Switzerland

Author: | Published: 9 Jul 2001
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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.


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