Banking Regulation 2025

Introduction

In the aftermath of the financial crisis of 2008/2009, Switzerland launched a massive overhaul of its financial regulations, in pursuit of several objectives. Banking regulations were revised to ensure the stability of the financial system, in line with the recommendations of the Financial Stability Board ("FSB") and other international standard-setters. Switzerland reacted to EU law in order to ensure equivalence and to be able to continue to access the European market as a third-party state. Therefore, the reforms also aimed to align Swiss law with EU regulations Directive 2014/65/EU on Markets in Financial Instruments II ("MiFID II") and Regulation (EU) No 600/2014 on Markets in Financial Instruments ("MiFIR"). Finally, the reforms were geared towards revising Swiss regulations from a patchwork of sectoral rules to a consistent regulatory framework.

The core of the new Swiss banking regulation consists of the following Swiss Federal Acts:

• the existing Federal Act on Banks and Savings Banks of 8 November 1934 ("BankA");
• the existing Federal Act on the Swiss Financial Market Supervisory Authority of 22 June 2007 ("FINMASA");
• the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading of 19 June 2015 ("FinMIA"); as well as
• the Federal Act on Financial Services of 15 June 2018 ("FinSA") and the Federal Act on Financial Institutions of 15 June 2018 ("FinIA").

The latter two, together with their implementing ordinances, have materially changed the Swiss regulatory landscape. The changes have affected domestic financial services providers as well as foreign providers with a physical Swiss establishment, but – in a departure from the former liberal regime – also foreign providers that pursue their Swiss business on a cross-border basis only. All these players had (or still have) to review the new regulatory requirements and adapt their business accordingly.

Banks in Switzerland have been facing pressure due to regulatory and legal developments, which have led to heavily increased reporting burdens. The tougher international capital and liquidity standards such as Basel III, issued by the Basel Committee on Banking Supervision ("BCBS"), or the new standards set by the FSB over the past few years, have led to increased costs of a bank's capital and long-term funding and other regulatory requirements including, e.g., new standards for resolution planning.

Additionally, the importance of the sanctions regimes has grown over recent years due to the outbreak of the war in Ukraine.

Besides these increased burdens, other major challenges currently lie in responding to strong competitive pressure, including from new entrants and business models coming from the technology sector, and more transparency on fees. The positive benchmark interest rate of the Swiss National Bank ("SNB") (1% as of Q3 2024) continues to prove favourable to banks in the core banking business.

The current environment has also been characterised by a variety of related legal developments, particularly in international tax matters. Switzerland implemented the automatic exchange of information ("AEOI") in accordance with the Common Reporting Standard established by the Organisation for Economic Co-operation and Development ("OECD"). In this context, the Federal Act on the International Automatic Exchange of Information in Tax Matters of 18 December 2015 ("AEOI-Act") entered into force on 1 January 2017, and the Federal Tax Administration for the first time exchanged information with partner states from September 2018. In addition, in the course of the implementation of the revised recommendations of the Financial Action Task Force ("FATF") and the Global Forum on Transparency and Exchange of Information for Tax Purposes ("Global Forum"), several laws have been amended and further reforms are under way. The legal framework on anti-money laundering ("AML") and anti-terrorism financing has also become more stringent. Additionally, foreign regulations are a limiting factor for outbound Switzerland cross-border banking business.

The accumulation of these factors has forced many banks to scale back some of their activities in Switzerland and has consequently led to a trend towards consolidation in the Swiss banking sector in recent years (from 292 banks in 2014 to 239 banks in 2023 (FINMA statistics, supervised financial market participants 2023, https://www.finma.ch/de/dokumentation/finma-publikationen/kennzahlen-und-statistiken/statistiken/ aufsicht )). This trend towards consolidation is primarily seen with small banks and Swiss subsidiaries of foreign banking groups.

Despite this currently challenging environment, Switzerland is still a highly attractive financial centre, as it combines many years of accumulated expertise, particularly in private banking and wealth manage- ment. Consequently, the Swiss financial centre is the global market leader for assets managed outside the owner's home country, with a global market share of approx. 25% (see Swiss Banking, Banking Baro- meter 2022: Economic trends in the Swiss banking industry, available at https://www.swissbanking.org ). Professional advice, top-quality services, political and economic stability and sophisticated banking products are the traditional strengths of Swiss financial institutions.

Furthermore, Switzerland has positioned itself to become a hub for innovative financial technologies ("Fintechs"), with projects such as Diem (formerly Libra), the envisaged global cryptocurrency, even if eventually not realised in Switzerland, bringing it into the focus of the public globally. As part of this effort, the Swiss regulatory framework is under continuous adjustment to address the needs of Fintech providers and to create a suitable environment for applications of distributed ledger technology ("DLT"). Particularly, the Swiss Parliament amended the BankA with effect from 1 January 2019 to introduce a so-called Fintech licence as a new regulatory licence category geared towards limited deposit-taking activities, with fewer stringent requirements compared to the fully fledged banking licence. Within the regulatory framework defined by federal laws and regulations, the Swiss Financial Market Supervisory Authority ("FINMA") aims to take a technology-neutral approach in its practice and revised several of its circulars to remove obstacles for technology-based approaches to financial services.

On 25 September 2020, the Swiss Parliament adopted the new Federal Act on the Amendment of Federal law in light of the Developments regarding DLT. The new regulations include a number of fairly significant changes to federal laws, in particular the Federal Code of Obligations of 30 March 1911 ("CO"), the Federal Debt Enforcement and Bankruptcy Act of 11 April 1884 ("DEBA"), the Federal Act on the Prevention of Money Laundering and Terrorist Financing of 10 October 1997 ("AMLA"), and the FinMIA. The changes introduce, in particular, a concept of ledger-based securities (Registerwertrechte) into civil securities law pursuant to the CO, as well as a new stand-alone licence type under the FinMIA for so-called "DLT Trading Facilities" (DLT-Handelssysteme), i.e., institutions for multilateral trading in standardised DLT securities. The new regulation improves the environment for blockchain and DLT projects in Switzerland.

The serious crisis of Credit Suisse group, leading to intervention by Swiss authorities and rescue by way of a merger with UBS group in March 2023, has significantly shaken the financial marketplace and may well result in changes to the Swiss regulatory framework over the longer term.

Regulatory architecture: Overview of banking regulators and key regulations

Responsible bodies for banking regulation

FINMA is the supervisory authority for banks, securities firms and other financial institutions such as collective investment schemes and insurance undertakings. FINMA's primary tasks are to protect the interests of creditors, investors and policyholders and to ensure the proper functioning of financial markets. To perform its tasks, FINMA is responsible for licensing, prudential supervision, enforcement and regulation.

In parallel, the SNB is responsible for monetary policy and the overall stability of the financial system. This includes the mandate to determine banks and bank functions as systemically important, in consultation with FINMA.

Under the so-called dual supervisory system for banking regulation, FINMA largely relies on the work of recognised audit firms. As the extended arm of FINMA, these audit firms exercise direct supervision over financial institutions. They conduct regulatory audits of the banks on behalf of FINMA. In addition, FINMA may undertake targeted, on-site supervisory reviews with the aim of achieving timely and comprehensive supervision. As an exception to the dual supervisory system, FINMA has a dedicated supervisory team that is responsible for directly monitoring the largest Swiss banking group under UBS Group AG. Furthermore, FINMA also increasingly performs on-site inspections and takes "deep dives" into selected financial intermediaries to gain a better understanding of the inner workings of supervised entities.

Key legislation and regulations applicable to banks

The key legislation for Swiss banks includes the following:

• the FINMASA defines the role and powers of FINMA;
• the Federal Act on the Swiss National Bank of 3 October 2003 defines the role and powers of the SNB;
• the BankA and the Federal Ordinance on Banks and Savings Banks of 30 April 2014 ("BankO"), which entered into force on 1 August 2017, provide for the general regulatory framework governing banks, including the banking licence requirements and accounting rules for banks;
• the FinMIA and the Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading of 25 November 2015 contain: (i) licence requirements for stock exchanges, multilateral trading facilities, operators of organised trading facilities, central depositories, central counterparties, payment systems and trade repositories, (ii) takeover and disclosure rules referring to listed companies, and (iii) regulations on market conduct in securities and derivatives trading; and
• the FinSA and its implementing ordinance, the Ordinance on Financial Services of 6 November 2019, set out rules of conduct for all financial services providers, including banks, as well as rules on prospectuses and key information documents ("KIDs") for certain financial instruments.

Further important regulations are:

• the Ordinance of FINMA on Foreign Banks in Switzerland of 21 October 1996 ("FBO-FINMA"), which provides for additional requirements for banks controlled by foreign persons as well as branches and representative offices of banks incorporated abroad;

the Ordinance on Capital Adequacy and Risk Diversification for Banks and Securities Firms of 1 June 2012 ("CAO");

• the Ordinance on Liquidity for Banks and Securities Firms of 30 November 2012 ("LiqO"), governing capital adequacy and liquidity requirements applicable to banks and securities firms;
• the Ordinance of FINMA on the Insolvency of Banks and Securities Firms of 30 August 2012 ("BIO-FINMA"), governing resolution and recovery as well as insolvency proceedings applicable to banks and securities firms;
• the Federal Act on Collective Investment Schemes ("CISA") of 23 June 2006 and the Ordinance on Collective Investment Schemes of 22 November 2006 on investment funds and companies as well as rules on distribution;
• the Federal Act on Consumer Credit of 23 March 2001; and
• the AMLA and its implementing ordinances.

In addition, FINMA specifies its practice in numerous circulars. FINMA circulars as such are, in principle, not binding for Swiss courts but constitute a mere codification by FINMA of how it interprets and applies the applicable financial laws and regulations. Still, the guidance of FINMA circulars can have significant effects as a Swiss court might be reluctant in practice to interpret the regulation differently before having thoroughly considered the view of FINMA.

Furthermore, the Swiss financial sector has a long tradition of self-regulation by self-regulatory organisations ("SROs"). FINMA has recognised several self-regulatory guidelines and agreements of SROs as minimum standards, thus incorporating them within the regulatory framework and subjecting non-compliance to enforcement action (available at https://www.finma.ch/en/documentation/self-regulation/anerkannteselbstregulierung ). An important example of self-regulation is the agreement on the Swiss bank's code of conduct with regard to the exercise of due diligence of 2020 ("CDB 20") by the Swiss Bankers Association ("SBA"). It defines the know-your-customer rules that banks and securities firms must apply.

Influence of supranational organisations and regulatory regimes or regulatory bodies

Switzerland is engaged in several international bodies, such as the FSB, the Bank for International Settle- ments, the BCBS and the International Organization of Securities Commissions. Furthermore, Switzerland is a member of the FATF, which sets out international standards in the area of AML, the OECD and the Global Forum. Finally, although Switzerland is not a member of the G20, it has regularly been invited to participate in this international forum, which plays a leading role in defining international initiatives.

International standards have an increasing importance for Switzerland, as it has to ensure access for its financial institutions to foreign markets and maintain a good reputation for the Swiss financial market overall. The standards established by supranational organisations, including, e.g., the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions dated 15 October 2014, and Guidance on Arrangements to Support Operational Continuity in Resolution dated 18 August 2016, thus have a strong impact on Swiss regulation in the financial sector. As a case in point, Basel III had a significant influence on the Swiss regulatory framework, such as the capital adequacy and liquidity standards specified in the CAO and the LiqO.

The Swiss regulatory framework is particularly influenced by developments in the European Union. As an example, the European Union harmonised its capital market regulation with MiFID II and MiFIR. Consequently, the Swiss legislator is following up and voluntarily harmonising certain aspects of Switzerland's legislation with similar provisions in the FinMIA and FinSA, with the aim of ensuring access to the European financial markets (which requires, inter alia, a regulation that is equivalent to the EU regulation). Furthermore, the revised Federal Act on Data Protection ("FADP") and its implementing ordinances, which entered into force on 1 September 2023, also apply to the banking sector. The revision harmonised the FADP with the recently revised data protection regime of the European Union, in particular the General Data Protection Regulation (EU) No 2016/679. Similarly, the provisions on derivatives trading of the FinMIA were significantly influenced by the respective provisions in the European Market Infrastructure Regulation (EU) No 648/2012 and by rules of international standard-setting bodies; for example, the FinMIA implements the commitments assumed at the G20 summit in Pittsburgh in 2009. FinMIA adapts the Swiss regulation of the financial market infrastructures and derivatives trading to international requirements.

In December 2023, Switzerland and the UK signed the "Berne Financial Services Agreement" on the mutual recognition of their regulatory regimes regarding financial services, aiming at boosting competitiveness and fostering cooperation between these two major international financial centres. The agreement is based on the concept of mutual recognition of equivalence of the legal and supervisory frameworks of the parties, and on that basis improves market access for the financial institutions and service providers of either jurisdiction in selected areas of the financial sector (e.g., banking, investment services, insurance, asset management and financial market infrastructures). The agreement will allow, inter alia, Swiss financial institutions to provide financial services to high-net-worth individuals (assets exceeding GBP 2 mn.) and professional clients in the UK, and the provision of cross-border insurance services in certain areas of non-life insurance to Swiss clients by UK insurance undertakings. The approval of both countries' Parliaments of this agreement is still pending. The agreement is not expected to enter into force before 1 January 2026 but no specific date has yet been set.

Restrictions on the activities of banks

A bank must obtain a licence from FINMA in order to operate in Switzerland, or from Switzerland abroad. Switzerland follows the model of universal banking. Therefore, a bank is allowed to engage in any other business in the financial industry in addition to its deposit-taking business, if it has an appropriate organisation to carry out such activity, manages the operational risks and meets the requirements for fit and proper conduct of business. There are a few exceptions where an additional licence is required (e.g., if the bank acts as a depository of collective investment schemes). Moreover, a bank cannot operate a fund management company, an insurance company or a financial market infrastructure except payment systems.

A bank is required to describe in detail the scope of business (including the subject matter and geographical scope) of its activities in its licence application (and in the articles of association and the organisational regulations). In case of any changes (in particular, an expansion) in the scope of the business activities of a bank, it is required to inform and obtain prior approval from FINMA. Consequently, the scope of a banking licence is de facto individualised and varies from case to case.

Furthermore, many larger financial groups have separate entities engaging in fund management. In contrast, financial conglomerates, including both banks and insurance undertakings, are a relatively rare occurrence in Switzerland.

Recent regulatory themes and key regulatory developments

New architecture of the Swiss regulatory framework

Under the new regulatory framework of the FinSA and FinIA that entered into force on 1 January 2020, financial institutions are subject to cross-sectoral regulation. The FinSA aims to protect customers of financial services providers by regulating the provision of such financial services (including those by banks, securities firms, etc. but excluding insurance business) and the offering of financial instruments. FinSA includes the following topics, e.g.:

• regulation on client segmentation;
• rules of conduct;
• registration requirements for client advisors of financial services providers that are not subject to prudential supervision;
• rules on prospectuses; and
• requirements for the KID for financial instruments.

In addition, the FinSA introduces the concept of a mandatory affiliation with an ombudsman office (subject to exemptions).

The FinIA regulates the licence requirements for certain financial institutions, including securities firms, fund management companies, managers of collective assets, asset managers and trustees. Banks and Fintechs remain subject to the regulatory requirements set out in the BankA (and the BankO). Asset managers and trustees are subject to a FINMA licence requirement but supervised by a FINMA-authorised, private supervisory body.

In the course of the new regulatory framework, FINMA adopted the Ordinance of FINMA on Financial Institutions of 4 November 2020 and amended various FINMA ordinances and FINMA circulars.

With the aim of strengthening the competitiveness of Switzerland as a jurisdiction for the establishment of investment funds, the CISA has been partially revised and entered into force in Q1 2024. It provides for a new fund category specifically for qualified investors (in the sense of the FinSA and CISA), the so-called "Limited Qualified Investor Fund" ("L-QIF"). The L-QIF is exempt from FINMA authorisation and approval requirements and can, in principle, take any of the legal forms of Swiss collective investment schemes (e.g., in particular, the form of a contractual fund or a corporate form such as a SICAV). However, while the fund itself is exempt, the asset manager or fund management company responsible for an L-QIF must be an eligible institution supervised by FINMA. This indirect supervision takes due account of the level of protection required by qualified investors.

Regulation of systemically important banks

In the financial crisis of 2007/2008, the Swiss government had to bail out UBS AG, the largest Swiss bank, with a capital injection of CHF 6 bn. and liquidity support from the SNB. Consequently, Switzerland decided to take a position as a leader in the global efforts to improve the resolution of systemically relevant financial institutions carried out under the aegis of the FSB.

The Swiss approach consists of a policy mix of stringent capital requirements, both on a risk-weighted and absolute (through a leverage ratio) basis, and liquidity ratios for systemically important banks ("SIBs"), as well as recovery and resolution planning by the financial institutions and FINMA, acting as a resolution authority. In addition to the standard capital requirements, Switzerland phased in the requirements regarding total loss-absorbing capacity ("TLAC") to ensure that sufficient capital is available to finance the resolution of SIBs.

Unlike other jurisdictions, the Swiss framework did not impose explicit requirements on ring-fencing or bans on proprietary trading; it relied on a carrot-and-stick approach. The stick consisted of a regulatory requirement imposed on SIBs to ensure that they can be resolved in an orderly manner without compromising their systemically relevant functions. At the same time, the regulator was empowered to grant discounts to SIBs that take additional measures to enhance their resolvability. This led the two global SIBs ("G-SIBs"), UBS AG and Credit Suisse Group AG, to restructure their corporate group to be controlled by a holding company, which is to serve as a single point of entry in resolution, to carve out their domestic business in a separate financial institution, and to create dedicated service entities to ensure that the domestic business, which houses the core of the systemically relevant activity, can remain viable even if the group enters into resolution.

In March 2023, the Swiss regulatory framework was tested when an acute crisis of confidence threatened the continuation of the business of Credit Suisse group and resulted in the merger of Credit Suisse Group AG with UBS Group AG. FINMA, SNB and the Swiss Federal Council supported the merger, taking into consideration that a resolution under the too-big-to-fail regulations might likely be highly risky in view of the fragile environment and potentially trigger a national or even international financial crisis with severe impacts on the Swiss financial market for the longer term. The measures taken included, inter alia, a federal loss protection guarantee for UBS for an amount of CHF 9 bn. (terminated in August 2023), a loan of CHF 100 bn. from the SNB in the form of an Emergency Liquidity Assistance, and a guarantee of CHF 100 bn. in favour of the SNB to secure liquidity assistance loans in the form of a Public Liquidity Backstop ("PLB") (terminated in August 2023), by means of a Federal emergency ordinance. Following these events, the too-big-to-fail regulations are now under comprehensive review; it remains to be seen how regulation will develop in this area.

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Originally Published by GLI Global Legal Insights

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