Switzerland says goodbye to light touch regulation

By Guest Contributor
May 3, 2012

By Rachel Wolcott

LONDON, May 3 (Thomson Reuters Accelus) - These days even the Swiss are fed up with their bankers. The financial crisis has riled Swiss citizens to the point that the Alpine country’s reputation for light-touch financial regulation will soon be a thing of the past. In a direct democracy such as Switzerland, where every citizen can vote on laws and even propose them, the people have spoken. What they have said is: we want more rules and regulation for bankers and asset managers.

“In the past people were against regulations which seemed too restrictive, but this is changing. The public mood is still critical vis-à-vis the banks and the culture of big bonuses for board of directors and management. Now we may see overregulation also because of the immediate political pressure facing a direct democracy,” Marc Raggenbass, head of the regulatory, compliance and legal practice at Deloitte in Zurich, told Thomson Reuters.The Swiss Federal Council, with the blessing of its citizens, has already taken a hard look at its financial services sector. It plans to introduce targeted measures to improve the general regulatory and tax environment with a view to shoring up the competitiveness and sustainability of the Swiss financial services sector, which employees 212,000 people and represents about 10.6 percent of GDP.

Last year the Council revised Switzerland’s Banking Act to strengthen financial sector stability and brought in too-big-to-fail capital requirements on Credit Suisse and UBS — 19 percent of risk-weighted assets to be held in equity in the narrowest sense — considered to be the most stringent requirements for systemically important financial institutions (SIFIs).

There is more to come from the Federal Council. In January this year, it set out an agenda for financial services and tax regulatory reforms and initiatives. In addition, the Financial Market Supervisory Authority (FINMA), the Swiss financial regulator, recently reported to the Council on a package of measures aimed at strengthening consumer protection. This proposal is being considered by the Council, which is also studying whether to bring in a whole new financial services act. The Council will publish its own views on these matters at the end of the year, which could initiate another round of rule making.

Mario Tuor, a spokesman for the Federal Council, told Thomson Reuters: “We need to find a balance between consumer protection and market competitiveness. We want the best regulation, not the most.”

EXTERNAL PRESSURES

The Swiss banking industry is also facing serious external pressures. The U.S. government has come down hard on Swiss banks found to be helping Americans evade taxes. With successful prosecutions of UBS, Credit Suisse and Wegelin Bank by the U.S. authorities, the Swiss have started to sign up to withholding tax and double taxation agreements with countries such as Germany, Austria, the UK and the U.S. The U.S.’s adoption of the Foreign Account Tax Compliance Act (FATCA) will ensure that these tax agreements hold fast and are taken extremely seriously by Swiss banks.

In February, the Federal Council announced its proposal for a financial centre strategy (Finanzplatzstrategie) which, among other measures, will require enhanced due diligence around potential tax evasion by foreign account holders. The Federal Council said it would propose concrete measures by September 2012.

NOT AN ISLAND IN EUROPE

European Union regulation such as the Markets in Financial Instruments Directive (MiFID), the proposed European Market Infrastructure Regulation (EMIR) and the Alternative Investment Fund Management Directive (AIFMD) will also change Switzerland’s ability to keep its traditional light touch on financial services.

Sindy Schmiegel, a spokeswoman for the Swiss Banking Association (SBA), said: “Switzerland is not an island in the universe of banking. Switzerland has an interconnected banking centre and it is quite obvious that these international developments have an influence on Switzerland.”

In fact, what the Swiss have found is that not being up-to-speed or compliant with its neighbours’ rules and regulation is bad for business. Switzerland did not adopt MiFID and some believe this was a mistake which caused its banks and asset managers to be locked out of some EU business. That attitude is changing, however, and the Federal Council has set up a mechanism for the early recognition of international developments to improve its knowledge of other international financial centres’ regulatory initiatives.

“All these requirements — MiFID, PRIPs and now MiFID II and Basel III — Switzerland should take these rules on board and not have a different system,” Raggenbass said.

Having learned a difficult lesson, the Federal Council is keenly following developments from Brussels about MiFID II, EMIR and AIFMD. In future, the Council will be forced to adopt some or all of this EU regulation and meet the third-country regimes under MiFID II and EMIR. Otherwise Swiss financial intermediaries will be unable to access the EU financial markets.

Schmiegel said: “We would like to see that a MiFID-conforming regulation implemented in Switzerland reflects our local particularities. The issues for the Swiss banks are about market access, equivalence tests and other compliance issues that would hinder non-EU financial firms from conducting business with clients in EU countries, but for the moment we don’t have a clear idea on how MiFID II will look.”

COLLECTIVE INVESTMENT SCHEME ACT AMENDMENT

All of this new regulation and movement to align the country more closely with EU rules marks a huge change in the way the Swiss approach financial services. For the most part, industry representatives like the SBA and the Swiss Funds Association (SFA) recognise the need for these changes. However, when it comes to the Swiss response to AIFMD, which takes the form of an amendment to the Collective Investment Scheme Act (CISA), there are fears that the FINMA and the Federal Council may have gone too far.

Robert Mirsky, head of KPMG’s hedge fund practice, said: “[CISA's] clearly gone beyond what the AIFMD would require at this point. I’m not sure that they’re actually serving the needs of the Swiss investor base or the Swiss fund management base. There’s no question that they’ve got to do something. They’ve got to look and feel like a third country that’s going to work for AIFMD. Otherwise they are going to be left in the cold.”

The CISA amendment is expected to come into effect by January 2013, in time for AIFMD. According to Glen Millar, a director at Kinetic Partners, the law will bring managers of foreign collective schemes under local prudential supervision and extend to branches of foreign companies. It could bring 200-500 newly regulated management companies under FINMA’s oversight. CISA will also bring in changes to the distribution of foreign funds, new organisational requirements and new standards for governance. This extra layer of rules on top of AIFMD has been dubbed a “Swiss finish” by local lobbyists, who are trying convince the government not to go too far.

Matthäus Den Otter, chief executive of the SFA, told Thomson Reuters: “We are afraid that if there is too much and too burdensome regulation, that will deter foreign-based asset managers from contacting Swiss institutional investors. We say that’s not in the interest of Swiss pension funds. That is why we are concerned. We are working hard to take some of the Swiss finish elements out of these proposals, but there will be regulation in areas that were previously unregulated.”

It is doubtful, however, that the CISA amendment will negatively affect the many big hedge funds that have made Switzerland their home over the past decade. Most of these big funds are regulated already. It will be the smaller firms that have to worry. Once CISA comes into play firms will be regulated and may be required to have a compliance officer. A large portion — perhaps 80 percent — of Swiss asset managers have fewer than 10 members of staff, so adding a compliance function may be unaffordable. What is clear is that regulation is going to usher in many changes to this part of the market in the form of mergers, the use of common platforms and perhaps the liquidation of some firms.

 

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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