Changes in the Swiss financial market over the last two years continue to have a profound impact on regulatory initiatives and legislation in Switzerland. Most notably, the Swiss government used its emergency powers to force a takeover of Credit Suisse by UBS in March 2023 after Credit Suisse suffered significant deposit outflows and a loss of market confidence. This extraordinary intervention spurred questions on the effectiveness of the Too-big-to-fail regime and triggered calls for measures to reestablish confidence in the Swiss financial market. Separately, events including the abolishment of negative interest rates, the substitution of the Swiss Franc LIBOR by SARON, scandals in the international crypto markets and an increased international focus on sustainable finance also continue to affect the regulatory agenda.

By René Bösch / Thomas Werlen (Reference: CapLaw-2024-03)

The state rescue of Credit Suisse by way of a forced takeover by UBS has sent shockwaves through the Swiss and international financial markets. In its wake, legislators and FINMA have been pressing to further expand the regulation and supervision of banks. These calls to revise banking laws have come in addition to existing proposals to amend capital markets rules such as the full implementation of the Basel III framework and efforts to increase sustainability in the Swiss financial sector. We present an overview of the numerous current legislative projects aimed at revamping the Swiss financial sector. 

1) Regulatory Consequences to the failure of Credit Suisse

The most significant financial market event last year in Switzerland was the government-supported takeover of Credit Suisse by UBS. After a series of bad financial results and scandals over the last years Credit Suisse progressively lost the confidence of the market and the regulator alike. Credit Suisse attempted to regain trust by announcing a new strategy in October 2022. A CHF 4bn capital increase early December 2022 intended to finance its implementation but brought only short relief as customers continued to withdraw their funds. The situation took a turn for the worse in March 2023, ending in an apparent refusal of a significant number of counterparties to accept funds from Credit Suisse. Swiss government officials appear to have agreed that a resolution of Credit Suisse, as would have been the ordinary course for a bank in crisis under the existing Too-big-to-fail (TBTF) regime, would have been too risky in the current market environment. A takeover deal was therefore brokered between Credit Suisse and UBS in the third week of March 2023. The Federal Council adopted an extraordinary ordinance based on its constitutional emergency powers to facilitate the deal with additional liquidities and exemptions from Swiss law which would otherwise have created obstacles to the takeover. On 19 March 2023 Credit Suisse and UBS announced the takeover. The Swiss Government, the Financial Market Supervisory Authority FINMA (FINMA) and the Swiss National Bank (SNB) declared their support on the same day and disclosed that they had made use of the emergency ordinance to supply Credit Suisse with additional liquidities, including a Public Liquidity Backstop (PLB), and granted UBS state guarantees to cover for the financial risk involved in the transaction. Credit Suisse Group was merged into UBS Group on 12 June 2023. The full integration of Credit Suisse is expected to occur in or towards the end of 2024.

Both the emergency rescue and the apparent difficulty in the years prior to steer Credit Suisse back into safe waters spurred a frenzy of governmental inquiries into lessons learned and measures available to reestablish confidence in the Swiss financial market. Swiss Federal Parliament held a special session in April 2023 to debate the causes for and conclusions to be taken as a result of that Credit Suisse’s financial crisis. A few months later, Federal Parliament also established a Parliamentary Investigation Committee (PUK) tasked with investigating the causes and responsibilities for the failure of Credit Suisse. The Swiss Federal Department of Finance (FDF) commissioned a first report from an expert group, which was ultimately published on 1 September 2023 (Banking Stability Report), providing recommendations on how to strengthen the existing TBTF framework. On 19 December 2023 FINMA published its own report on the Credit Suisse-related events and the lessons learned (FINMA Report). As expected, many members of the Federal Parliament submitted motions to the Federal Government with requests to look into particular aspects of the Credit Suisse crisis and the events leading up to it, and come up with legislative proposals preventing another such crisis. In particular, public sentiment is that UBS as the sole globally systemically important bank (G-SIB) remaining in Switzerland could, for obvious reasons, not find itself in a similar situation.

These reports and political initiatives call for a number of regulatory responses, most importantly in the following areas:

– Strengthening and refining the TBTF regime: The Federal Government is expected to present proposals on how to improve the current TBTF regime; the goal is to prevent future crises of Switzerland’s remaining systemically important banks (SIBs), i.e., UBS, PostFinance, Raiffeisen and Zürcher Kantonalbank (ZKB). A first occasion to do that is in the context of its report on the TBTF Regime that is due pursuant to the Banking Act in the first half of 2024 (TBTF Report). Observers expect the TBTF Report to follow the proposals contained in the Banking Stability Report. We anticipate specific proposals on the framework for crisis management and collaboration among the Federal Government, FINMA and SNB, the tightening of liquidity requirements and the addition of new tools to provide liquidity support in crisis (see below), improvements or extensions on FINMA’s powers to intervene in a banking crisis, and the improvement of transparency in certain markets.

– Public Liquidity Backstop: Prior even to Credit Suisse’s rescue, the Federal Government proposed introducing a PLB regime, which would grant SNB the power to extend significant liquidity support guaranteed by the government to an ailing bank as part of its restructuring. The proposed PLB regime was not implemented in time to assist Credit Suisse during its March 2023 crisis. The PLB thus found its way into the emergency ordinance. Shortly thereafter, the Federal Government accelerated its legislative agenda and announced introducing the PLB into ordinary law via a corresponding amendment of the Banking Act and related Ordinance on 6 September 2023. We expect this proposal to be debated in the Federal Parliament as early as in June 2024.

– Introduction of Senior Manager Regime: FINMA alongside many members of the Federal Parliament requested that the Federal Government propose a senior manager regime similar to that in the EU and in UK, making specifically designated senior representatives of banks personally liable for any violations of duties and/or introducing regulatory requirements within their sphere of responsibility, both financially and criminally.

– Broadened authority of FINMA for issuing penalties: In its 2023 FINMA Report, FINMA lamented that it did not have enough powers to intervene early in Credit Suisse’s downward spiral. It could, notably, not take any strict measures or issue significant sanctions against representatives of the bank and the bank itself to correct Credit Suisse’s course. It therefore moves to be vested with broadened powers to issue sanctions against senior bank representatives (see above), to issue penalties (incl. fines) and make enforceability proceedings public (“naming and shaming”) as a deterrent measure.

– Restrictions on the payment of variable compensation: The Federal Government has been under pressure to introduce significant restrictions on the payment of variable compensation to bank managers in case of financial distress of the bank. This is a direct reaction to the failure of Credit Suisse which has been criticized for having a history of excessive bonuses even in times of financial distress. A first step in that direction is already included in the legislative package relating to the PLB (see above).

The PUK is expected to issue its final report towards the summer of 2024. The report will remain confidential for an extended period of 50 years but is likely to shape the implementation of the regulatory proposals above. While its contents and recommendations are yet unknown, we assume that the pressure on politicians and authorities to move for decisive regulatory and legislative action is significant.

2) Implementation of the Basel III Standards

End of November 2023 the Federal Council adopted a bill implementing the full Basel III Standards into Swiss law. The project had been in the works since the Basel Committee on Banking Supervision (BCBS) adopted the finalized framework in December 2019 and completed it with a revised minimum standard for market risks in February 2019. The Federal Council’s bill requires amending the Capital Adequacy Ordinance (CAO) to ensure stronger capital requirements for higher-risk areas of the banking business and more transparent calculations of capital. The Federal Council stated that this amendment would not create any significant change in the total capital requirements for the banking sector on average. It will however likely mean an increase in capital requirements for UBS as it is the only Swiss G-SIB left. The amendment is expected to enter into force in 2025. The banking sector will thus gear up in 2024 to meet the higher capital adequacy requirements.

3) Revision of the Swiss Financial Markets Infrastructure Act

The Swiss Financial Markets Infrastructure Act of 2015 (FMIA) entered into force on 1 January 2016, with certain provisions being phased-in later. In line with general legislative policies in Switzerland the FDF initiated preliminary consultations in 2022 on the need for amendments to improve current regulation, in particular in light of international developments. Improving the transparency in the markets and removing certain loopholes or weaknesses in current regulations are the main goals of the impending amendments.

We expect that a legislative proposal reflecting the gaps identified above will be published in the first half of 2024.

4) Introduction of a Limited Qualified Investor Fund in Switzerland

The revised Collective Investment Schemes Act (CISA) and its implementing provisions are expected to enter into force on 1 March 2024. The revision introduces an innovative fund product called Limited Qualified Investor Fund (L-QIF) onto the Swiss market. The L-QIF is exempt from supervision by FINMA. It must however be managed by an institution approved by FINMA, usually a fund management company, and is only open to qualified investors. The introduction fills a gap in the Swiss market and seeks to increase Switzerland’s competitiveness as a fund location.

5) Revision of the Insurance Oversight Act

The revised Insurance Oversight Act (IOA) entered into force in January 2024. The revision allows an insurance company to be restructured rather than left to go bankrupt in the event of insolvency. This measure is intended to strengthen customer protection. Small insurance companies now also benefit from relaxed supervisory rules with the aim of improving competitiveness and innovation in the insurance market.

6) Sustainable Finance

Sustainable finance remains one of the cornerstones of Switzerland’s 2022-2025 agenda for the Swiss financial market. Fifteen measures have been approved by the Federal Council as part of this agenda to position Switzerland as a leading sustainable finance market. The primary focus has been on preventing greenwashing and creating transparency about the impact of corporate activities on climate and biodiversity. In that respect, the following regulatory measures apply, respectively are on the agenda in 2024:

– In 2022, Switzerland imposed obligations on certain large companies to disclose their climate and social impact. These measures were sharpened this year with a new Ordinance on Climate Reporting that entered into force on 1 January 2024, requiring disclosure obligations to comply with the internationally recognized Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Following these recommendations, large companies, including banks and insurance companies, have to report the financial risk they carry due to their climate-related activities, the impact their activity is having on the environment and their quantitative reduction goals concerning direct and indirect greenhouse gas emissions. The reporting obligations are, among other environmental goals, intended to protect investors against climate-related financial risks. The first reports will have to be published for the first time in 2025 on the company’s websites.

– These climate disclosure obligations may be sharpened further down the line to meet similar obligations in neighboring countries. A consultation draft is expected mid-2024, proposing among others to require the climate reports to be audited by an external auditor.

– The FDF is also expected to submit a consultation draft of revisions to the Collective Investment Scheme Ordinance (CISO), the Financial Services Ordinance (FinSO) and the Insurance Oversight Ordinance (IOO) to address greenwashing in financial markets by the end of August 2024.

– FINMA has also announced a number of measures aimed at greening the financial market. It is notably drafting a binding FINMA circular laying out nature-related risk management requirements for banks and insurance companies. FINMA will start a public consultation on the circular in the first quarter of 2024.

7) Initiatives in the field of FinTech and Crypto

Developments in the FinTech space have been high on FINMA’s agenda for many years. FINMA’s focus was on responding to new technological trends in the fields of Decentralized Finance and crypto assets. The Banking Act was therefore amended in 2019 to allow FINMA to issue so-called FinTech licenses to market participants focusing on the usage of new technologies and crypto assets. In 2021, the Federal Government put into force the Distributed Ledger Technology (DLT) Act which reflected the technological development in the field at the time while ensuring legal certainty in cases where these DLT trading systems would go bankrupt. The DLT Act also enabled FINMA to issue licenses for DLT trading systems. 

Since then, FINMA has issued a number of permits for crypto market participants and regulated novel issues in the crypto market. In September 2021 it authorized the first Swiss crypto fund (limited to qualified investors) and issued two licenses to financial market infrastructures which base their services on DLT. It also determined the regulatory treatment of crypto assets and the regulatory status of institutions offering related services. We expect that FINMA is currently working on a new license type for Crypto Asset Service Providers in line with international developments, in particular the Markets in Crypto-Assets Regulation (MiCA) of the EU. We also expect FINMA to issue further clarifications on its regulatory assessment of certain services rendered in connection with crypto assets, as it has recently done with respect to staking.

In 2022, the Federal Council published a report, identifying additional areas of required action in the FinTech space (Digital Finance Report). The Federal Council therefore instructed the FDF and the State Secretariat for International Finance (SIF) to review the existing legal and supervisory framework with regard to, among others, the dispersion of service provision in the digital finance market, the regulation of responsibilities and risks and the need to differentiate existing FinTech license categories. 

SIF is currently drafting a legislative proposal to address these gaps. It is notably examining whether the FinTech licenses for payment service providers, including stablecoin, and for providers of crypto assets should be amended. We also expect recent bankruptcies and allegations of fraud on the international crypto market to shape the SIF’s proposed risk regulation. The SIF plans to issue its proposal for consultation in the second half of 2024.

8) Other Developments

Further developments marked the Swiss financial market: 

– The transition from the CHF LIBOR to SARON was closely monitored by FINMA and took place without significant market disruption, not accounting for potential bilateral disputes such as regarding pricing and unilateral amendment of terms. We have not identified a need for follow-up regulatory action.

– In September 2022 SNB joined other central banks around the world in tightening its monetary policy to curb inflation. It raised its policy interest rate to 0.5 %, ending Switzerland’s seven-year run of negative interest rates. While some financial institutions were and are still slow in granting retail clients positive interest rates on their cash and savings accounts, we don’t see a need for regulatory action in this field;

– The Federal Council is expected to issue a legislative proposal on the transparency of legal entities and beneficial owners in the first half of 2024. This will mark another step in combatting money laundering and terrorism financing on the Swiss financial market;

– Further action is expected to improve the bilateral and multilateral exchange of information between financial market supervisors and regulators;

– In the area of continuing supervision FINMA announced its plan to focus on monitoring and managing cyber risks and risks emanating from AI technology.

9) Conclusion

We observe a full agenda for regulatory and legislative action for 2024. The focus point will be on the lessons to be learned from the Credit Suisse crisis, but other important topics need attention as well. 

As the Swiss finance minister observed, the Credit Suisse crisis was not a crisis of the financial system or existing financial regulation as such but a crisis of confidence in Credit Suisse. While thorough analyses are required as to why the existing regulation was viewed as insufficient to address the Credit Suisse situation – triggering (yet another) instance of the government’s use of its extraordinary powers –, we also call for regulatory restraint. The existing TBTF legislation did not fail, it was simply not applied. We don’t see a need for a massive overhaul of that legislation, certain individual, principle-based adjustments may suffice.

In this process of measured adjustment, the Credit Suisse situation has shown once more the need for a pragmatic awareness – an understanding that the resilience of financial markets depends not only on the efficacy of regulatory amendments but also on its participants’ capacity to navigate the uncertain terrain where crises materialize, typically when least expected.

In turn, relatively new regulatory areas such as in the areas of cryptocurrencies and regulatory efforts pursuing a policy goal such as in the area of sustainability should be pursued cautiously and with a very clear and internationally compatible understanding of the respective regulatory purposes to ensure, as far as possible, that new rules can be effectively applied.

René Bösch (rene.boesch@homburger.ch)
Thomas Werlen (thomaswerlen@quinnemanuel.swiss)