On 15 June 2018 the Swiss Parliament enacted the Federal Act on Financial Institutions. The act will have a significant impact on Swiss trustees and foreign trustees active in Switzerland, as it obliges them to obtain a licence to carry out their activities. The act will enter into force on 1 January 2020.
In November 2015 the Federal Council published a first draft of the Federal Act on Financial Institutions in response to the 2008 financial crisis and to align Switzerland's financial services regulatory framework with international standards.
The act will fundamentally overhaul the existing financial services regulatory framework and create a new supervisory regime governing all financial institutions. In particular, it provides for new supervision over independent asset managers and trustees.
Under the current regime, trustees (as financial intermediaries) are supervised only in relation to compliance with anti-money laundering obligations. The Anti-money Laundering Act obliges (for example) financial intermediaries – including trustees – to affiliate with a recognised self-regulatory organisation (SRO) or submit to the direct supervision of the Financial Market Supervisory Authority (FINMA), which oversees trustees' compliance with anti-money laundering obligations. Apart from such affiliation or submission, at present, no authorisation requirements apply to trustees.
Once the new Federal Act on Financial Institutions enters into force, Swiss trustees and foreign trustees active in Switzerland must obtain FINMA authorisation to carry out their activities. The act introduces a 'split supervision' for trustees, exercised by FINMA and one or several supervisory organisations.
Under the new regime, FINMA will be in charge of granting trustee licences and will also be empowered to:
- issue penalties during enforcement proceedings; and
- terminate licences.
However, FINMA will not be responsible for the day-to-day supervision of regulated trustees – this will be entrusted to FINMA-authorised supervisory organisations. There will likely be several authorised supervisory organisations because some of the existing SROs will apply for such status in order to supervise any trustees that are currently affiliated to them.
The act denies trustees the possibility of being directly supervised by FINMA; such supervision will always be conducted by a supervisory organisation. Under the new regime, FINMA will also cease its direct supervision of financial intermediaries to regulate compliance with the anti-money laundering rules.
The Federal Act on Financial Institutions defines a 'trustee' as:
a person who on a professional basis manages or disposes of a separate fund for the benefit of a beneficiary or for a specified purpose based on an instrument creating a trust within the meaning of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition.
The 'professional basis' criterion will be defined in more detail in the implementing ordinance, which is likely to be issued for consultation in October 2018. However, it is expected that the legislature will opt for the existing test in order to assess whether a financial intermediary is subject to the Anti-money Laundering Act. If so, it would imply that a trustee acts on a professional basis if it:
- has a turnover exceeding Sfr50,000 per year;
- has business relationships with more than 20 co-contracting parties;
- has the power to dispose of third-party assets exceeding Sfr5 million; or
- executes transactions with a total volume of over Sfr2 million per year.
Exemptions The Federal Act on Financial Institutions contains some exemptions. One exemption provides that trustees that exclusively hold or manage the assets of persons with whom they have family ties are not subject to the new law. This exemption covers single-family offices, but not multiple-family offices. The implementing ordinance will provide further guidance on the exact scope of this exemption.
The act sets out the following requirements which Swiss trustees must meet in order to obtain a licence from FINMA:
- The management of Swiss trustees must effectively take place in Switzerland.
- Swiss trustees must take the form of:
- a sole proprietorship;
- a Swiss commercial enterprise (eg, a company limited by shares or a limited liability company); or
- a Swiss cooperative.
- Swiss trustees must comply with the minimum capital requirement of Sfr100,000.
- Trustees should maintain adequate collateral or professional liability insurance.
- Trustees must always have funds available equal to one quarter of the fixed annual costs.
- Trustees must implement appropriate risk management and internal control mechanisms.
- Trustees must comply with the proper business conduct requirement at all times – this applies not only to the trustee, but also to its directors, managers and qualified participants.
- At least two of the trustee's directors or managers should be qualified and experienced. The implementing ordinance is expected to specify when a person is deemed 'qualified and experienced'.
- Trustees should establish appropriate corporate governance rules and maintain an organisation that can fulfil its statutory duties.
Foreign trustees Foreign trustees which are active in Switzerland may, under certain circumstances, also fall within the scope of the Federal Act on Financial Institutions.
A foreign trustee could (for example) establish or be deemed to have established a branch in Switzerland. A 'branch' is a local office that conducts business activities, which from an economic point of view are independent from the parent entity, but are not legally separated from its parent and therefore does not have separate legal personality.
In connection to a trustee, the presence of a branch is established if persons are employed on a permanent and professional basis and such persons:
- carry out the activity of a trustee;
- conclude transactions; or
- manage client accounts in or from Switzerland in the name of a foreign trustee.
If a foreign trustee wishes to establish a Swiss branch office, it must obtain prior authorisation from FINMA. FINMA will only grant such authorisation if the applicant can demonstrate that it:
- is properly organised to operate its business;
- has sufficient financial resources; and
- has personnel who are qualified to operate a branch office in Switzerland.
The foreign trustee must also demonstrate that it is subject to appropriate supervision in its home jurisdiction and that this supervisor does not object to the establishment of the branch office.
The foreign supervisory authority must immediately notify FINMA of any material changes to the foreign trustee's situation and provide it with administrative assistance.
In addition, the branch office must also:
- comply with the 'proper business conduct' requirement set out in the Federal Act on Financial Institutions; and
- establish and implement appropriate corporate governance rules.
Finally, the granting of an authorisation to a foreign trustee to establish a Swiss branch may be contingent on a guarantee from the jurisdictions in which the foreign trustee or the foreigners holding a qualified participation in such foreign trustee have their seat or residence.
The Federal Department of Finance is currently finalising the draft of the Federal Act on Financial Institutions implementing ordinance, which will add further details to this new legislation. A draft of the ordinance is scheduled for release in October 2018.
The act will likely enter into force on 1 January 2020. Active trustees at the time that the new law enters into force should notify FINMA of their activities as trustees within six months. They should further start complying with the act's requirements and apply for authorisation from FINMA within three years. During such period, they can continue to exercise their trustee activities, provided that they are affiliated with an SRO for anti-money laundering purposes. For trustees that commence business on or after 1 January 2019, slightly different transition rules will apply.
Trustees that start their activities after the act enters into force should immediately comply with its rules, affiliate to a supervisory organisation and obtain a licence from FINMA before commencing business.
Swiss trustees and foreign trustees active in Switzerland would be well advised to begin assessing the steps that they will need to take in order to bring their organisation into line with the new Swiss trustee licensing requirement.
For more information please contact Leonard Vijverberg or Mark Barmes at Lenz & Staehelin by telephone (+41 58 450 70 00) or email ([email protected] or [email protected]). The Lenz & Staehelin website can be accessed at www.lenzstaehelin.com.
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