Patrick Hünerwadel, Shelby R du Pasquier, Alexandre Richa and Cristina Theus Sigismondi

Transcription

1 Patrick Hünerwadel, Shelby R du Pasquier, Alexandre Richa and Cristina Theus Sigismondi Regulatory framework 1 What are the principal governmental and regulatory policies that govern the banking sector? The Swiss banking sector is subject to official supervision. From a Swiss perspective, a banking activity means the taking of deposits from the public (or by way of refinancing from other banks) for the purpose of financing a large number of persons or entities. Banking activities may only be conducted in or from if the relevant entity has been granted a licence by the Federal Financial Market Supervisory Authority (FINMA) (formerly the Federal Banking Commission see question 8). The FINMA grants the licence to the legal entity pursuing the banking activities (and not to the managers or to the shareholders thereof). The various criteria to be complied with in order to obtain a licence are set out in the Federal Banking Act. Inter alia, the applicant must establish that the persons entrusted with its management enjoy a good reputation and thereby assure the proper conduct of business operations (ie, guarantee of irreproachable activity). If, at a later stage, any of the licence requirements is no longer fulfilled, the FINMA may take administrative measures, including, in extreme cases, the withdrawal of the banking licence. One of the most highly publicised aspects of Swiss banking regulations is the Swiss banking secrecy. Disclosure of information pertaining to the client bank relationship is prohibited under the Federal Banking Act. Banking secrecy rules encompass all data that pertain to the contractual relationship between the bank and its clients. Disclosure means communication to any third party, including the parent company of the bank as well as the supervisory authority of this parent company or any other company of the relevant group of companies. As a matter of principle, any disclosure amounts to a breach of banking secrecy and may trigger administrative and criminal sanctions, as well as civil liability, for the concerned bank. Exceptions apply under certain situations, for instance in the context of the consolidated supervision over an international banking group or pursuant to a formal request emanating from Swiss public authorities (acting, as the case may be, following a request for international judicial or administrative assistance emanating from a non-swiss public authority see question 6). 2 Please summarise the primary statutes and regulations that govern the banking industry. The Federal Banking Act is the main statute governing the conduct of banking activities in or from. The provisions of the Federal Banking Act have been detailed in several implementing ordinances issued by the Swiss government (the Swiss Federal Council) and by the FINMA. Furthermore, the FINMA issued a series of circulars setting out its interpretation of the regulatory framework. In addition to being licensed as banks, most Swiss financial institutions need a licence as a securities dealer. A securities dealing activity is governed by the Swiss Federal Act on Stock Exchanges and Securities Trading and its implementing ordinances. From a Swiss perspective, securities dealing refers to five broad categories of activities, namely: issuing houses; derivative suppliers; market makers; brokers operating on a short-term basis for their own accounts; and brokers acting in a professional manner for the account of their clients. Swiss banks also qualify as financial intermediaries within the meaning of the Swiss anti-money laundering legal framework and, as such, fall within the ambit of the Federal Anti-Money Laundering Act and its implementing ordinances. A Swiss bank may also serve as custodian for collective investment schemes. This type of activity is subject to the Collective Investment Scheme Act and its implementing ordinances. Finally, the Swiss banking supervision system allows for the delegation of certain duties to self-regulating organisations. The Swiss Bankers Association and the Swiss Funds Association regularly issue self-regulatory guidelines to their members, which the FINMA recognises as minimum standards that need to be complied with by all Swiss banks. This is true in particular as regards the duty of due diligence in identifying the contracting party and the beneficial owner (Agreement on the Swiss Banks Code of Conduct with regard to the Exercise of Due Diligence), the rules of conduct for securities dealing and the guidelines governing portfolio management. 3 Which regulatory authorities are primarily responsible for overseeing banks? The FINMA is the supervisory authority in charge of supervising in particular, banks, securities dealers, collective investment schemes, insurance companies, as well as other financial intermediaries for anti-money laundering purposes. 4 Describe the extent to which deposits are insured by the government. As a general rule, deposits with Swiss banks are not insured by any public authority in. Special rules apply to cantonal banks, namely, banks that are controlled by a Swiss canton (at least one-third of the capital and voting rights must be held by a Swiss canton in order for the bank to be characterised as cantonal ). The relevant cantonal legislation will specify to what extent the liabilities incurred by such cantonal bank are secured by the concerned canton. In addition, the Federal Banking Act provides for a privileged deposit system, which was revised in December 2008 in reaction to the financial crisis. Small cash deposits, up to an amount determined by the FINMA on a case-by-case basis, are paid out as soon as possible to each depositor following the bankruptcy of a Swiss bank, 131

2 and are not subject to the standard liquidation procedure set forth in the Federal Banking Act and the Federal Debt Enforcement and Bankruptcy Act. In addition, Swiss banks are under an obligation to participate in a deposit securing system whose aim is to secure the payment of cash deposits up to 100,000 Swiss francs. Such deposits also rank in a privileged class in the bankruptcy estate of a Swiss bank. The deposit securing system is limited to a maximum aggregate amount of 6 billion Swiss francs (4 billion Swiss francs before 20 December 2008). Finally, banks are now required to secure preferential deposits by claims against third parties secured in or by assets in for a total amount corresponding to at least 125 per cent of the preferential deposits they hold. The FINMA may increase this amount, or grant derogations. 5 Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an affiliate for this purpose? Swiss banking law does not provide for limitations that expressly apply to transactions between a bank and its affiliates. It is however worth noting that a financial group or conglomerate which comprises a Swiss bank or securities dealer or which is in fact managed from, may be subject to the consolidated supervision of the FINMA. In this context, intra-group positions of a Swiss bank may, under circumstances fall within the aggregate limit imposed on single risk positions for diversification purposes. Under banking law, entities are considered as affiliate(s) if they are linked through a controlling relationship (ie directly or indirectly held with more than 50 per cent of the voting rights or share capital or dominated in any other manner) or by a factual or legal obligation to assist. 6 What are the principal regulatory challenges facing the banking industry? In our view, the principal regulatory challenges facing the Swiss banking industry may be summarised as follows: Banking secrecy: on 13 March 2009, the Swiss Federal Council announced that would adopt the OECD standard on administrative assistance in tax matters in accordance with article 26 of the OECD Model Tax Convention. This amendment would in turn allow the lifting of Swiss banking secrecy in situations where suspicions of tax offenses exist. This will now need to be implemented through the renegotiation of the network of double taxation agreements to which is a party. This is likely to take several years. As a result, the distinction between tax fraud and tax evasion will no longer be relevant in the context of international assistance. Capital adequacy ratio: the two large Swiss banks (Credit Suisse and UBS) are to comply with new capital adequacy ratios in a range between 50 per cent and 100 per cent above Basel II minimum requirements by In addition, these two banks will have to comply with a leverage ratio (ie, a nominal cap on debt levels regardless of the risk involved) set at a minimum of 3 per cent at group level and at 4 per cent for the individual institutions. Insider trading and implementation of the latest recommendations of the Financial Action Task Force (FATF): an expert commission on market abuses commissioned by the Federal Finance Department proposed on 29 January 2009 to include insider trading with illicit profit exceeding 100,000 Swiss francs on the list of relevant crimes for money laundering purposes. This may have a material impact on the Swiss banking industry. It is also proposed to extend the scope of insider trading behaviours prohibited by the Swiss criminal code. Compensation schemes: the FINMA is expected to propose new rules regarding compensation schemes in the banking sector by mid Other changes are likely to happen for various matters such as securities lending. 7 How have the regulatory authorities responded to the current state of crisis in the banking industry? What approaches, if any, have they taken to restore confidence in the banking system (eg, nationalisation, capital injections, etc)? The following measures have been taken to tackle the current crisis: strengthening of the deposit protection system (see question 4); increase of the capital adequacy targets and new leverage ratio for large banks (see question 6); capital injection in UBS through the subscription by the Swiss Confederation of a compulsory convertible bond for 6 billion Swiss francs; setting up of a special purpose vehicle, essentially financed by the Swiss National Bank, to purchase up to US$60 billion of illiquid assets from UBS; UBS overhaul, further to FINMA s request, of its compensation scheme, including a bonus or malus system. It should be further noted that the FINMA is working on a circular dealing with compensation schemes of banks. Also, the Swiss federal government is working on draft modifications of the Swiss Code of Obligations on these topics. A parliament vote could take place by mid 2010; FINMA s order to UBS to transmit US clients data to US authorities in view of the systemic risk which would have been caused by US sanctions on UBS. 8 In what ways do you anticipate the legal and regulatory policy changing over the next few years? Since 1 January 2009, the FINMA has replaced the Federal Banking Commission, the Federal Office of Private Insurance and the Anti-Money Laundering Control Authority. This should result in a harmonisation of the supervisory framework applicable to all the financial intermediaries that will be subject to the Federal Financial Market Supervisory Authority. Otherwise, see question 6. Supervision 9 How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they? Swiss banking supervision is based on a division of tasks between the FINMA and the banks external auditors. Pursuant to this two-tier supervision system, the auditors conduct on-site audits while the FINMA retains responsibility for overall supervision and enforcement measures. To a certain extent, the auditors act as an extension (long-arm) of the FINMA, exercising direct supervision through regular audit checks. In addition to examining the annual financial statements with an independent valuation of assets and liabilities, the auditors also review whether the banks comply with their articles of association and their organisational rules, as well as with the provisions of Swiss banking law, the circulars issued by the FINMA and any applicable self-regulatory provisions. External auditors must annually prepare so-called long-form reports addressed to the members of the board of directors of the concerned bank and to the FINMA. These reports provide a compre- 132 Getting the Deal Through Banking Regulation 2009

3 hensive overview of the business activities and the internal organisation of the relevant bank. The purpose of these reports is to allow the FINMA to ensure that the financial institution complies with the regulatory requirements and that the individuals entrusted with its management enjoy a good reputation and thereby assure the proper conduct of the business operations (ie, guarantee of irreproachable activity). These audit reports are the main informational tools through which the FINMA exercises its supervision. In addition to the long-form reports, the auditors are obliged to inform the FINMA if they suspect any breach of the law or uncover other serious irregularities. The FINMA then initiates investigations and takes other measures necessary to ensure compliance with the legal framework and to eliminate irregularities. A special supervisory regime has been put in place for the two major Swiss banks, namely UBS and Credit Suisse, given the systemic risk caused by the size of these institutions. In short, the FINMA does not rely exclusively on the reports received from the auditors but carries out its own investigations. 10 How do the regulatory authorities enforce banking laws and regulations? The enforcement of Swiss banking laws and regulations is closely linked to the obligation for Swiss banks to ensure at all times compliance with the requirements for a banking licence (continuing compliance with the conditions of a banking licence). If, at any time after the granting of the licence, any of the licence requirements is no longer fulfilled, the FINMA may take administrative measures aimed at ensuring that the breach be remedied. The FINMA may also appoint an investigator in order to clarify the factual situation and to facilitate the implementation of the measures being imposed by the authority. Should the breach of the legal and regulatory framework be characterised as serious, the FINMA could ultimately decide to withdraw the banking licence, something that would trigger the forced liquidation of the bank. 11 Would you describe the regulatory regime as more principles-based or rules-based? In our view, the Swiss regulatory regime applicable to banks is rulebased, although certain important principles must be adhered to (eg, the guarantee of an irreproachable activity that is to be fulfilled by the persons entrusted with the management of a Swiss bank). As indicated in question 2, the legal framework is composed, inter alia, of the Federal Banking Act, its implementing ordinances, the circulars issued by the FINMA and the applicable self-regulatory texts. 12 What are the most common enforcement issues and how have they been addressed by both the regulators and the banks? In our view, the most common enforcement issues encountered in the practice of the FINMA may be summarised as follows: the forced liquidation of unauthorised securities dealers (by contrast, the forced liquidation of unauthorised entities pursuing banking activities is rather rare); the insolvency procedures and protective measures related to authorised and unauthorised entities, such as Kaupthing Bank Luxembourg SA, Geneva Branch, Lehman Brothers Finance AG or ACH Securities SA; the issues related to the compliance with the know-yourcustomer rules anchored in the Federal Anti-Money Laundering Act and the agreement on the Swiss banks code of conduct with regard to the exercise of due diligence (see question 2); and the ongoing supervision of licensed entities (especially banks and securities dealers), in particular in order to ensure that the persons entrusted with the management of these entities fulfil on an ongoing basis the guarantee of an irreproachable activity. In particular, we note that UBS has been subject to investigations and close monitoring by the FINMA. 13 How has bank supervision changed in response to the current crisis? In addition to the regulatory changes which have been outlined in question 7, we note that the FINMA has been generally more active and interventionist than was previously the case with the two large Swiss banks (in particular with UBS). However, the bank supervisory framework has not materially changed subject to the amendments already described. Capital requirements 14 Please describe the legal and regulatory capital adequacy requirements for banks. The granting of a banking licence is subject to a minimum equity requirement. The fully paid-up share capital of a Swiss bank must amount to a minimum of 10 million Swiss francs. In practice, the FINMA determines in each case the appropriate level of capital with regards to the scope of the contemplated activities. These capital adequacy rules are based on the Basel II principles. The FINMA agreed with the two large Swiss banks, UBS and Credit Suisse, a new capital adequacy regime in order to increase the banks strength for potential future crisis (see question 6). 15 How are the capital adequacy guidelines enforced? The enforcement of the capital adequacy requirements is part of the ongoing supervision process aimed at ensuring that the requirements of the banking licence are met. The compliance with the capital adequacy requirement is one of the topics addressed in the long-form reports issued by the bank s external auditors on a yearly basis (see question 9). 16 What happens in the event that a bank becomes undercapitalised? The FINMA benefits from an exclusive competence to intervene in the event of a bank s under-capitalisation. Upon the occurrence of a risk of undercapitalisation or insolvency, the FINMA can take various protective measures, such as a moratorium of claims. Further, in case of need, the FINMA may appoint a trustee in charge of the bank s reorganisation. The latter is then to propose to the FINMA a reorganisation plan with the purpose of protecting the bank s creditors. Such a scheme generally aims at recapitalising the bank, for example, through a conversion of debt into equity. As the case may be, the FINMA is also authorised to liquidate insolvent banks, in particular in the event no reorganisation is possible. 17 What are the legal and regulatory processes in the event that a bank becomes insolvent? The FINMA benefits from the power to intervene in the event a bank becomes insolvent. Please see question 16 for the intervention tools that are available to the FINMA

4 18 Are capital adequacy guidelines expected to change in light of the current state of the banking industry? Other than the new capital adequacy regime imposed on the two large Swiss banks, UBS and Credit Suisse, which must be implemented by 2013 (see question 6), there are currently no further envisaged changes publicly known. With regards to the small- and mediumsized banks the FINMA seems to take an individual approach for each of these banks. Ownership restrictions and implications 19 Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes control for this purpose? For purposes of the Federal Banking Act, a participation is deemed to be qualified if it amounts to at least 10 per cent of the capital or voting rights of the bank or if the holder of the participation is otherwise in a position to significantly influence the business activities of the bank (a qualified participation ). It should be noted that, in practice, the FINMA often requires disclosure of participations of 5 per cent and more for its assessment whether the requirements of a banking licence are continuously met. The Federal Banking Act does not set any restrictions on the type of entities or individuals holding a controlling interest in a bank. However, one of the general conditions for a bank to obtain a licence is that individuals or legal entities that hold directly or indirectly a qualified participation in a bank must ensure that their influence will not have any negative impact on the prudent and reliable business activities of the bank. Thus, the bank s shareholders and their activities may be of relevance for the grant and the maintenance of a banking licence. Examples of circumstances where shareholders with a qualified participation may have a negative influence on the bank are a lack of transparency, unclear organisation or financial difficulties of financial conglomerates as well as an influence of a criminal organisation on the shareholder. Should the FINMA take the view that the conditions for the banking licence are no longer met due to a shareholder with a qualified participation it may suspend the voting rights in relation to such qualified participation or, if appropriate and only as a last measure, withdraw the existing licence of a bank which would set the bank into liquidation. 20 Are there any restrictions on foreign ownership of banks? If foreigners with qualified participations hold directly or indirectly more than half of the voting rights of, or have otherwise a controlling influence on, a bank incorporated under the laws of, the granting of the banking licence is subject to additional requirements. In particular, the corporate name of a foreign-controlled Swiss bank must not indicate or suggest that the bank is controlled by Swiss individuals or entities and the countries where the owners of a qualified participation in a bank have their registered office or their domicile must grant reciprocity, that is: Swiss residents and Swiss entities must have the possibility to operate a bank in the respective country; and such banks operated by Swiss residents are not subject to more restrictive provisions compared to foreign banks in. The reciprocity requirement is subject to any obligations to the contrary in governmental treaties and it is, thus, in particular not applicable to the member states of the World Trade Organization. Furthermore, the FINMA may request that the bank is subject to adequate consolidated supervision by a foreign supervisory authority in case the bank forms part of a group active in the field of finance. Update and trends As in many other countries, the current crisis of the world s financial sector brought up extensively discussed topics, such as the governmental influence on and support of financial institutions as well as the positive or negative effects of a high density of regulations for certain sectors. In addition, Swiss banking secrecy and the pressure applied by foreign countries to led to extensive discussions within and outside. If a bank incorporated under the laws of becomes foreign controlled as described above or if in case of a foreign controlled bank the foreign holders of a direct or indirect qualified participation in the Swiss bank change, a new special licence for foreign controlled banks must be obtained prior to such event. A foreigner for the purposes of the Federal Banking Act is: (i) an individual who is not a Swiss citizen and has no permanent residence permit for ; or (ii) a legal entity or partnership that has its registered office outside or, if it has its registered office within, is controlled by individuals as defined in (i) above. 21 What are the legal and regulatory implications for entities that control banks? There are no restrictions as to the business activities of the entities holding qualified participations in a bank as long as the conditions for the granting and maintenance of the licence (see question 19) are complied with. Generally, transactions between the (controlling) shareholders of a bank and the bank itself may be subject to specific requirements, for example, the granting of loans to significant shareholders must be in compliance with generally recognised principles of the banking industry. 22 What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank? Each controlling shareholder has the duty to notify the acquisition or disposal of a qualified participation as well as the attainment, exceeding or falling below certain thresholds (see question 27). Further, as mentioned above, the holder of a qualified participation must not negatively influence the prudent and reliable business activities of the bank, otherwise the bank may lose its licence. In cases where justified concerns are held that a bank is overindebted, no longer complies with the capital adequacy rules or has serious liquidity problems, the FINMA may order certain protective measures and the establishment of a recapitalisation plan. Under the recapitalisation plan the rights of creditors as well as shareholders may be impaired (see also questions 16 and 17). 23 What are the implications for a controlling entity or individual in the event that a bank becomes insolvent? There are no specific implications for a controlling shareholder of a bank if the bank becomes insolvent, other than those described in questions 16, 17 and Getting the Deal Through Banking Regulation 2009

5 Changes in control 24 Describe the regulatory approvals that would be required to acquire control of a bank, including how control is defined for this purpose. Even though the acquisition of a qualified participation in a bank by a Swiss individual or a Swiss entity triggers, in theory, only notification obligations (see question 27), it is necessary to seek a letter of no objection from the FINMA for the account of the bank, in advance of an envisaged transfer of a controlling stake in a Swiss bank since the FINMA controls the continuing compliance with the conditions of a banking licence. The FINMA will examine whether the influence of the new shareholder with a qualified participation would be detrimental to the prudent and reliable business activities of the bank. 25 How is the regulatory process different for a foreign acquirer? The notification requirements outlined in question 27 also apply to non-swiss acquirers. In addition, if a foreign individual or entity acquires a qualified participation in a Swiss bank, the bank must apply to the FINMA for a special licence, provided that foreigners with qualified participations hold directly or indirectly more than half of the votes of, or exercise otherwise a dominant influence on, the bank. For the conditions of the additional licence, see question What factors are considered by the relevant regulatory authorities in considering an acquisition of control of a bank? The FINMA generally considers whether the requirements for the banking licence are still met and, in particular, whether the new shareholders with a qualified participation will not negatively influence the bank s prudent and reliable business activities. Each individual or legal entity must notify the FINMA prior to acquiring or selling a direct or indirect qualified participation in a bank organised under the laws of. This notification duty also applies if a foreigner increases or reduces its qualified participation and thereby attains, falls below or exceeds 20, 33 or 50 per cent of the capital or voting rights in the bank. The notification must include a declaration whether the participation is held for the own account and whether any option or similar rights have been granted over the participation. The notification may be made with the forms available on the website of the FINMA. The bank itself is also required to notify the FINMA of any changes triggering the notification duty of the shareholders once it becomes aware of such change, in any case at least once a year. In case of a foreign controlled bank, prior to any change of a foreign holder of a qualified participation, the bank must apply with the FINMA for a special licence. In its application the bank has to demonstrate all the facts based on which the FINMA may assess whether the conditions for the special permit are fulfilled. As mentioned in question 24, it would be advisable that the bank contacts the FINMA prior to a change of a holder of a qualified participation even in case the bank is Swiss controlled. This would not need to be in the form of a formal application. 28 What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer? Generally, the timing of the approvals or statements by the FINMA largely depend on the workload of the FINMA. The process for a special banking licence in case of a foreign controlled bank may take easily three months. However, if the country of domicile or residence of the foreigner is not a member state of the World Trade Organization, the process may take much longer. The FINMA will have to assess whether such country grants the right of reciprocity. In case the acquirer is not a foreigner, there is no formal approval or licence required and, thus, a statement of the FINMA is available within a shorter time frame. 27 Describe the required filings for an acquisition of control of a bank. Patrick Hünerwadel Shelby R du Pasquier patrick.hunerwadel@lenzstaehelin.com shelby.dupasquier@lenzstaehelin.com Route de Chêne 30 Avenue du Tribunal-Fédéral Geneva Lausanne Tel: Tel: Fax: Fax: Bleicherweg Zurich Tel: Fax: