A closer look at Swiss licensing requirements for trustees and their exemptions
Jürg Frick of Homburger examines the exemptions and requirements for trustees which have emerged from Switzerland’s new financial market regulations
In the recent past, Swiss trustees have become subject to a licensing requirement. When Switzerland introduced new financial market regulations in 2020, such as the Financial Services Act (FinSA) or the Financial Institutions Act (FinIA), it also introduced new licensing requirements for certain financial intermediaries, including trustees. The regulations and licensing requirements entered into force on January 1 2020, and the transitional periods will expire by the end of 2021 and in certain cases by the end of 2022. In any case, time is running.
Against this background, it is high time to assess whether a trustee, who is registered or has their domicile in Switzerland, qualifies as a financial service provider in the sense of FinSA or has to be licensed by the Swiss Financial Market Authority (FINMA), in accordance with FinIA.
Since the relevant regulations are new and, more importantly, since Swiss law does not know trusts as such, there is limited knowledge, expertise and experience in the Swiss market, including with the Swiss regulator, about the activities and operations of trustees. Unsurprisingly, numerous questions surround these new regulations and a number of these questions remain to be answered.
The aim of this article is to address three main questions, which inevitably arise in connection with the new legislation: (i) Do trustees or trusts fall under the FinIA and FinSA?; (ii) What are the exemptions?; (iii) And even if trustees are subject to these regulations, what would be the consequences?
Our particular focus is on the exemptions from the licensing requirements under FinIA. Other relevant topics such the different types of trusts, differences between domestic and foreign trusts, the acknowledgement of foreign trusts, segregation rights or debt enforcement as well as the qualification of trustees as financial intermediaries under the Swiss Anti-Money Laundering Act (AMLA) will not be addressed in this article.
Trusts and trustees under FinIA and FinSA
First, one needs to understand what Swiss law considers to be a trust or a trustee. The notion ‘trust’ is delicate because it is broad and flexible which is a consequence of the trust concept being challenging to classify.
Surprisingly in Switzerland, a trust is neither a legal entity nor does it have a legal personality in the sense of Article 52(1) Swiss Civil Code. Accordingly, trusts cannot be established under current Swiss law, although foreign trusts have been recognised as legal institutions sui generis since the entry into force of the Hague Trust Convention of July 1 1985, on the Law Applicable to Trusts and on their Recognition (HTC).
Nevertheless, Article 149a Federal Act on Private International Law in connection with Article 2 HTC defines the term ‘trust’ as legal relationships created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. The latter may be of a general nature or involve favouring specific individuals.
In accordance with these articles, a trust has the following characteristics: the assets constitute a separate fund (getrenntes Sondervermögen) and are not part of the trustee’s own estate; title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee; and the trustee has the power and the duty to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon them by law.
Thus, it is clear that the trust is a three-party relationship between settlor, trustee and beneficiary, with the trustee at its centre. Even though the settlor establishes the trust and the beneficiary has the equitable interest (wirtschaftliches Eigentum) of the trust assets, the trustee is their legal owner (Eigentümer zu Vollrecht). It is they who hold and manage the trust assets (that have been entrusted to them by the settlor) and are responsible for all administrative activities.
Trustees under FinIA
Scope of application
The new Financial Institutions Act subjects trustees, but not the trusts, to a licensing requirement. Trusts are out of scope of Swiss regulation since trusts can also not be established in Switzerland. The provisions governing the trustee only rarely refer to trusts, even though trusts are of course always part of a trust structure.
Looking at a trust structure from a Swiss regulatory point of view, the relevant question is whether a Swiss party assumes the role of the trustee in the sense of FinIA and therefore falls in scope of this new act.
Should a financial institution qualify as trustee, then, as a rule, it would need to be licensed by FINMA. According to Article 17(2) FinIA, a trustee is a person who – on a commercial basis – manages or holds a separate fund for the benefit of the beneficiaries or for a specified purpose based on the instrument creating a trust within the meaning of the HTC.
First, this definition shows that the trustee is – from a regulatory perspective – perceived as an intermediary operating a vehicle for asset management (the trust), a certain type of asset manager, so to speak, even though there are fundamental differences between a trustee and an asset manager.
Differences are, for instance, that an asset manager acts as a direct representative in the name and on behalf of another person who authorised the asset manager to dispose over certain of that other person’s assets. The trustee, on the other hand, is the legal owner of the assets of the trust and the trustee only acts as representative to the extent that the trustee manages the assets on behalf of the beneficiaries. Furthermore, the legal basis for an asset manager is an asset management agreement, whereas the legal basis for a trustee is the applicable trust law and act of the settlor setting up the trust.
The reason why a trustee is worth being regulated for ‘investor’ protection purposes is because the trustee, even though they are the legal owner of the trust assets, still manages other people’s money.
Second, the aforementioned ‘commercial basis’ (Gewerbsmässigkeit) is often the decisive factor determining whether or not a person is actually considered to be a trustee under the FinIA. Pursuant to Article 19(1) FinIO, a trustee acts on a commercial basis if the trustee (i) generates gross earnings exceeding CHF 50,000 (approximately $54,300) per calendar year; (ii) establishes business relationships with more than 20 contractual partners per calendar year, each of which relationships is not limited to a once-only activity, or the trustee maintains at least 20 such relationships per calendar year; or (iii) has unlimited power of disposal over assets belonging to others, provided the value of such assets exceeds CHF 5 million at any given time.
For the assessment of the commercial basis and, in particular, the assessment, whether the relevant thresholds are exceeded, all relevant trustee activities of a certain party need to be taken into account. This provided, however, that activities undertaken or services rendered which do not qualify as trustee activities or services are not counted to the relevant thresholds.
If a person acts as trustee in the sense of FinIA and if it does so on a commercial basis, i.e. at least one of the thresholds set out above is exceeded, then the respective person is in scope of the Financial Institutions Act and, therefore, has to be licensed by FINMA.
There are some exemptions, which are discussed below.
FinIA provides for certain exemptions from the licensing requirement for trustees, whereby the most prominent exemption is set forth in Article 2(2)(a) FinIA pursuant to which the licensing requirement does not apply to persons who manage solely the assets of persons with whom they have business or family ties. The rationale of this exemption is that affiliates or other members of a group are acting under the control of a parent company and, therefore, and since such companies are not truly independent from each other, the money managed by a group’s internal treasury, cash management or asset management company is not truly ‘other people’s money’ and thus does not require investor protection regulation.
The family ties exemption applies if the respective persons are relatives by blood or by marriage. Family ties are deemed to exist insofar as trustees manage in-house funds in favour of persons who have family ties with one another, if the portfolio managers or trustees are directly or indirectly controlled by third parties who have family ties with these persons or by a trust or a similar legal construct set up by a person with family ties (Article 4(2) FinIO). The exemption of family ties also includes the activity of a family member for the family office of his or her family, or persons who are not related to the family but are nevertheless employed for the management of a single family office. This family office exclusively manages its own assets and is controlled by the family members.
Trustees acting within the framework of a private trust company are also covered by the exemption (a private trust company is a company established with the sole purpose of acting as trustee for a single trust or a group of trusts of the same settlor or for a certain group of beneficiaries, usually a certain family. Private trust companies are regularly owned by a family member or by a trust or foundation which in turn has been established by a family member).
The same is true for trustees acting on behalf of a dedicated trust company (a dedicated trust company is a company established, held and controlled by a licensed trustee at the request of a settlor and which acts as a special purpose vehicle solely as trustee for trusts established by a family member as settlor for the benefit of other family members as beneficiaries).
Finally, trustees are exempt from the licensing requirement if they exclusively act as trustees for trusts which were established by the same person or in favour of the same family and which are held and monitored by a financial institution which possesses a respective license by FINMA.
Exemption for trustees acting under control (Article 2(2)(a) FinIA)
In practice, FINMA seems to be granting the exemption of Article 2(2)(a) FinIA only under very strict requirements and only with a certain reluctance. This is critical from a legality and due process point of view because the intention of the legislator has been clearly established and set forth in the law. The intention of the lawmaker was undoubtedly to exempt trustees from a licensing requirement if they are acting under certain control, be it due to business or family ties.
As a matter of the Financial Institutions Ordinance (FinIO), the implementing ordinance of FinIA, family ties are deemed to exist insofar as a trustee manages in-house funds in favour of persons who have family ties with one another, if the trustee is directly or indirectly controlled by (i) third parties who have family ties with these persons; or (ii) a trust, a foundation or a similar construct set up by a person with family ties.
The level of control can be discussed and control can be exerted in a number of ways. In particular, the range of powers which may be exercised by a third party is broad and in particular includes powers over the trustee.
For instance, third parties may be given the right to (i) consent to actions of the trustee; (ii) give the trustee instructions, guidelines or directions; (iii) veto; or (iv) remove the trustee and appoint another trustee. The nature of these powers can be different in as much as the powers under (i) and (ii) are a priori powers, i.e. powers that give the third party the right to intervene before the trustee takes certain actions, and the powers under (iii) and (iv) are a posteriori powers, i.e. powers that give the third party the right to intervene after the trustee has taken certain actions. Which power in certain circumstances are adequate shall be dependent as always on the particular facts of the case.
There is a view that all these powers, be it each alone or combined with one another, should be sufficient for the trustee to benefit from the exemption to be licensed by FINMA. However, as a matter of fact, it seems that FINMA has a tendency that a priori powers are required in order to benefit from the exemption. This is critical because in many cases it is against the nature of a trust and the appointment of a trustee to grant a third party a priori control rights over the trustee and the parties are fine with a posteriori powers, in particular, the right, for instance, of a protector to replace the trustee in case the trustee acts against the best interests of the trust and the beneficiaries.
If a person is deemed to be a trustee under the FinIA, such a person has the duty to obtain license by FINMA. In order for a trustee to receive such a license, it must fulfil a number of requirements. A license is granted to anyone who meets the general licensing requirements and who complies with special regulations applicable to trustees. This may include, among other things, conditions regarding the legal entity form, minimum capital, compliance with capital adequacy requirements, insurance coverage, satisfaction by the managers of fit and proper tests, compliance with business conduct rules, independence of the board of directors as well as suitable risk management and internal control systems. Furthermore, the trust generally must effectively be managed from Switzerland.
According to the FinIA, the trustee’s duties consist, but are not limited to, the management of separate funds, maintenance of value and employment for specified purposes (Article 19(2) FinIA). Trustees may also provide investment advice, portfolio analysis and offering of financial instruments in particular (Article 19(3) FinIA).
To summarise, these obligations show that the legislator’s concern lies with ensuring that trustees meet certain professional standards. These standards aim at preventing them from causing harm to those to whom they are accountable, their counterparties, other financial market operators, or the financial markets themselves.
Trustees under FinSA
Scope of application
FinSA governs the rendering of financial services as well as offering of financial instruments. Financial services include, for instance, investment advice, investment management or receipt and transmission of orders in relation to financial instruments.
Any party carrying out these activities on a commercial basis is considered a financial services provider, irrespective of its legal form, and therefore, is subject to the code of conduct and the respective regulatory requirements set out in FinSA. These include, among others, the duty to provide clients with certain information, the completion of appropriateness and suitability tests, the obligation to document activities, as well as the duty to comply with the principles of good faith and equal treatment when handling client orders.
As has been seen before, the activity of a trustee basically relates to asset management or the operation of a vehicle for asset management, the trust. In any case, the trust assets constitute separate special assets (getrenntes Sondervermögen) and are not part of the trustee’s personal assets.
In short, it can be assumed that the activity of a trustee generally does not fall under the definition of financial services in the sense of FinSA and therefore should also not fall under the FinSA as a whole. However, it cannot be ruled out that trustees may engage in certain secondary activities that fall within the scope of the FinSA. Therefore, in order to be able to completely exclude the application of the FinSA, all activities and secondary activities of a trustee must be subjected to an analysis.
As a rule of thumb, tax advice, legal advice, accounting, payroll, investment accounting, corporate finance activities, property management, auditing, human resources management, insurance brokerage and large parts of economic and management do not count as ‘financial services’. In contrast, activities in connection with financial advice, inheritance, assistance, asset management, investment advice, credit mediation, advice on personal pensions or pension funds may constitute ‘financial services’ within the meaning of FinSA.
FinSA does not provide specific exemptions for trustees. Either a trustee provides services which are considered to be financial services and are subject to FinSA as described above or not.
If a trustee qualifies as a financial services provider under FinSA, then the trustee is subject to a number of regulatory requirements, such as the duty to provide information to the client, the assessment of appropriateness and suitability of certain financial services, the documentation and rendering of account, the transparency and due execution of client orders as well as some organisational duties or measures.
The Swiss legislator decided to also regulate trustees, be it under FinIA as financial institutions which are subject to a FINMA licensing requirement or, under certain circumstances, under FinSA as financial service providers. This territory is new for all of the Swiss legislators, Swiss courts and the Swiss regulator, FINMA. The Swiss legislator tried to tailor a regulatory framework which adequately addresses the key guiding principles of regulation, and which offers protection of investors and protection of the Swiss financial market. This tailor-made regulatory concept also provides for certain well-defined exemptions for the licensing requirement or regulation as a financial service provider.
In order to allow these new regulations to be well received by the market and market participants, it is important that FINMA allows the respective parties to benefit from regulatory exemptions if the requirements for such exemptions are met. It would be counter-productive and it could harm the Swiss market as an attractive place for trustees if FINMA would apply these exemptions too restrictively or in a way that renders these exemptions as illusionary.
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Jürg Frick is a partner at Homburger. He is a banking and finance specialist whose main focuses include financial services and collective investment regulations, syndicated debt financing, international bond offerings, venture capital and buyout financing, restructurings and insolvency law.
Jürg holds a doctorate degree from the University of Zurich and a LLM from Harvard Law School.