Switzerland traditionally has a strong banking sector, so it’s not surprising for the country trying to establish itself as a leading FinTech hub. Somewhat in need of diversification following the increasing pressure on its private banking activities with the de facto end of the famous Swiss bank secrecy as well as the increased competition from other financial markets like Singapore, FinTech is seen by some as the silver bullet.
It’s therefore somewhat astonishing that Switzerland seems to have appeared a little late to the party, but if recent studies are to be believed it is catching up quickly.
In itself a market probably too small to be competitive given its limited numbers of potential users, FinTech firms need to position themselves internationally. Hence it is important to be competitive from a regulatory perspective as well and the Swiss regulator seems to be at least cognisant that much needs to be done on that front, too. FINMA, the Swiss Financial Market Supervisory Authority has recently published a new circular aiming to remove obstacles (see post) and its head, Mark Branson, pleaded that regulation in Switzerland currently is not fit for FinTech and that it needs a political determination to change the framework for the sector. The legislator is currently in discussions regarding how potential amendments such as a light version of the banking licence or a sandbox for startups.
Let’s have a look at the current regulatory framework though:
Before launching operations, FinTech companies must establish whether they are subject to anti-money laundering and authorisation requirements. According to FINMA rules, a firm is most likely subject to the Anti-Money Laundering Act if
- client assets are paid into the firm’s accounts;
- payment transactions, currency exchange, fiduciary services, asset management lending and leasing, and issuing payment instruments are part of a firm’s business model.
With regard to client onboarding, FINMA has recently introduced new rules that allow for the establishment of business relationships (onboarding) via digital channels. Subject to compliance with certain requirements, financial intermediaries can onboard clients by means of video transmission, putting this form of identification on a par with in-person identification. As other forms of online identification, apart from video identification, are also permitted, the circular covers a range of methods of onboarding via digital channels.
Accepting assets or providing assistance in the investment and transfer of assets are subject to the rules set out in the Anti-Money Laundering Act. This includes credit and leasing transactions, asset management, fiduciary activities, payment service providers and money exchangers. Trading with digital currencies (Bitcoin, etc.) and operating a payment system fall under the Anti-Money Laundering Act (AMLA). If a firm’s business subject to the AMLA, it must either become a member of a self-regulatory organisation (SRO) or be supervised directly by FINMA. FINMA has provided additional information regarding due diligence requirements in the fact sheet “Combating money laundering: financial intermediaries must comply with due diligence requirements”.
As mentioned above, FINMA supports the introduction of a new licensing category for financial innovators and a licence exempt area (sandbox). This licensing category would be for business models which carry out some banking activities, but with limited acceptance of client assets and no lending activity. Because the risks are lower and the scope of business limited, the licensing requirements would be less extensive than for a banking licence. For example, financial services providers who do not accept more than CHF 50 million in deposits could apply for this type of financial innovators’ licence provided they hold 5% of the deposits and at least CHF 300,000 capital as collateral. The issuance of such licences would lower the entry threshold for providers of payment systems, applications for managing assets digitally and crowdfunding platforms. A fully licence-exempt environment would be conceivable, particularly for start-up companies, up to a deposit threshold of CHF 200,000 and irrespective of the number of depositors. FINMA is currently discussing a range of ideas with the banking sector and the competent authorities.
For the time being though, if a firm intends entering the financial market, the financial services the firm wishes to provide may require FINMA authorisation. Individuals and legal entities must apply to FINMA to obtain authorisation for certain activities and, in some cases, for specific products. In addition to other institutions, FINMA authorises and supervises banks, securities dealers, insurances, fund management companies, collective investment schemes, exchanges and multilateral trading systems. At its dedicated FinTech area (see link), FINMA has provided a checklist regarding the different kinds of authorisations for traditional activities into which FinTech activities could fall as well as further information in respect of authorisation for service providers.
Clearly, it is a time of transition for Swiss FinTech regulation, too, and changes will be made whether in the proposed form or not, but with its rich history in financial services, Switzerland shouldn’t be underestimated when it comes to the digitalisation of the banking sector.