During the current debate on the supervision of financial institutions, FINMA’s enforcement instruments have repeatedly been accused of being ineffective, especially when compared to other foreign financial market supervision authorities’ tools. While FINMA has long been opposed to additional enforcement instruments, this has now changed and FINMA has recently proposed three additional tools to strengthen the authority’s enforcement activities.

The following article discusses the enforcement instruments currently at FINMA’s disposal and the possible additional instruments proposed by FINMA, especially taking into account the supervisory toolkit of foreign enforcement authorities. 

By Lukas Roesler / Stephanie Walter (Reference: CapLaw-2023-25)

1) Introduction

FINMA has a broad range of enforcement tools to uphold supervisory law. When applying these tools, it is bound to observe constitutional principles and the rules governing administrative law. The term “enforcement” covers all investigations, proceedings and measures carried out by FINMA in relation to violations of the law. The main purpose of a FINMA enforcement proceeding is to uphold supervisory law and to restore compliance. 

The enforcement tools at FINMA’s disposal include remedial measures to restore compliance with the law, declaratory rulings, industry bans, activity bans, publications of rulings, the confiscation of profits, the revocation of license or withdrawal of recognition. Contrary to most foreign enforcement agencies, FINMA does not have the competence to impose fines on entities or individuals under supervision. 

As a result of the current discussion about the effectiveness of the existing instruments, FINMA has proposed possible additional enforcement tools to further strengthen the enforcement of financial markets law. These are in particular the possibility to impose fines against institutions and individuals, a senior management regime to hold senior individuals accountable, and more leeway regarding the information of the public about individual enforcement proceedings. These proposals are not new; in recent years, there have been repeated discussions and several political proposals to equip FINMA with further enforcement instruments. However, these efforts did not find the necessary support and until recently FINMA itself was of the opinion that its toolkit was sufficient and that there was no need for further measures. Due to recent events, further instruments are however under serious consideration in Swiss parliament again.

2) FINMA enforcement proceedings

a) Persons subject to enforcement proceedings

As a matter of principle, entities and businesses engaging in an activity requiring a license under financial markets regulations are subject to the supervision of FINMA (art. 3 Federal Act on the Financial Markets Supervisory Authority (“FINMASA”)). Controlling shareholders and persons holding a substantial shareholding in a supervised entity (“Qualified Shareholders”) as well as directors and senior managers of supervised entities (“Key Individuals”) are also subject to FINMA’s supervision in two capacities. Indirectly, as FINMA requires from a licensed entity that its Key Individuals and Qualified Shareholders are fit and proper for their role (e.g., art. 3 para. 2 cif. c or c^bis Banking Act). Directly, as FINMA can initiate enforcement proceedings against Key Individuals or Qualified Shareholders if it intends to take measures against them personally.

b) Opening of formal enforcement proceedings

FINMA’s enforcement division takes action if there are indications of a possible violation of supervisory law. FINMA initially launches a preliminary investigation to establish the facts. If there is concrete evidence of a breach of supervisory law and if there is no other possibility to restore compliance, FINMA opens a formal enforcement proceeding. 

When deciding whether to initiate enforcement proceedings, two main criteria are relevant: The seriousness of the violation of supervisory law on the one hand and the “enforcement-interest” on the other. When determining the seriousness of the violation, FINMA particularly considers (i) the risk created for investors or insured persons, (ii) whether the violation occurred systematically, (iii) the duration of the violation and (iv) the knowledge of management (art. 30 FINMASA). From the point of view of enforcement interest, FINMA examines whether there is a need to restore compliance and makes considerations regarding prevention and the impact on the reputation of the financial center.

c) Applicable procedure

Enforcement proceedings are formal administrative proceedings and as such governed by the Federal Act on Administrative Procedure (“APA”). FINMA is entitled to certain specific rights under FINMASA, including the right to request supervised entities, their auditors and their qualified shareholders to provide any information or documents required by FINMA to carry out its task (art. 29 para. 1 FINMASA). Notably, supervised persons have a duty to cooperate in such administrative proceedings. Statements made by respondents in such proceeding cannot be used against them under criminal law unless they were also granted the right to remain silent and have not been subjected to any undue coercion.

If as a result of its enforcement proceedings FINMA concludes that a breach of financial markets law has occurred, FINMA may take different types of measures, depending on the severity of the violation. FINMA generally concludes the proceedings by issuing a ruling in which it sets out measures to restore compliance with the law.

3) FINMA enforcement tools

a) Restoration of compliance with the law (art. 31 FINMASA)

In case of ongoing violations of supervisory provisions or other irregularities, FINMA may order specific measures to restore compliance with the law (art. 31 FINMASA). In principle, FINMA will only order remedial measures if the supervised entity has not implemented adequate mitigating measures itself. FINMA has broad discretion regarding the measures to be imposed on the supervised entity. It can order any measure it deems necessary and appropriate. FINMA may, inter alia:

– temporarily or permanently restrict the supervised entity’s business activities by prohibiting the supervised entity from performing certain transactions or acquisitions;

– impose conditions on the organization or internal processes of the supervised entity;

– order the supervised entity to remove certain Key Individuals (board of directors and executive management) or certain Qualified Shareholders; or

– suspend the voting rights of shareholders and partners with a qualified participation (art. 23^ter Banking Act).

b) Declaratory ruling and substitute performance (art. 32 FINMASA)

Where the proceedings reveal that the supervised entity has seriously violated the law, but there is no longer a necessity to order remedial measures, FINMA may issue a declaratory ruling (art. 32 para. 1 FINMASA). The purpose of such a ruling is merely to hold that FINMA found that the supervised entity has committed serious violations of regulatory provisions. A declaratory ruling may not be published unless the conditions for a publication in accordance with art. 34 FINMASA (see lit e) hereafter) are met (and under certain circumstances in accordance with art. 22 FINMASA).

Further, FINMA has the power to perform the required act itself or have it performed at the expense of the defaulting party (art. 32 para. 2 FINMASA) if an enforceable ruling of FINMA is not observed within a set deadline and after a prior warning.

c) Prohibition from practicing a profession (managers) (art. 33 FINMASA)

FINMA can also take measures against Key Individuals such as prohibiting them from acting as a director or in a senior management capacity for a period of up to five years, if she/he is responsible for a severe breach of a supervisory provision (art. 33 FINMASA). To issue an industry ban, FINMA must be able to prove direct, individual, and causal responsibility for the violation of supervisory law. There must be a proven breach of duty that has led to these violations. Furthermore, FINMA can confiscate undue profits realized by Key Individuals and Qualified Shareholders (art. 35 FINMASA, see lit. f) (hereafter for further details).

d) Prohibition from performing an activity (traders and client advisors) (art. 33a FINMASA)

Art. 33a FINMASA enables FINMA to ban individuals temporarily or permanently (in the case of repeated offences) from trading in financial instruments or from acting as a client adviser at a supervised institution in case of a serious violation of the provisions of the financial market acts, the implementing ordinances, or in-house directives. Hence, all employees who perform a respective activity can be sanctioned in addition to staff in senior functions and those bound by proper business conduct rules.

e) Publication of the supervisory ruling (art. 34 FINMASA)

FINMA may publish its ruling as a “naming and shaming” measure provided that a serious violation of supervisory provisions by the supervised entity or a Key Individual in the sense of art. 34 para. 2 FINMASA has occurred. The publication may disclose the names and personal data of the supervised entity and individuals concerned (art. 34 FINMASA). Due to the potentially serious sanctioning effect on such persons, the publication must comply with the administrative law principle of proportionality (Verhältnismässigkeitsprinzip), i.e. it must be suitable, necessary and in reasonable proportion to its goals. 

While this instrument was initially mostly used in relation to authorized institutions who had seriously violated supervisory provisions, these days, the vast majority of rulings published under art. 34 FINMASA concern cease or desist orders, i.e. bans on specific individuals conducting unauthorized activities. 

It shall be noted that FINMA may also publish a ruling or otherwise issue a press release based on art. 22 para. 2 FINMASA, i.e. in the course of its general duty to inform the public on individual proceedings if it sees a particular need to do so from a supervisory point of view (i.e. not as a punishing measure in accordance with art. 34 FINMASA). Such communications may also take place while the respective FINMA proceedings are ongoing. According to Art. 22 para. 2 FINMASA a particular need for such a publication is namely given if the information of the public is necessary (i) to protect market participants or supervised persons, (ii) to correct false or misleading information or (iii) to safeguard the reputation of the financial centre.

f) Confiscation (art. 35 FINMASA)

FINMA is entitled to confiscate any profit that was made through a serious violation of supervisory provisions (art. 35 FINMASA). In this context, FINMA enjoys a certain discretion regarding the determination of the amount of the profits concerned (in particular if the amount cannot be determined or can only be determined with inadequate efforts). However, a causal link between the profit and the severe breach of regulatory law must be shown.

g) Investigating agents (art. 36 FINMASA)

Pursuant to art. 36 para. 1 FINMASA, FINMA can appoint an independent and suitably qualified person (an investigating agent) to investigate circumstances relevant for supervisory purposes or to implement supervisory measures that it has ordered. Rulings issued by FINMA also state whether and to what extent investigating agents are empowered to act in place of the company’s management. The individuals concerned have their authorization temporarily withdrawn while the agent is acting in their place. If a corresponding entry is made in the commercial register, FINMA additionally provides information on its website about the appointment of the investigating officer.

h) Revocation of licence, withdrawal of recognition (art. 37 FINMASA)

FINMA can revoke a supervised entity’s licence, if it finds that (a) the supervised entity no longer satisfies the requirements to carry out its activity or (b) seriously violates supervisory provisions (art. 37 FINMASA). In both instances, based on the principle of proportionality, FINMA will only revoke the licence as ultima ratio, if it is necessary and no other measure would be sufficient and appropriate. Therefore, before revoking a licence, FINMA will consider whether other measures, e.g. remedial measures pursuant to art. 31 FINMASA, would be sufficient and appropriate. Whether an infringement of regulatory law constitutes a severe breach is assessed by FINMA on a case-by-case basis. Although past isolated breaches, regardless of their severity, are probably not sufficient grounds to revoke a licence, multiple and repeated breaches – even if they have been remediated – could be the cause for taking such action if they form a pattern that suggests that the supervised entity is not committed to put in place an appropriate organization to ensure effective compliance with the regulatory requirements and that, consequently, any other remedial measure will not be effective to prevent future breaches of supervisory regulations.

4) Proposed enforcement tools

a) Fines against financial institutions and individuals

One instrument that is currently being discussed is the authority to impose fines against financial institutions and individuals. Many foreign financial supervisory authorities such as the German BaFin or the British FCA are equipped with this competence. Both agencies use fines as a deterrent to prevent future violations.

As of today, FINMA cannot impose fines – whether as a criminal fine, regulatory fine or administrative sanction. When enacting the FINMASA, the legislator deliberately decided to strictly separate the responsibilities for criminal and administrative proceedings, focusing FINMA’s role on prevention (i.e. on the identification of developments and initiation of adjustments at supervised institutions to avoid inadequate practices) whereas the criminal justice authorities, in turn, have the role of dealing with (criminal) acts that have already occurred. Therefore, providing FINMA with the competence to impose fines would constitute a fundamental.

Apart from the question whether such fines are effective and targeted at the right stakeholders, a particular concern of commentators in relation to the power to impose fines is that FINMA’s enforcement proceedings may be slowed down and become less efficient, in particular because the (current) duty to cooperate in an administrative proceeding will be impacted by the right to remain silent of any individual threatened by a fine or penalty (art. 6 para. 1 European Convention on Human Rights). Due to this concern, FINMA has until recently only supported a competence to impose fines on supervised institutions, but not on individuals.

On May 2^nd 2023, in the aftermath of the merger of Credit Suisse with UBS, the National Council accepted a postulate (Postulat Birrer-Heimo, 21.4628, “Wirksame Sanktionen der Finma gegen fehlbare Finanzinstitute“). The postulate calls on the Federal Council to examine how FINMA can be enabled to impose fines and/or further sanctions on errant financial institutions and individuals in addition to the existing supervisory instruments.

b) Senior Managers Regime

In March of 2022 a large majority of the Swiss National Council approved a postulate for an improvement of the instruments to hold executives of supervised institutions accountable (Postulat Andrey Gerhard, 21.3893, “Schlanke Werkzeuge, um höchste Finanzmarktkader besser in die Pflicht zu nehmen“). The Federal Council is currently mandated to indicate in a report which adjustments to FINMA’s tools would be necessary to create incentives for stronger individual assumption of responsibility by the highest executives of financial institutions and to allocate the individual responsibilities of the management bodies. FINMA has declared its support for the initiative.

The postulate explicitly referred to the British Senior Managers and Certification Regime that has been in use in the United Kingdom since 2015. The most senior people in a firm who perform key roles (so-called Senior Management Functions or SMFs) need FCA approval before starting their roles. Every SMF must have a statement of responsibilities that clearly states what they are responsible and accountable for. Every SMF holder has a duty of responsibility under the UK Financial Services and Markets Act 2000. This means that if a financial institution is not in compliance with one of its requirements, the SMF responsible for that area could be held accountable if she/he did not take reasonable steps to prevent or stop the breach. SMFs must be fit and proper to do their jobs and financial institutions need to assess the SMF’s ongoing fitness and propriety at least annually

Compared to FINMA’s currently applied “fitness and propriety” (Gewähr) test, the British Senior Managers and Certification Regime is broader and also involves managers of the operative management. FINMA’s systematic focus when either licensing an institution or approving individuals in executive positions is on the top management and the members of the board (and only under special circumstances on other key individuals and risk takers).

Further, a responsibility document along the lines of the Senior Management and Certification Regime is also advocated for. Such a responsibility document shall clarify the bank’s organization and accountability structures. It would go beyond FINMA’s currently practiced approval of (less detailed) organizational regulations. Further,a very detailed definition of roles and tasks of individual managers is contrary to the principle-based supervision practiced by FINMA that shall allow each supervised entity to define its own adequate organization. 

Supporters hold that a more individual assignment of responsibilities may make it easier to hold the designated individuals accountable in case of mismanagement and, thus, raise awareness and have a preventive effect. More critical commentators hold that the focus of such a document on individuals may not be adequate in all circumstances for complex organizations with a high degree of division of labor and are critical of the expected results because many projects in supervised entities are already today subject to complex approval processes (that will also serve the individuals with assigned responsibilities as “due diligence defenses”).

c) Information of the public

One further measure proposed by FINMA is the ability to inform the public more openly about its enforcement procedures, in particular with a focus on prevention. As shown previously (see particularly cif. 3, lit b) and e) hereinbefore), FINMA may inform the public about individual proceedings against financial market participants basically only in cases of serious violations of law or where a need for a publication from a supervisory point of view is given. The hurdles for such publications are relatively high. Therefore, in order to enable FINMA to inform more openly, such hurdles would have to be lowered.

5) Summary

The current enforcement instruments at FINMA’s disposal cover a wide range of measures, including some directed at individuals. Compared to foreign financial market supervision authorities, the lack of the competence of FINMA to impose fines stands out and has repeatedly become an object of criticism. 

Given the current circumstances, the call for more rigid enforcement action is receiving broader political support than in previous years. It remains to be seen whether the legislator will equip FINMA with further enforcement tools.

Lukas Roesler (lukas.roesler@baerkarrer.ch)
Stephanie Walter (stephanie.walter@baerkarrer.ch)