On June 13, 2024, the Swiss Financial Market Supervisory Authority (FINMA) initiated bankruptcy proceedings against FlowBank SA, a Geneva-based neobank. This decisive action was driven by the bank's failure to maintain the minimum capital required for its operations, raising serious concerns about potential over-indebtedness. The intervention's primary goal is to safeguard depositors, with current estimates suggesting that all privileged deposits can be fully reimbursed from the bank's existing resources. The FlowBank case underscores the significant challenges that digital banks face in maintaining financial stability and adhering to regulatory compliance in a fast-evolving sector.
Background of FlowBank SA
Founded in 2020 by Charles Henri Sabet, a seasoned expert in digital finance, FlowBank SA was established as a neobank with a focus on offering advanced online trading and investment services to a global audience. Headquartered in Geneva, FlowBank aimed to revolutionize banking by leveraging cutting-edge technology to streamline processes and provide a comprehensive suite of financial products through a fully digital platform. The bank's offerings included access to various asset classes such as stocks, bonds, ETFs, and cryptocurrencies, targeting both retail and institutional investors.
FlowBank's rapid expansion included the opening of an additional office in Zurich by 2021, along with subsidiaries in London and the Bahamas. At its peak, the bank managed over 22,000 accounts globally, employed approximately 140 staff, and had a balance sheet totaling around CHF 680 million.
While FlowBank experienced significant growth, it faced challenges in meeting the capital adequacy requirements mandated by Swiss regulators, which are vital for maintaining the solvency of financial institutions. Our latest Insight addresses key aspects of FINMA's bankruptcy proceedings against FlowBank.
What led to the collapse of FlowBank?
The downfall of FlowBank can be traced back to significant regulatory violations and financial mismanagement. According to FINMA, FlowBank repeatedly failed to comply with essential regulatory requirements, particularly in areas of capital adequacy and risk management. The bank first came under scrutiny in October 2021 when FINMA identified major breaches of supervisory law, including failures to meet capital requirements and maintain a proper organizational structure.
Despite corrective measures and the oversight of an appointed auditor, FlowBank continued to violate regulations. By June 2023, a second enforcement proceeding revealed ongoing issues: the bank still failed to meet capital requirements, had inadequate financial reporting, and was poorly organized in several key areas. Additionally, FlowBank engaged in high-risk business activities without sufficient due diligence, further exacerbating its financial instability.
By March 2024, FINMA determined that FlowBank's financial condition had deteriorated significantly, leaving the bank unable to maintain the required minimum capital and facing potential insolvency. Consequently, FINMA revoked FlowBank's license and initiated bankruptcy proceedings to protect depositors, effectively bringing the bank's operations to an end.
FINMA's swift intervention in FlowBank has raised serious concerns about the communication and protection of client assets, particularly in relation to complex financial products like leveraged positions and cryptocurrency investments. The abrupt shutdown, combined with insufficient guidance from authorities, has left many clients uncertain about the security and status of their investments.
FlowBank's founder, Charles Henri Sabet, openly disagreed with FINMA's measures, describing the bank as innovative, profitable, and popular among its clients. Sabet argued that the bank could have been viable if FINMA had approved capital increases by shareholder decision. Although FlowBank has appealed the decision to the Federal Administrative Court, FINMA has implemented various preventive measures designed to protect against unauthorized asset withdrawals during the appeal process. These measures reflect the regulator's cautious approach in safeguarding the broader financial system while the legal proceedings unfold.
How are client deposits at FlowBank being handled?
Client deposits at FlowBank are being handled with the primary objective of protecting depositors. According to FINMA's official statement, during the bankruptcy proceedings, deposits up to CHF 100,000 are classified as “privileged deposits” and are given priority in the liquidation process. These deposits are expected to be fully repaid from the bank's available assets. FINMA has appointed a liquidator, Walder Wyss AG, to oversee the repayment process and ensure that clients receive their funds as quickly and securely as possible.
FlowBank's official communication reiterates that client deposits and securities held in custody accounts will be segregated from the bank's assets and returned to the clients. This means that these assets will not be used to cover the bank's liabilities, and clients can expect the return of their funds and investments, subject to the conditions set by the liquidator.
What is the process for FlowBank's bankruptcy proceedings?
The bankruptcy proceedings for FlowBank, initiated by FINMA, follow a structured and legally mandated process to protect depositors and ensure orderly liquidation. Here are the key steps involved:
- Appointment of Liquidators: Upon initiating bankruptcy proceedings, FINMA appointed Walder Wyss AG as the official liquidator. The liquidator is responsible for overseeing the entire process, including the distribution of assets and the resolution of claims.
- Account Reconfiguration: Client accounts at FlowBank are restructured into several sub-accounts to facilitate the liquidation process. These include a main cash account, a CFD gains account, and a securities account. This restructuring ensures that only secured deposits (up to CHF 100,000) are reimbursed initially.
- Notification and Information Dissemination: The liquidators regularly communicate with clients and stakeholders, informing them about the status of their accounts, the reimbursement process, and any legal obligations. This communication is crucial to prevent fraud and ensure that all parties are informed about the ongoing process.
- Reimbursement of Secured Deposits: One of the first actions taken by the liquidators is the reimbursement of secured deposits, up to CHF 100,000 per client. This step is prioritized to protect depositors and is carried out through the reactivated e-banking platform of FlowBank.
- Asset Liquidation and Claim Resolution: The liquidators will proceed with the sale of the bank's assets and the resolution of all outstanding claims. This includes the termination of all contracts and the settlement of any legal disputes. Stakeholders are advised to await further instructions from the liquidators on how to proceed.
- Finalization and Closure: After all assets are liquidated and claims resolved, the liquidation process will be finalized. This includes a final accounting of the proceedings and the distribution of any remaining funds to creditors and stakeholders.
Key Lessons from the FlowBank Case
The FlowBank case provides important insights for financial institutions, particularly in the fintech and neo-banking sectors:
✓ Regulatory Compliance: Persistent non-compliance with capital adequacy requirements and risk management deficiencies led to FlowBank's downfall. Ensuring compliance is critical to avoid similar outcomes.
✓ Transparency and Accurate Reporting: Incomplete and inaccurate financial reporting contributed to FlowBank's financial troubles. Transparency and accuracy are essential for maintaining trust and stability.
✓ Effective Risk Management: FlowBank's engagement in high-risk activities without addressing organizational deficiencies increased its vulnerability. Proper risk management is crucial to prevent exposure to potential risks.
✓ Sustainable Growth: FlowBank's rapid growth, driven by innovation and digitalization, was undermined by its failure to adhere to established banking practices. Sustainable growth that balances innovation with compliance is essential for long-term success.
✓ Consequences of Regulatory Non-Compliance: While FINMA's decision may be seen as disproportionate and harsh, it highlights the serious consequences of failing to meet regulatory obligations and may even be a new trend.
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