Switzerland assumes its responsibility for maintaining and supervising its own financial system in the context where there are many international initiatives that have helped to standardize its banking system activities. These international best practices and standards have been important for Switzerland because of the growing interdependence of the financial markets worldwide where Switzerland plays one of the leading roles.
From the international perspective, the first regulatory standardizing milestone was reached at the end of 1974 when the Basel Committee on Banking Supervision (BCBS) was established as the Committee on Banking Regulation and Supervision Practices settled by the central bank directors of the G10 countries in the aftermath of severe disruptions in the international currency and banking markets. The objective of the Basel Committee was therefore to formulate regulatory oversight standards linked to the best practices and to encourage member country authorities to adopt these common approaches and standards into their legislation. The Committee currently has about 30 working groups and technical task forces that meet regularly. Countries are represented by their central banks and by the official authorities responsible for the prudential supervision of the banking activities. What is important to underline is that it is also a committee of the Bank of International Settlements (BIS).
In the Risk Management framework, the Basel Committee has been responsible for the substantial outputs which are best known as the Basel Capital Accord published for the first time in 1988, which set down minimum capital standards for the banking industry. Known as Basel I, the 1988 accord was revised in 2007 by Basel II, which advanced the concept of the risk-based capital requirements implemented in Switzerland through the Capital Requirements Directive. Finally, following the Credit Crunch 2007-2009, Basel III introduced tighter reforms for the banking sector, with a specific focus on how banks should manage risks. This revised framework is known as Basel III and is being implemented by Swiss banking sector.
The second international standardizing milestone was reached in 1961 when the Organisation of Economic Cooperation and Development (OECD) emphasized the need to build strong economies for its member countries, to improve efficiency, to enhance market systems, to expand free trade and to contribute to development in industrialized as well as developing countries. The OECD has been moving beyond a focus on its own countries and has been setting its analytical sights on the global market economy. Its own focus is moving from consideration of each policy area within each member country to analysis of how various policy areas interact with each other and across countries.
The third international regulatory standardizing milestone was reached in 1983 with the establishment of the International Organisation of Securities Commission (IOSCO) with its members being international securities regulators. The organisation conducted much research and published high regulatory standards for supervisory bodies in the banking, insurance and securities sectors.
The fourth international regulatory standardizing milestone was reached in 1989 when the Financial Action Task Force on Money Laundering (FATF) became the authority responsible for international best practices to combat Money Laundering. Its role is to monitor the progress made by the member countries in the field of the implementation of Anti-Money laundering legislation, to study and review techniques against Money Laundering and its countermeasures, as well as to promote the adaptation of global measures to combat Money Laundering and to make recommendations on the best practices in this area. For example, the AML/CTF frameworks in Switzerland have been tightened in 2014. The Swiss Money Laundering Act is based on the Basel Committee’s “Core principles for effective Banking Supervision”. That has led to heavily increased reporting burdens and increased cost of bank’s capital and long-term funding (under Basel III issued by BCBS).
The fifth international regulatory standardizing milestone was reached in 2001 when the United States passed the Patriot Act. This act represented the unification and strengthening of America by providing the appropriate tools necessary to interfere and hinder terrorism. It was enacted shortly after the September 11, 2001 attacks in the United States and allowed various branches of the U.S. government to investigate and obstruct any person, group or idea that may support or advertise domestic or foreign terrorist activities. For example, after the attacks of 9/11, the Swiss Government obliged banks and non-banks financial intermediates to check their records and accounts against lists of persons and entities with links to terrorism, based on the “state security clause” of the state Constitution. Along US and EU lists, the Swiss Economic and Finance Ministries have drawn up their own lists.
The sixth international regulatory standardizing milestone was reached in 2001-2002 when false accounting, fraud and weak control systems, particularly in the field of corporate governance, contributed to the collapse of Enron, one of the largest US companies, and the near collapse of Worldcom. This has led to major regulatory reforms; particularly, the U.S. government passed the Sarbanes-Oxley Act (SOX), which aimed to protect investors by improving the accuracy and reliability of information provided by companies under U.S. securities laws increasing corporate and individual accountability to ensure the accuracy of financial information. For example, current regulatory environment in Switzerland has been characterized by a variety of legal developments, in particular related to tax matters. In 2014, Switzerland signed the FATCA agreement with the United States in order to disclose account details to US tax authorities. In this context, the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOI-Act) entered in force in 2017. Furthermore, Switzerland implemented revised recommendation of the Financial Action Task Force (FATF) and the Global Forum of Transparency and Exchange of Information for Tax Purposes (GlobalForum).
The seventh international regulatory standardizing milestone was reached with EU Directives, while there are many directives that could be noted here, some of the most significant are the following:
- The Market Abuse Directive which aims at harmonizing rules against market manipulation practices;
- the Markets in the Financial Instruments Directive (MiFID and MiFID II) has expanded the scope of cross-border trading activities in relation to conduct of business, internal organisation and and, in market, pre-and post-trade transparency.
For example, after the Credit Crunch 2007-2009, Switzerland launched reforms related to the financial regulation. These reforms had two objectives: firstly, to ensure the stability of the financial system in line with recommendations of the Financial Stability Board (FSB) and other international best practices setters; secondly, Switzerland reacted to EU law in order to be able to continue to assess the European market. Therefore, the Swiss Financial Service Act (FIDLEG) has been closely aligned with MiFID I/II. Here are key topics of Consumer Protection that have been started to be implemented in Switzerland from 2019:
- Scope of supervised entities: financial service providers including banks and asset managers.
- Corporate governance: adequate organizational measures also regarding collaboration with intermediaries, conflicts of interest and employee transactions.
- Cross-border regulation: market access rules for foreign financial institutions providing services within or into Switzerland.
- Client classification: classification of clients into retail, professional and institutional clients.
- Key rules of conduct: including duties in the advisory process regarding the suitability assessment and the best execution principle.
- Documentation: documentation of products (prospectus and basic information sheet) and services (advisory minutes) ensuring transparency and comparability.
The eighth international regulatory standardizing milestone was reached in 2018 with the implementation of the General Data Protection Regulations (RGPD), which was a new element of the European regulation. The GDPR applies to all EU Member States that process the personal data of data subjects residing in the EU. The areas concerned include consent, privacy breach notifications, right of access, right to be forgotten and data transfer. Finally, looking forward, Switzerland has positioned itself as a new hub for innovative financial technology (Fintech), and the Swiss regulatory environment has been adjusted for the Fintech providers. For example, FINMA revised several of its circulars to render them technology-neutral.
With increasing regulatory requirements and trends toward greater transparency, understanding the Source of Funds (SoF) and the Source of Wealth (SoW) of the Beneficial Owner (BO) has become a cornerstone in the Customer Due Diligence (CDD) process, particularly for legal entities. Collecting such information during the on-boarding process is part of the CDD sets of controls which seek to address greater money laundering, financial crime and terrorist financing risks.
Historically, the CDD finds its roots in Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations driven by the 40 Recommendations of the Financial Action Task Force (FATF). In modern financial services in Switzerland, the Customer Due Diligence (CDD) is a core component of an effective Anti-Money Laundering and Financial Crime Risk Management frameworks.
Under Swiss law, money laundering, pursuant to art. 305bis of the Swiss Criminal Code (SCC), is a criminal offense that is punished with a prison