition requirements may be checked at all times by FinMa.

ii Future changes

Market offences and market abuseFollowing the recommendations of an expert committee on market abuses, as well as the latest recommendations of the Financial action task Force (‘FatF’), the Swiss government decided to revise the rules on insider trading and market manipulation behaviours. it launched a consultation procedure in January 2010 and presented a final draft in august 2011. The proposed amendments aim at including ‘aggravated insider trading’ on the list of relevant crimes for money laundering purposes and specify the scope of prohibited behaviour qualifying as criminal offences of insider trading and price manipulation. From a formal perspective, both offences would be transferred from the Criminal Code to the Stock exchanges and Securities trading act. The proposed revision also strengthens the provision governing the obligations to disclose participations and

Switzerland

731

to tender public offers. The scope of application of these provisions would notably be extended to cover stakes in companies having their headquarters abroad but whose equity securities are primarily listed in whole or in part in Switzerland. The punitive fine for breaches of the obligations to disclose participations or to present a public offer would also be increased to up to 10 million Swiss francs. Furthermore, as regards supervisory regulation, the scope of prohibited insider trading and market manipulation behaviours would be extended to cover all markets participants instead of specific types of investors only. in this context, FinMa would be granted the power to apply its supervisory instruments (e.g., disclosure obligation, precautionary measures, suspension on voting rights, confiscation) to all market participants and not only to those under its supervision. The draft amendments are expected to be discussed by Parliament in the course of 2012.

Too big to failFollowing the recent crisis and the ensuing international discussions on the matter, an expert group was appointed in late 2009 to further address systemic risk issues linked to SiFis. The expert group focused its research on the banking industry and reported its findings in October 2010. The measures proposed mainly concern UBS aG and Credit Suisse aG, the two systemically important banks in Switzerland. The expert group’s recommendations primarily aim at (1) strengthening capital adequacy requirements; (2) establishing a legal basis formalising the liquidity requirements currently imposed on the two large banks; (3) reducing the degree of dependence of other banks on the two systemically important banks; and (4) ensuring the continuation of systemically important functions and an efficient resolution in the case of insolvency through the adoption of specific organisational measures and emergency plans by the banks.

Based on the recommendations of the expert group, the Swiss Federal Council elaborated a draft bill amending the Banking act, which was issued on 20 april 2011. in addition to elaborating on the measures proposed by the expert group as regards capital, liquidity, organisational and risk diversification requirements, the draft law also entails provisions that would allow the government to order adjustments to the remuneration system of a bank that would have to rely on government funding. as regards capital requirements, the Federal Council’s proposal takes over the expert group’s specific and rigorous concept. it calls for a total equity requirement of 19 per cent of the risk-weighted assets, which is composed of (1) a basic requirement of 4.5 per cent in line with the Basel iii minimum requirements applicable to all banks; (2) an additional equity cushion of 8.5 per cent; and (3) an additional progressive component of 6 per cent. Of the additional equity cushion 5.5 per cent must be held in the form of common equity (i.e., a 10 per cent common equity requirement in total), while the remaining 3 per cent and the additional 6 per cent progressive component may be covered by contingent convertible bonds (‘CoCos’) (see also Section iii, supra).

These amendments to the Banking act were approved by Parliament on 30 September 2011. The Swiss government is currently working on the corresponding necessary implementing provisions to be added to the regulations currently in force. The requirements introduced by the ‘too-big-to-fail’ reform will have to be gradually implemented by the relevant SiFis by the end of 2018.

Switzerland

732

Protection of investment advisory and wealth management clientsThe improvement of the protection of investment advisory and wealth management clients has been at the top of the agenda of FinMa for a couple of years now and is likely to be one of the most important legislative projects in the financial services sector for the years to come. The review of existing investment protection rules was notably prompted by the Madoff and Lehman cases, following on from which the supervisor conducted extensive investigations. in its findings, published in February 2010, FinMa stresses that the current investor protection appears insufficient and that, in particular, the level of information given to clients as regards potential returns and risks is seen as inadequate. also, the risk diversification practices of the industry are seen as inappropriate.

On this basis, the supervisor carried out an in-depth analysis of existing distribution rules and potential regulatory remedies. it issued its proposals on ways to improve client protection on 10 november 2010 in a comprehensive report entitled ‘regulation of the production and distribution of financial products to retail clients – status, shortcomings and courses of action’ (‘the distribution report’). in its distribution report, FinMa proposed key regulatory measures for discussion. Specifically, the supervisor stresses that there is a need to extend the requirements to produce coherent, product-neutral and standardised prospectuses addressing investment products’ characteristics, potential for returns and losses, associated risks, legal status and typical investor profile. FinMa also suggested the strengthening and harmonisation of the rules governing financial services providers’ duties of information and disclosure (see also Section iV, supra). in this context, the supervisor recommends that investment advisers or asset managers be required to carry out suitability tests and, where no advice or management services are provided (e.g., execution only), appropriateness tests at the minimum. in order to further increase the degree of protection of unsophisticated clients, FinMa proposes the introduction of a client segmentation that would mirror the one adopted in the eU Prospectus directive and MiFid. Furthermore, FinMa questions Switzerland’s liberal stance with respect to the cross-border offering of financial services from other countries (see Section ii.ii, supra), suggesting that this type of activity should be subject to more stringent regulation. Finally, the supervisor recommends subjecting financial services providers that are not yet supervised (e.g., independent investment advisers or asset managers) to registration requirements, in order, notably, to control compliance with business conduct rules.

in order to implement the proposed measures, FinMa proposes the drafting of a new ‘Financial Services act’ in the form of a framework. However, as this process is likely to take several years, the supervisor urges the Swiss Federal Council to issue interim measures that would entail detailed information and business conduct rules as regards securities trading and collective investment schemes distribution.

Based on the feedback and comments from the industry and other interested parties on FinMa’s proposals, which are expected to be compiled shortly, the Swiss government is likely to decide on the next advisable steps and on a time frame. in the meantime, following up on its distribution report, FinMa focused on investor information and carried out, in the second half of 2011, spot checks of various simplified prospectuses required by law for the sale of structured products. The supervisor published its assessment in concise report on 9 december 2011. while the supervisor’s review does not reveal sanctionable violations of the applicable regulatory requirements, it highlights shortcomings in the prospectuses’ structure, labelling and comprehensibility. as a result,

Switzerland

733

FinMa advocates a revision of the prospectus requirements entailed in the Collective investment Schemes act so as to ensure more uniformity and increased transparency in the product documentation provided to investors.

Revision of the Collective Investment Schemes Act and OrdinanceFollowing international developments and notably the adoption of the aiMF directive in the eU, the Swiss government has been working on a review of the Collective investment Schemes act (‘CiSa’), in particular to continue to ensure access to the eU markets under the new regulatory framework. The Federal Council issued its draft revision of the CiSa in July 2011. The amendments proposed would represent a complete overhaul of the rules applicable to the management, the custody and the distribution of collective investment schemes as they currently stand. among the most notable changes, the following can be mentioned: under the revised CiSa provisions, the licensing requirement for managers would be extended so that every Swiss manager of Swiss or non-Swiss collective investment scheme would fall under a regulatory supervision. as regards the custody of collective investment schemes, the depositary’s duties and liability regime would be set out in line with the requirements of the aiFM directive. The distribution of non-Swiss (i.e., unregistered) collective investment schemes would be strictly limited to qualified investors (so-called private placement rules). in addition, the appointment of a Swiss legal representative, as a point of contact for investors, would be mandatory for the distribution of any foreign collective investment scheme in Switzerland. Furthermore, the draft proposes the introduction of a licensing requirement for the distributor of collective investment schemes offering shares or investments in or from Switzerland, regardless of whether the distribution targets qualified or non-qualified investors.

The consultation process on the draft ended on 7 October 2011. On 11 January 2012 the Swiss Federal Council instructed the Federal department of Finance to amend the draft law on the basis of the results of the consultation process. it is therefore likely that the draft will be amended on several points, in particular as regards the extension of licensing requirements to all managers of collective investment schemes, the private placement rules and the requirement to appoint a Swiss representative for foreign collective investment schemes. as a result, the legislative process may be delayed from its original plan. More clarity on the revision’s time frame is expected shortly. indeed, to avoid any gaps between the implementation of the aiFM directive in the eU and the entry into force of the revised CiSa in Switzerland, the revision should enter into force by mid-2013. Once the revised CiSa is in force, however, a transitional period may be set for the application of certain new requirements.

iii The UBS case and the issue of cross-border financial services in and from Switzerland

in august 2009, the Swiss Confederation sold its stake in UBS aG. The stake resulted from the conversion of mandatory convertible notes subscribed in the autumn of 2008 for an amount of 6 billion Swiss francs.

The difficulties experienced in the context of US internal revenue Service (‘irS’) legal assistance requests concerning UBS accounts have led to intense legal discussions in Switzerland.

Switzerland

734

First, in a ruling dated 5 January 2010, the Federal administrative Court declared the order given by FinMa to UBS in February 2009 to transfer data to the US authorities unlawful. FinMa, which had reacted in order to avoid the systemic risk that would have been caused by US sanctions on UBS, appealed against this ruling. in a 15 July 2011 decision, the Swiss Supreme Court overruled the Federal administrative Court and confirmed the legal validity of FinMa’s February 2009 order based upon the serious and immediate risks associated with the US proceedings for UBS and, hence, for the Swiss financial markets taken as a whole.

Second, the Federal administrative Court has considered the agreement concluded on 19 august 2009 between the Swiss Confederation and the United States on the processing of the legal assistance request of the irS concerning UBS accounts (‘the UBS agreement’) in violation of the double taxation treaty between Switzerland and the United States of 1996. The UBS agreement specified categories of situations, in which bank account information was to be transmitted, and described behaviours that, according to the Federal administrative Court, could not qualify as ‘tax fraud or the like’ cases, for which legal assistance could be granted pursuant to the double taxation treaty. This breach was eventually handled through the approval of the UBS agreement by Parliament in June 2010, allowing the Swiss Federal tax administration to resume the assessment of the assistance requests.

in parallel to these tax law developments, another aspect of the UBS case attracted the attention of the Swiss supervisor: following the numerous accusations for breaches of US securities and tax law raised against the bank and its ensuing difficulties with US authorities, FinMa was led to reappraise foreign legal risks. indeed, the different legal risks deriving from supervisory, tax, criminal, civil or even procedural law that are linked to the cross-border provision of financial services to private clients residing outside Switzerland have increased in recent years. during 2009 and 2010, FinMa has scrutinised these legal risks and issued a position paper on 22 October 2010. in its position paper, FinMa presents its expectations as to how Swiss financial institutions should address legal and reputational risks. FinMa underlines that, although Swiss financial regulation does not expressly request Swiss financial intermediaries to comply with foreign law, it requires, however, that their business be conducted in a proper manner. This implies that regulated financial institutions must be organised so as to adequately identify, mitigate, monitor and control all risks, including legal and reputational risks. FinMa thus expects regulated institutions to assess the legal framework and the risks associated with their current cross-border business and take measures to mitigate or eliminate those risks. in practice, this notably means that regulated institutions will have to define an appropriate service model for each of their target markets.

FinMa is closely following the implementation of the recommendations entailed in its position paper and the concrete measures taken by Swiss financial intermediaries in this respect. Furthermore, FinMa is likely to focus on these aspects as a part of its ongoing supervision and is likely to expect strict abidance by foreign supervisory legislation. in this context, breaches of foreign rules may end up being considered as infringing upon the Swiss requirements on proper business conduct and in severe cases, ultimately lead to the withdrawal of the licence.

in light of the US tax and regulatory investigations recently initiated against other Swiss banks, including Credit Suisse aG, Basler Kantonalbank, zürcher Kantonalbank

Switzerland

735

and wegelin and Co, it is likely that cross-border issues will continue to gain prominence in the coming years.

VIII OUTLOOK AND CONCLUSIONS

The recent crisis brought up many regulatory topics that have been examined by the supervisory authority and extensively discussed in the banking industry, such as the effects of a high density of regulations for certain sectors or the governmental influence on and support of financial institutions. in general, FinMa has been more active and interventionist in the past couple of years, in particular with the two largest Swiss banks, Credit Suisse aG and UBS aG. in line with international developments and discussions, it continues to work on a refinement and strengthening of capital adequacy and liquidity requirements and gives closer attention to systemic risk issues. The Swiss regulatory framework is further converging from a principle to a rule-based approach.

in 2010, FinMa published its strategic goals and priorities for 2010 to 2012. These reflect likely future developments in financial regulation and supervisory trends and consist in reducing systemic risks and complexities, improving client protection, streamlining and optimising regulation, increasing the effectiveness and efficiency of supervision, implementing sustainable market supervision and effective enforcement, positioning for international stability and close integration of markets, and strengthening FinMa as an authority.

907

Shelby R du PaSquieRLenz & StaehelinShelby R du Pasquier is a partner at Lenz & Staehelin, where he is the head of the banking and financial group at the Geneva office. In this context, he advises Swiss and international financial institutions, as well as private equity and hedge funds. Mr du Pasquier is a frequent speaker at professional conferences. His publications include a number of contributions and articles on banking law and financial services, hedge funds and private equity. Mr du Pasquier served as vice chair (2001–2005) on IBA subcommittee I1 (private funds) and is admitted as an expert to the SIX Swiss Exchange for listing purposes.

Mr du Pasquier has been a partner at Lenz & Staehelin since 1994. He completed both a business degree and a law degree from the University of Geneva in 1983. He also obtained an LLM from Columbia University School of Law in 1988.

PatRick hüneRwadelLenz & StaehelinPatrick Hünerwadel is a partner at Lenz & Staehelin, where he heads the banking and finance practice group of the Zurich office. He is an expert in structured and lease finance, asset securitisation, derivatives and regulatory matters. He is the author of various netting and collateral opinions for the finance industry, its associations and regulators.

Mr Hünerwadel is a lecturer on corporate law and contracts at the University of St Gallen. He also serves as co-chairman of the banking law practice group of the Zurich Bar Association and is admitted as an expert to the SIX Swiss Exchange for listing purposes.

Mr Hünerwadel has been a partner at Lenz & Staehelin since 1994. He studied at the University of St Gallen (Dr iur) and at the Morin Center for Banking and Financial Law, Boston University.

MaRcel tRanchetLenz & StaehelinMarcel Tranchet is a partner in the Zurich office of Lenz & Staehelin, where he advises in banking and finance and capital market matters. His practice includes syndicated

appendix 1

ABoUT THE AUTHoRS

About the Authors

908

bank financings, structured finance, leveraged finance, project finance, workouts and recapitalisations, securities transactions, derivatives and regulatory matters.

Mr Tranchet joined Lenz & Staehelin in 2003 and is a partner since 2011. He studied at the University of St Gallen and at the Morin Center for Banking and Financial Law, Boston University.

ValéRie MenoudLenz & StaehelinValérie Menoud completed her law studies at the University of Lausanne and holds a doctoral degree from the University of Zurich. Her publications include contributions and articles on banking law and international financial law. She is an associate at Lenz & Staehelin.

lenz & StaehelinBleicherweg 588027 ZurichSwitzerlandTel: +41 58 450 80 00Fax: +41 58 450 80 01

Route de Chêne 301211 Geneva 17SwitzerlandTel: +41 58 450 70 00Fax: +41 58 450 70 01

Avenue du Tribunal-Fédéral 341005 LausanneSwitzerlandTel: +41 58 450 70 00Fax: +41 58 450 70 01

www.lenzstaehelin.com

the banking regulation review - lenz & staehelin - … banking regulation review reproduced with...

Documents