The Swiss Federal Council and the Economic Affairs and Taxation Committee EATC of the Council of States decided a few days ago to take actions to reduce market entry barriers for unconventional financial service businesses (e.g. fintech firms). The decisions taken have been based upon different legislative procedures but with a common purpose: reduction of regulatory requirements for innovative applications beyond conventional banking services.

Federal Council’s initiative to reduce market entrance barriers

According to the current law, business activities with the sole purpose of settling clients' transactions are not considered deposits and thus do not require a banking license (Art. 5 para. 3 letter c Banking Ordinance). However, in practice, the exemption only applies if the timeframe of the credit balance is limited to seven days. Therefore, the Federal Council is proposing an amendment of the Banking Ordinance and an extension of the timeframe to 60 days. Spontaneous crowdfunding projects with a project period of less than two months would therefore be exempt from a burdensome and costly banking license and financial supervision.

Furthermore, the Council is of the opinion that limiting the number of clients to 20 depositors for authorisation-exempt institutions does not take into consideration the business model of the fintech industry. In the future, an unlimited number of clients could be accepted as long as the overall deposits do not exceed CHF 1 million.

For all other cases, the Council proposes the introduction of a "banking license light" for financial institutions offering non-conventional banking products/services. Such a “banking license light” would be available for entrepreneurs not involved in the conventional lending business and with no maturity transformation. Public deposits accepted may not exceed the threshold of CHF 100 million, unless individual clients are protected by a special guarantee and the case is approved by FINMA. Deposits may not be invested or interest-bearing. Minimum capital requirements for such a “banking license light” should be 5% of the accepted deposits with a minimum of CHF 300’000.

The Federal Council is preparing legislative amendments, where necessary, and will prepare a consultation draft by January 2017.

Legislative initiatives of the Swiss Council of States

The EATC of the Council of States has published its proposal for debate at the plenary session of the Council of States beginning on the 28 November. The EATC does not mention the “banking license light”, rather it proposes a new definition of the scope of the Banking Act (Art. 1a). According to the proposed draft legislative text, “banks” are defined as those companies mainly active in the financial sector and accepting public deposits (or recommend publicly themselves the acceptance of deposits) of more than CHF 100 million (para. 1 letter a) or of less than CHF 100 million if the money is invested or interests are paid (para. 1 letter abis). For businesses, where public deposits accepted are below CHF 100 million and the funds are neither invested nor interest-bearing, the Banking Act only applies in analogy (Art. 1abis draft Banking Act, so-called “promotion of innovation” clause). Businesses falling under this specific clause must only meet the accounting standards according to the Swiss Code of Obligations, their financial statements (consolidated financial statements if applicable) are audited according the Swiss Code of Obligations and the depository protection provisions (Art. 37a and 37b Banking Act) do not apply.

Art. 1abis para. 4 letter a of the draft Banking Act provides FINMA with the delegated power to apply Art. 1abis of the draft Banking Act for specific businesses accepting public deposits of more than CHF 100 million if these funds are not invested and not interest-bearing and if specific client protection precautions have been taken.

Finally, EATC allows FINMA to provide a license and to apply the provisions according to Art. 1abis of the draft Banking Act on request. This voluntary license and supervision applies to businesses mainly active in the financial sector but not accepting public deposits. This option may be useful for innovative (e.g. fintech) firms having to meet the “equivalent standards” requested by foreign jurisdictions and/or to strengthen their reputation in a competitive environment.

Conclusion

The Federal Council’s proposal and the legislative initiative of the EATC of the Council of States provide a wide range of alternatives to reduce market entrance barriers for unconventional financial institutions. There is a consensus between the political bodies that the purpose of the new requirements is to strike a balance between the Swiss government’s intention to attract new, unconventional businesses for Switzerland’s financial place and the need to protect clients and client’s deposits. However, Parliament and Federal Council should coordinate their plans and act quickly so that the Swiss financial market remains ahead in a very competitive environment.

Sven Probst - Financial Services and Banking Lead Partner

Sven leads the Financial Services and Banking practice in Switzerland. Having started his career as a banker, he has been providing external advice and assurance services to the industry for over 20 years. Sven has a broad range of experience and expertise covering governance and control, regulatory challenges, investigations, payments and sanctions, project management, IT and Cyber risk. In his previous life he has also been the CEO of an IT services provider.

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Marc Raggenbass - Regulatory, Compliance & Legal 

Marc an Attorney-at-Law with a Master Degree (LL.M.) in international business law. He has more than 15 years of experience advising Swiss and international financial services firms in regulatory, compliance and legal matters (e.g. outsourcing, corporate governance, compliance-organisation, cross-border topics).

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