Market structure and trends
Switzerland is one of the world's leading financial
centers. The main factors which helped Switzerland to
achieve this position are a stable political environment, the
country's capacity for saving, a stable currency with minimum
transfer restrictions, traditionally low interest rates, and
highly sophisticated and secure financial institutions.
Domestic and international investors find a favorable financing
climate and can rely upon the quality and efficiency of the
banking system nationwide. Switzerland has a universal banking
system. Banks can engage in all financial services, including
securities transactions. Foreign-controlled banks and branches
of foreign banks enjoy the same treatment as domestic
institutions. The two leading Swiss banks (UBS and Credit
Suisse Group) maintain a nationwide network of branches and
are, through subsidiaries and branches, present in all the
major financial market places.
The past few years have seen rapid consolidation in the
financial services industry. The consolidation process
culminated in December 1997 in the merger of Swiss Bank
Corporation and Union Bank of Switzerland to form UBS.
Furthermore, in 1997, federal securities regulation was
introduced. The recent past has seen a number of domestic
initiatives in the field of e-banking and online trading, some
with promising results and others being less successful.
Main regulatory bodies and key legislation
Authorities and institutions
The power to regulate and supervise the financial market is
vested in the National Bank and the Federal Banking Commission.
The traditional role of the National Bank is that of a central
bank; the main objective to be pursued by the Federal Banking
Commission under the Federal Banking Statute ("Banking
Statute") is creditor protection. In recent years, the National
Bank and the Federal Banking Commission have together tried to
expand their traditional functions into an overall supervision
of the financial market. They take the position that pure
policing functions are insufficient to ensure the integrity and
smooth functioning of the Swiss financial market.
Beside the National Bank and the Federal Banking Commission
there exist self-regulatory organizations. Self-regulation has
a long-standing tradition in Switzerland's banking and finance
industry. The leading self-regulatory organization is the Swiss
Bankers Association. Its members are banks and similar
institutions, such as securities firms, other finance and
holding companies, and auditing firms. The membership list
encompasses virtually all institutions in the banking and
financial sector.
Powers
The main duties of the National Bank are to regulate the
country's money supply, facilitate payment and implement
Switzerland's credit and currency policy.
The Federal Banking Commission is the supervisory authority
for banks, investment funds, securities dealers and stock
exchanges. With the introduction of the Federal Act on Stock
Exchanges and Securities Trading ("Stock Exchange Act") in
1997, the Federal Banking Commission has also become the
supervisory authority for stock exchanges and securities
dealers. Also based on the Stock Exchange Act, the Federal
Banking Commission supervises the disclosure of shareholdings
in, and public takeover offers for, Swiss listed companies.
The Swiss Bankers Association concentrates on representing
the interests of the Swiss banking and financial community
before federal and cantonal law-makers, regulatory and
supervisory agencies, and in various Swiss and foreign
organizations. It was instrumental in the creation of bank
industry organizations such as Telekurs and SIS
(SEGAINTERSETTLE). It also influences banking and finance
directly through self-regulatory measures. These include
guidelines and recommendations on banking procedure in order to
reach generally accepted industry standards.
Types of Financial Institutions
Banks
Banks engage in all types of banking activities, such as
acceptance of deposits, extension of loans, payment
transactions, dealing in securities, precious metals and
foreign exchange, portfolio management, custody and deposit
services, and underwriting. The criteria commonly used to
categorize banks are size, geographical scope of activities,
Swiss or foreign control, tradition and special legal status.
Categories are cantonal banks, the two big banks, regional and
savings banks, loan associations, other banks, in particular
foreign subsidiaries of foreign banks, branches of foreign
banks and the traditional private banks.
The Banking Statute subjects banks, including private banks
and savings banks, to the statute. Securities dealers and
portfolio managers who do not engage in regular banking
business are expressly exempted from the Banking Statute. As a
rule, individuals and corporations which are not subject to the
Banking Statute may not publicly solicit customer deposits. In
practice, institutions which are engaged in traditional banking
business are considered banks. Since interest-indifferent
banking activities have recently become a more and more
important part of the banking business, and since these
activities are increasingly performed by institutions other
than banks, the Swiss banking regulators have enlarged the
traditional definition of a bank. The Banking Ordinance defines
banks as institutions whose main area of activity is financing
business. More particularly, banks are institutions which, for
their own account, publicly solicit customer deposits or
substantially refinance themselves with banks which are not
major shareholders in order to provide financing to an
undefined number of persons or enterprises.
In addition, the Banking Ordinance clarifies the definition
of public solicitation for the acceptance of deposits. Public
solicitation exists in principle if deposits are regularly
accepted from 20 creditors who are neither banks nor
institutional investors nor closely related to the accepting
institutions.
Securities dealers
Securities dealers who only trade in securities and engage
in transactions directly related thereto, are not banks in the
sense of the Banking Statute as long as they do not engage in
regular banking business. Since most Swiss securities dealers
are banks, the community of professional securities dealers
mainly consists of subsidiaries and branches of foreign
brokerage houses.
Securities dealers are regulated under the Stock Exchange
Statute and need a licence from, and are subject to supervision
by, the Federal Banking Commission. Banks who engage in
securities transactions also need a licence under the Stock
Exchange Statute, in addition to the banking licence.
Portfolio managers
Portfolio managers are unregulated, and do not fall under
the Banking Statute or the Stock Exchange Statute as long as
they merely administer their clients' funds and do not conduct
a banking or securities dealer business. Portfolio or asset
management has been traditionally a very important part of
Switzerland's financial services business. The variety of
institutions and individuals who compete in the portfolio
management business include banks, professional securities
dealers, trust companies, corporate and individual portfolio
managers and lawyers. To prevent a misuse of the very liberal
market framework to the detriment of the international standing
of the financial market, provisions to regulate certain aspects
of portfolio management have been enacted or are under
consideration.
The Swiss Bankers Association has adopted portfolio
management guidelines for the exercise of asset management
mandates by banks. Although the guidelines are binding neither
on the members of the Swiss Bankers Association nor on
non-banks active in portfolio management, they represent the
generally accepted industry standard.
Establishing a banking operation
Before a bank can start operating in Switzerland, it must
obtain a banking licence from the Federal Banking Commission.
Before a licence is granted, a bank cannot be entered in the
Register of Commerce. The licence is granted if:
- the bank precisely defines the scope of its business in
the Articles of Incorporation, by-laws and regulations and
provides for an internal organization that is adequate for
its business, including the creation and definition of duties
of separate bodies for supervision, management and
control;
- the bank maintains the fully paid-in minimum capital
required by law;
- the individual members of the board of directors and the
managers (a majority of whom must be Swiss residents) enjoy a
good reputation and assure proper business conduct;
- the principal shareholders ensure that their influence is
not detrimental to the business conduct of the bank; and
- the place of residence of the managers allows them to
effectively and reponsibly manage the bank.
Although a bank theoretically has a choice as to the legal
form of its business organization, the usual form is that of a
share corporation. The bank is subject to the legal provisions
applicable to share corporations in general. Furthermore, it
must observe the binding organizational guide-lines of the
Banking Statute and the Banking Ordinance. In its Articles of
Incorporation, by-laws, or internal regulations, the bank must
define its business, showing the nature of its principal
activities in clear detail. For high risk business activities
such as lending, foreign currency and stock exchange
transactions, separate internal regulations must be drafted.
Larger institutions must provide for a strict separation
between the board of directors, whose duties are supervision,
control and making the principal decisions, and management,
which is in charge of the day-to-day operations and decisions.
The practice of the Federal Banking Commission also requires
larger institutions to maintain an internal control
organization.
The Banking Statute imposes additional conditions on
foreign-controlled entities that wish to obtain a banking
licence. A special licence for foreign-controlled banks is
required if a bank is newly incorporated or if an existing bank
becomes foreign-controlled. In addition, each change of control
through acquisition by foreigners from foreigners is subject to
approval by the Federal Banking Commission.
The Federal Banking Commission has defined the conditions
for the opening of Swiss branches by foreign banks in the
Ordinance on Foreign Banks. Foreign banks who maintain a branch
or representative office in Switzerland need a licence from the
Federal Banking Commission.
Subsidiaries of foreign banking groups must confirm to the
Federal Banking Commission that the parent bank is supervised
by its home authorities on a consolidated basis that includes
the Swiss subsidiary. Further conditions may be imposed on a
case-by-case basis by the Federal Banking Commission if the
Swiss bank is a subsidiary of an investment banking group (eg a
subsidiary of a US broker-dealer, subject to securities and
exchange commission supervision).
Financial services online/e-banking
Scope of financial regulations
Before looking at respective Swiss regulations, the question
as to when a provider of electronic financial services becomes
subject to Swiss supervision arises. Other than with respect to
the offering of foreign investment funds, the principle of
territoriality invariably governs. Only providers of online
financial services who maintain a physical presence within
Switzerland fall within the scope of Swiss financial
regulations. However, the Federal Banking Commission may
consider a foreign provider of electronic banking services to
have a physical presence in Switzerland, if it for example: (i)
involves Swiss based affiliates; (ii) maintains a call centre
in Switzerland; or (iii) maintains a server in Switzerland.
Specific rules for e-banking
Up to the end of 2000, there were no special laws or
regulations covering the specific issues arising from the
electronic provision of financial services. The general
requirements of having an adequate organization and offering
assurance of proper business conduct set forth in the present
Swiss banking legislation apply to e-banking services. The
Federal Banking Commission has in 2000 licensed seven e-banks
and e-securities dealers that offer and provide their services
exclusively over the internet.
Given the swift development of electronically offered
financial services, the Federal Banking Commission decided that
its guidelines on the combatting and prevention of money
laundering needed to be revised and prompted the Swiss Bankers
Association to revise its 1998 Agreement on the Swiss banks'
code of conduct with regard to the exercise of due diligence.
As an interim measure until the specific amendments enter into
force, the Federal Banking Commission issued specific minimal
standards for e-banks which complement the existing rules.
The Federal Banking Commission permits pure e-banks to open
an account for important customers only after the bank has met
its new customer personally. Important customers are considered
to be all customers who initially deposit assets worth
SFr500,000 ($279,000) or more. In case this threshold is not
met upon the opening of an account, a personal contact must be
held within three months after the assets on the respective
customer's account meet or exceed the said threshold or if the
aggregate of funds credited to an account within a month meets
or exceeds the threshold of SFr500,000. E-banks may open
accounts for domiciliary companies only upon a personal contact
with the beneficial owner, provided such beneficial owner is an
individual. Finally, e-banks are required to establish specific
internal directives and regulations on the procedures and the
criteria to monitor their customer accounts.
Paperless contracts
At present, new federal legislation on electronic
signatures, which reflects the principles of the respective EU
Directive, is in the legislative process. Until it enters into
force, e-banks will still have to rely on written and
hand-signed agreements where the present legislation provides
for agreements in written form. In particular, for consumer
loan contracts, sureties, assignments of claims or instalment
payment transactions, the written form and the signatures of
the parties is required for a valid conclusion of the contract.
In addition, rules of proper business conduct, money
laundering, due diligence and other regulations require that
banks receive certain documents in physical form.
Buying financial institutions
There are no specific Swiss laws or ordinances dealing with
the acquisition of financial institutions. When acquiring a
bank two main aspects must be borne in mind.
Due diligence v bank secrecy
Due to bank secrecy, a possible target bank is restricted by
law to disclose its customer data to an interested buyer. In
practice, this problem is overcome by having the target bank
itself retain the services of an accounting firm or a law firm
to carry out a due diligence examination on the bank's behalf.
The due diligence report in anonymous form is then handed over
to the buyer. Another possibility is to have a representative
of the buyer elected as a board member of the target bank who
is entitled to access the relevant customer data. However, any
information obtained by such representative protected by bank
secrecy cannot be disclosed to the buyer. Often, the two
possibilities are combined.
Qualified participations
Under the Banking Statute, any acquisition as a consequence
of which an individual or a legal entity, directly or
indirectly, participates in at least 10% of the capital or
voting rights of a bank or may otherwise exercise a similar
influence on the bank's business activities has to be disclosed
to and approved by the Federal Banking Commission. The buyer of
such qualified participation must be able to prove to the
Federal Banking Commission that its influence on the bank will
not have a negative impact on a prudent and solid business
activity of the bank. Furthermore, a buyer of a qualified
participation must provide the Federal Banking Commission with
a declaration as to whether it has acquired the participation
for its own account or on a fiduciary basis for third parties
and whether it has granted options or similar rights for this
participation.
Continuing bank supervision
Accounting and auditing
First, the provisions of the Swiss Code of Obligations are
applicable to banks if they are organized as share
corporations. Secondly, the Banking Statute provides additional
accounting and auditing rules. With respect to accounting, the
Banking Statute and the Banking Ordinance prescribe in detail
the format to be followed for banks' annual financial
statements and interim balance sheets.
The Banking Statute provides that banks must appoint a
special independent, external bank auditor in addition to the
statutory auditor required by corporate law. Auditing firms
that perform bank audits must be recognized by the Federal
Banking Commission. The conditions for recognition are
independence, high professional standing of the individuals
conducting the audit and an adequate business organization.
The responsibilities and duties of the bank auditors reach
far beyond those of the statutory auditors. Apart from auditing
and reporting on the banks' annual and interim financial
statements, bank auditors must ensure that the banks comply
with all relevant legal provisions.
Reporting and publication requirements
The main reporting requirements of banks and bank auditors
are:
- submission of the statutory auditors' report to the
shareholders;
- submission of the bank auditors' report to the board of
directors, statutory auditors and the Federal Banking
Commission;
- upon the request of the Federal Banking Commission,
submission by banks and bank auditors of any information that
the Commission deems necessary; and
- submission of annual and interim financial statements and
any other necessary information to the National Bank.
Banks are required to publish financial statements and
additional information within four months of the end of their
business year in the Official Journal of Commerce. Interim
balance sheets must be published semi-annually by banks with
total assets of SFr100 million or more.
Disclosure requirements
A bank has a constant obligation to notify the Federal
Banking Commission of all amendments to its Articles of
Incorporation, by-laws and internal regulations in so far as
they change its business purpose, scope of operations
(including the opening of branch offices in Switzerland and
abroad), capital, or internal organization. Disposal or
acquisition of principal shareholdings in a bank must be
notified to the Federal Banking Commission. The auditors of a
bank are charged with safeguarding the continuous observance of
the conditions for obtaining a bank licence. The Federal
Banking Commission has the power to revoke the licence if the
conditions are no longer met or if the bank is in gross breach
of its legal obligations.
The Banking Statute requires (as a condition of retaining a
banking licence) that the persons charged with the
administration and management of a bank assure the proper
conduct of business operations The application of this
provision is an important means by which the Federal Banking
Commission supervises banks. Irreproachable business conduct
must be assured both by the bank and by each person who
exercises functions in a managerial position and whose conduct
might jeopardise the security of the bank. Irreproachable
business conduct must be assured continuously; it also extends
to the administration and management of banking subsidiaries.
Under the practice of the Federal Banking Commission, banks
must be run by capable professionals with reliable characters.
Among other things, criminal acts and breaches of external
supervisory or internal regulations are irreconcilable with
irreproachable business conduct.
When a bank becomes insolvent
The Banking Statute provides for specific rules on
insolvency and bankruptcy of banks. These rules are based and
complemented by the general bankruptcy provision set out in the
Swiss Debt Collection and Bankruptcy Act.
Deferral of maturity
In the event that a bank becomes exposed to continued and
excessive withdrawals it may apply for a deferral of maturity
with the Federal Council. Such deferral of maturity will be
granted on the basis of a special audit report establishing
that all creditors' claims are fully covered and that the
payment of interest can be maintained during the moratorium.
The duration of the deferral must be limited.
Bank moratorium
The moratorium pursuant to the Banking Statute provides for
particular aid for a bank to overcome its temporary
illiquidity, but is not available to banks which have lost
their entire equity. It will be granted for one year if the
financial reports prove that the bank will, after the
moratorium, be capable of meeting its liabilities. The
moratorium may be extended for another year. A commissioner,
usually a recognized auditing firm, will be appointed, under
whose supervision and upon whose instructions the bank will
continue to carry out its business. Other than for secured
claims, debt collection and enforcement proceedings may neither
be initiated nor continued and periods of limitation and
peremptory deadlines do not run. The moratorium will be
terminated if and when the bank has achieved to overcome its
illiquidity or if and when it has been established that the
bank is not capable of meeting its liabilities anymore, in
which case the commissioner will file for bankruptcy.
Bankruptcy proceedings
If the bank has not or not successfully applied for a
moratorium to propose a composition agreement and/or a debt
collection proceeding could not be successfully challenged by
the bank, bankruptcy proceedings will be initiated upon
application by a creditor or the commissioner, as the case may
be. In the bankruptcy procedure, a receiver in bankruptcy is
appointed unless a commissioner has already been designated to
this effect who exercises all powers which would be exercised
by the bankruptcy authorities in a ordinary bankruptcy
proceeding. Subject to certain exceptions, all assets of the
bank fall within the bank's bankruptcy estate. This includes
all funds credited to customers' accounts but not: (i)
securities and tangibles in customer deposits; and (ii)
tangibles, securities and claims which are held by the bank on
a fiduciary basis for the respective customer. The receiver in
bankruptcy draws up an inventory of the bank's assets,
publishes a notice of bankruptcy and orders all creditors and
debtors to file their claims and announce their debts. The
receiver draws up a schedule of claims for the distribution of
the remaining assets to the creditors. Claims arising in
relation to: (i) accounts to which income from employment,
annuities or pensions from employers or maintenance or support
amounts by virtue of family law are credited; or (ii) savings
accounts and deposits or treasury bills (Kassenobligationen)
are allocated, up to a maximum amount of SFr30,000 per
creditor, to a special preferred class.
Composition agreement
The Banking Statute further provides the possibility for a
bank to request a moratorium for the purpose of concluding a
composition agreement with its creditors. The competent court
appoints a receiver who will supervise the bank during this
moratorium. The moratorium will be granted for a period of six
months and may be extended for another six months. The
competent court will rule upon the extent the bank will be
permitted to carry on its activities during the moratorium. The
bank may propose to its creditors either: (i) a so-called "pro
rata settlement" according to which the creditors agree to
reduce their claims by a certain percentage; (ii) a "moratorium
agreement" according to which the creditors agree to postpone
the maturity of their claims; or (iii) a composition agreement
with assignment of all or certain parts of the assets and
liabilities to the creditors. The proposed composition
agreement must be approved by the competent authorities. In a
composition agreement with assignment of assets, the claims of
creditors must rank in accordance with the rules applicable in
a bankruptcy of a bank.
Capital requirements and bank secrecy
Equity and liquidity requirements
In order to ensure permanent solvency, banks must maintain
an adequate relationship between: (i) their equity and their
total liabilities; and (ii) their liquid and marketable assets
on the one hand and their short-term liabilities on the
other.
These principles are spelled out - taking into account the
scope of business and type of bank - in the Banking Ordinance,
which defines 'equity' in detail and sets exact equity and
liquidity ratios. The banks must constantly fulfil the equity
and liquidity requirements. Liquidity statements must be
regularly filed with the Federal Banking Commission.
The present provisions on equity requirements are the result
of a revision of the Banking Ordinance in February 1995. The
purpose of the revision was to adapt the Swiss rules to the
recommendations of the Bank for International Settlements'
Basle Committee on Banking Supervision and the corresponding
Council Directives of the EU on the equity and solvency ratios
and equity adequacy for credit institutions. On the one hand,
the revisions somewhat relaxed the strict Swiss provisions; on
the other hand, the revisions submitted certain new financial
instruments, which do not affect the banks' balance sheets, to
more adequate equity requirements. The new rules remain
stricter than the common international standard. The Swiss
banks' actual equity and liquidity ratios exceed those required
by law and position them among the world's leaders in this
respect.
Lending limits
To ensure diversification of risk, the Banking Statute
states that loans granted to any single customer and an
investment in any single undertaking must bear an appropriate
relationship to the bank's equity. Again, the details are laid
down in the Banking Ordinance, which give special consideration
to counterparty risks and the nature of the existing security.
It further provides that a bank must report to the bank
auditors and the Federal Banking Commission if the total
liability of a single customer or an investment in a single
undertaking exceeds a certain percentage (which depends on the
type of customer and liability or investment) of its
equity.
The Banking Statute further states that loans to related
parties, including members of the board of directors, managers
and controlling shareholders, may be granted only in line with
generally accepted principles of banking.
Holding structure
Restrictions on banks acquiring investments in companies in
or outside the banking and finance sector. The accounts of
direct or indirect subsidiaries (Swiss or foreign) engaged into
banking, finance or real estate business must be consolidated.
The bank must meet the equity requirements on the basis of both
the unconsolidated and consolidated financial statements.
Bank secrecy
Bank secrecy is protected by Article 47 of the Banking
Statute. A breach of bank secrecy is a criminal offence. In
addition, a breach of bank secrecy constitutes a breach of
contract or a tort.
All entities fully subject to the Banking Statute are bound
by bank secrecy. This includes all banks in Switzerland,
including foreign controlled banks, and all Swiss branches of
foreign banks. Foreign subsidiaries or foreign branches of
Swiss banks are not subject to Article 47 of the Banking
Statute. Criminal sanctions can be imposed only upon the
individuals acting for the banks; the bank is liable for civil
damages and is subject to administrative sanctions. Bank
employees remain bound by bank secrecy even after the
termination of their employment.
All facts entrusted to or discovered by banks in the
exercise of their profession are protected by bank secrecy.
This includes all business and contractual relations between
the banks and their customers. It includes also information
relating to the financial situation of the customer and the
customer's relationship with other banks and third parties.
A more or less identical provision, namely Article 43 of the
Stock Exchange Act, subjects stock exchanges and securities
dealers to the same confidentiality obligation.
Foreign-controlled banks or securities dealers may, subject
to certain conditions, forward the necessary non-public
information and documents to their parent companies, if the
parent companies is itself subject to bank or financial market
supervision. Such information may only be used for internal
control and supervisory purposes of banks and other licenced
financial intermediaries. The parent company and the foreign
supervising authorities must be subject to a secrecy
obligation.
Pestalozzi Lachenal Patry
Lowenstrasse 1
Zurich
CH-8001
Tel: +41 1 217 91 11
Fax: +41 1 217 92 17
www.plplaw.ch