The Swiss financial market laws provide for a number of regulatory notification and approval requirements which must be adhered to in the context of asset deals involving entities prudentially supervised by FINMA. This article provides an overview of the relevant regulatory requirements which may be applicable in the context of acquiring a portfolio of assets, liabilities and contracts by and/or from a Swiss regulated financial institution.
1) Introduction
In the past two years the number of traditional share deals involving Swiss regulated entities has vastly increased. There has been M&A activity in the public markets (such as the well-publicized public take-over battle between Liontrust Asset Management plc and the investor group NewGAMe regarding the listed Swiss fund manager, GAM Holding AG) and the private markets (among others, the acquisition of Kaleido Privatbank AG by Bank Richelieu, or the acquisition of Sociéte Génerale Private Banking (Suisse) SA by Union Bancaire Privée). The Swiss financial market laws set out a number of regulatory notification and approval requirements which must be adhered to in the context of the acquisition of a qualified participation in Swiss regulated financial institutions under a share deal. In the article CapLaw-2024-85, „M&A Transactions in the Swiss Financial Market – Part I: Acquiring a Qualified Participation in a Swiss Regulated Entity“ the author provided an overview of the regulatory requirements which must be complied with upon acquiring a qualified participation in a Swiss regulated entity.
In addition to the activity in the traditional M&A-markets, there has been a rise in the number of asset-related deals (Asset Deals) in the Swiss regulated sector. Such Asset Deals are often not as well publicized as traditional share deals but rather are typically executed away from the public eye. However, the recent acquisition of the client book of Privatbank IHAG Zürich AG by Vontobel AG serves as an example of the increased activity in Asset Deals in the Swiss regulated market. The underlying intentions of such transactions vary in practice, with most deals aiming at expanding the acquirer‘s business by assuming a part of the operations of the selling entity. Asset Deals may also serve as a balance sheet-driven risk transfer instrument (often referred to as Synthetic Risk Transfers or SRTs), under which the underlying risks and credit exposures of a portfolio of mortgages and/or other loans are (synthetically or formally) transferred to the acquirer in exchange for the payment of a premium. Often SRTs are executed on a collateralized basis with the underlying claims also being transferred to the acquirer as collateral.
The Swiss regulatory framework provides for a number of notification and/or approval requirements which may be applicable in the context of an Asset Deal involving a Swiss regulated entity. The specific regulatory consequences of any given transaction will, however, typically have to be assessed on a case-by-case basis and will vary depending on the transferred assets, the size of the transaction relative to the overall business of the involved entities, and the regulatory status of the transaction parties.
The considerations outlined herein focus on the regulatory requirements applicable to banks licensed under the Federal Act on Banks and Savings Institutions (Banking Act); and other financial institutions, such as securities houses, fund management companies, asset managers for collective assets, trustees and portfolio managers within the meaning of the Federal Act on Financial Institutions (Financial Institutions, and together with banks, collectively Swiss Regulated Entities).
2) Asset Deals Involving Swiss Regulated Entities – Buy-Side Consideration
In contrast to the specific notification and approval requirements applicable in the context of an acquisition of a qualified participation in a Swiss Regulated Entity, the Swiss financial market laws, in particular the Banking Act and the Federal Act on Financial Institutions (FinIA), do not provide for specific notification and approval requirements applicable to Asset Deals. As a consequence, each Asset Deal, and the consequences thereof, must be assessed under the general licensing, approval, and regulatory notification requirements set out under the Banking Act and FinIA. Therefore, in practice, the regulatory licensing, approval and/or notification requirements applicable to a specific transaction will depend on whether (i) the holding of the assets and/or the operation of the business transferred under the respective transaction requires a license under the financial market laws of Switzerland, (ii) the existing regulatory license of the acquiring entity permits the holding of the assets and/or operation of the business acquired under the transaction in question, and (iii) the transaction in question triggers any regulatory approval and/or notification requirements under the regulatory license of the selling entity.
a) Asset Deals – Potential Regulatory Licensing Requirements
The regulatory consequences of an Asset Deal are primarily driven by the regulatory qualification of the portfolio of assets, liabilities, and contracts transferred under the transaction, in particular whether the operation of the acquired business qualifies as a regulated activity under the financial market laws of Switzerland.
The Banking Act and the FinIA set out the general licensing requirements for Regulated Entities in Switzerland. As a consequence, engaging in any of the regulated activities outlined below requires a corresponding license under the applicable regulatory framework. Therefore, to the extent that an Asset Deal includes the transfer of business operations qualifying as regulated activities under the Banking Act or FinIA, the acquiring entity will need to assess and ultimately ensure that such regulated activities are covered by its existing regulatory licenses. Depending on the scope of a specific Asset Deal, the following licensing requirements may be of relevance:
- Regulated Deposit Taking: Pursuant to article 1a Banking Act, any person that is active in the financial sector and on a commercial basis (i) accepts public deposits in the form of cash or crypto-assets (subject to certain de-minimis thresholds) and/or (ii) publicly advertises such services, is considered a bank that requires a banking license under the Banking Act. The term deposit taking is interpreted broadly by the Swiss Financial Market Supervisory Authority FINMA (FINMA) and ultimately covers any acceptance of cash or crypto-assets with a simultaneous establishment of a repayment obligation. However, the broad term of public deposits is narrowed down by several exemptions set out under article 5 et seqq. of the Federal Ordinance on Banks and Savings Institutions (Banking Ordinance).
- Regulated Portfolio Management and Trustee Activities: Article 17(1) FinIA defines portfolio managers as any person that based on a mandate including a power of attorney can dispose over client assets on a discretionary basis. Such services are, however, only subject to a licensing requirement under FinIA to the extent such services relate to financial instruments within the meaning article 3(a) of the Federal Act on Financial Services (FinSA). In contrast, portfolio management services exclusively relating to assets that do not qualify as financial instruments within the meaning of FinSA, such as cryptocurrencies qualifying as mere payment tokens under FINMA‘s regulatory practice, do not qualify as regulated portfolio management services and are hence not subject to a licensing requirement under article 17(1) FinIA. Whilst portfolio managers manage client assets based on a power of attorney in the client‘s name and on the client‘s behalf, article 17(2) FinIA defines regulated trustee services as the management or holding of segregated funds on a fiduciary basis on behalf of the beneficiaries of a trust pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition.
- Portfolio Management for Collective Assets: Pursuant to article 24 FinIA, portfolio managers for collective assets are entities that manage assets and provide portfolio management services on a commercial basis on behalf of collective investment schemes within the meaning of the Federal Act on Collective Investment Schemes (CISA) and/or occupational pension schemes. Consequently, providing portfolio management services to collective investment schemes and occupational pension funds generally requires a license as a portfolio manager for collective assets – with certain exemptions applying, for example, if (i) the portfolio management services are exclusively provided to collective investment schemes that are only open to qualified investors within the meaning of CISA, and (ii) the statutory de-minimis threshold is adhered to.
- Regulated Fund Management Activities: Article 32 FinIA defines regulated fund management services as management and administrative services on behalf of investors in collective investment schemes within the meaning of CISA. Whilst fund management companies may, pursuant to article 6(3) FinIA provide portfolio management services to the underlying funds, fund management companies additionally provide administrative services in relation to the collective investment schemes, such as the decision making regarding the issuance of units in the respective fund, the calculation of the net asset value, the determination of redemption prices and the exercising of all rights associated with the fund and its underlying assets.
- Securities House Activities: Article 41 FinIA defines regulated securities house activities as (i) the trading of securities on behalf of clients, (ii) proprietary trading of securities, to the extent (aa) such trading activities may endanger the proper functioning of the financial market, (bb) the respective entity is a participant of a regulated trading venue or (iii) the respective entity operates an organized trading facility within the meaning of the Federal Act on Financial Market Infrastructures, and (iii) the provision of market making services by (aa) trading in securities on a short-term and proprietary basis and (bb) permanently and publicly quoting prices for specific securities. In addition, pursuant to article 12 FinIA, underwriting activities, i.e., the acquisition and public offering of securities issued by a third party on the primary market and the issuance and public offering of derivatives qualifying as securities on the primary market require a securities house license pursuant to article 41 FinIA.
Certain Asset Deals may be unproblematic from a licensing perspective, such as a transfer of a mortgage portfolio between two banks. Other Asset Deals, particularly those involving the transfer of client relationships, may trigger regulatory licensing requirements under FinIA and/or the Banking Act if the existing license of the acquiring entity does not cover the acquired business, as per the licensing hierarchy defined in article 6 FinIA. In such cases, the buyer may need to obtain a new license or apply for an extension of its existing license, in accordance with the licensing hierarchy defined in article 6 FinIA. For example, if a licensed portfolio manager acquires a client portfolio from a portfolio manager for collective assets, the licensed portfolio manager will need to obtain a new license or apply for an extension of its existing license to cover the newly acquired regulated activities relating to funds and occupational pension schemes. A requirement to obtain a corresponding regulatory license will also apply in constellations in which a foreign regulated entity establishes a new operating entity in Switzerland to acquire the Swiss regulated business from a Swiss Regulated Entity.
b) Asset Deals – Potential Regulatory Approval and Notification Requirements
An Asset Deal may also trigger regulatory approval and/or notification duties in situations where the regulatory license of the acquiring entity, in principle, already covers the operation of the acquired business.
Pursuant to article 8a Banking Ordinance, a bank must notify FINMA of any changes to the facts underlying its current banking license, whereas such changes must be formally approved by FINMA to the extent that such changes are considered material. Article 8 FinIA and article 10 of the Ordinance of Financial Institutions (FinIO) stipulate a corresponding notification and approval requirement for Financial Institutions.
i. Regulatory Framework – Overview
Article 3 Banking Act defines the general licensing requirements for banks which must be satisfied to obtain a respective banking license under the Banking Act. Pursuant article 3(a) Banking Act, the business model, including a description of the geographical scope of the business, and the corporate organization of the bank must be outlined in the articles of association and the organizational regulations of the respective bank. Therefore, any license granted by FINMA is limited to the business model and the corresponding geographical scope as outlined in the bank‘s articles of association and organizational regulations. As a consequence, a private bank, which according to its articles of association and organizational regulations exclusively provides wealth management services, while holding a license under the Banking Act, is not automatically permitted to engage in corporate banking services. Similarly, a retail bank with a purely domestically oriented business model licensed by FINMA is not permitted to actively engage in cross-border banking activities without prior FINMA approval. Article 7 FinIA and article 9 et seqq. FinIO provide an equivalent framework for Financial Institutions.
In view of this general licensing framework, article 8a Banking Ordinance sets out an approval and notification procedure in case of changes relating to the facts underlying the respective banking license. While non-material changes must be notified to FINMA, pursuant to article 8a(2) Banking Ordinance, events resulting in material changes to the facts underlying the existing regulatory license must be approved by FINMA. Article 8 FinIA and article 10 FinIO provide for a corresponding notification and approval requirement applicable to Financial Institutions. Neither the Banking Act, FinIA, nor the pertaining implementing ordinances define which changes are considered material in the context of the regulatory approval requirement. Consequently, FINMA has considerable discretion in determining the materiality of the respective changes and ultimately the applicability of the notification or approval requirement. Article 10 FinIO does, however, provide for an exemplificatory, non-conclusive list of changes that are considered material in the context of Article 8 FinIA. Thereunder, namely changes to the articles of association and the organizational regulations as well as changes to the regulatory capital requirements are considered material within the meaning of article 8(1) FinIA and must be formally approved by FINMA. Whilst article 10 FinIO applies to Financial Institutions and is consequently not legally binding for banks, the principles set out under article 10 FinIO can serve as guidance when assessing the materiality of certain changes in the context of article 8a Banking Ordinance.
ii. Asset Deals subject to an Approval Requirement
In view of the regulatory approval requirements set out under article 8a Banking Ordinance and article 8 FinIA, for each Asset Deal it will have to be assessed whether the transaction in question will result in material changes to the existing regulatory license held by the acquiring entity. Each Asset Deal will need to be analyzed on a case-by-case basis, however in the following constellations the transaction will typically result in material changes to the regulatory license of the acquiring entity, consequently requiring prior FINMA approval:
- Expansion of the Business Model: A formal approval requirement under article 8a(2) Banking Ordinance or article 8(2) FinIA will typically apply if the acquisition of the portfolio of assets under an Asset Deal results in an expansion of the business model of the acquiring entity previously licensed by FINMA. Such an expansion may occur from a geographical perspective if the acquisition involves a portfolio of cross-border client relationships relating to a jurisdiction not previously included in the licensed geographical scope of the acquiring entity‘s business. Alternatively, the expansion may relate to the core business model, such as when the acquisition results in a material expansion of the type of services offered by the acquiring entity that are not currently included in the business model licensed by FINMA (e.g., an expansion of the custody business to include crypto- assets).
- Changes to the Organizational Structure: As a general regulatory principle, any changes to a Regulated Entity‘s articles of association and/or organizational regulations are subject to prior FINMA approval (see article 3(3) Banking Act and article 10(a) FinIO). Therefore, a formal approval requirement will also apply in the context of an Asset Deal if the acquisition of assets leads to and/or requires changes to the organizational structure outlined in the applicable articles of association and/or organizational regulations.
- Relative Size of the Acquired Assets: Finally, a formal approval requirement may apply in the context of an Asset Deal if the size of the acquired portfolio of assets, liabilities, and contracts is considered substantial relative to the size of the acquiring entity‘s current business. Whilst the regulatory framework does not provide for quantitative thresholds, an acquisition would likely be considered material and subject to an approval requirement if it (i) has implications on the applicable regulatory capital requirements and the entity‘s capability to satisfy such requirements, (ii) leads to a considerable change in the risk profile of the entity‘s balance sheet or (iii) considerably increases the balance sheet size or has a considerable influence on the turnover and/or earnings prospects of the acquiring entity (i.e., if the integration of the acquired business will require considerable amount of capital).
iii. Asset Deals subject to a Notification Requirement
In constellations in which – based on the assessment of the acquiring entity – an Asset Deal leads to changes relating to the facts underlying the current license, that are not considered material as outlined above, FINMA must pursuant to article 8a(1) the Banking Ordinance and Article 8(1) FinIA merely be notified of the transaction, with no formal approval requirement applying. A notification pursuant to article 8(1) FinIA of licensed portfolio managers and trustees must be submitted to the competent supervisory authority (see article 22(1) FinIO).
It should also be noted that article 29(2) of the Financial Market Supervisory Act (FINMASA) sets out the general notification requirement under which Regulated Entities must notify FINMA of all facts and/or events which are significant for FINMA‘s supervision. Whilst the notification requirement stipulated under article 8a(1) Banking Ordinance and article 8(1) FinIA apply to changes in the facts underlying the current regulatory license, the scope of the notification requirement under article 29(2) FINMASA is broader and applies to any facts that may be significant for FINMA‘s supervisory activities. Consequently, even where the conclusion of an Asset Deal does not affect the facts underlying the current regulatory license within the meaning article 8a(1) Banking Ordinance and article 8(1) FinIA, as applicable, the respective transaction may trigger a notification requirement under article 29(2) FINMASA, if deemed significant for FINMA‘s supervisory activities. Depending on the size and balance sheet implications of the transaction, this may be the case for SRTs between banks which will typically not have any implications on the facts underlying the existing regulatory license of the involved parties but may be of significance for FINMA‘s broader supervision of the entity.
3) Asset Deal Involving Swiss Regulated Entities – Sell-Side Consideration
As outlined above, under an Asset Deal the regulatory focus will generally be on the acquiring entity, which must ensure that all regulatory approvals for the acquisition of the respective portfolio of assets, liabilities, and/or contracts are in place. However, the selling entity, based on the transferred assets, liabilities, and contracts, must assess whether the transaction in question will lead to any regulatory approval and/or notification requirements under article 8a Banking Ordinance, article 8 FinIA, or article 29(2) FINMASA, as applicable. This may, for example, be the case if the sale of the respective portfolio results in the selling entity ceasing a considerable part of its regulated business.
4) Cross-border Transactions – in particular
In the context of cross-border transactions, i.e. in constellations in which a non-Swiss regulated entity acquires assets, liabilities and contracts located in Switzerland, additional regulatory requirements may apply which must be taken into account.
a) Establishing a Physical Presence in Switzerland by a Foreign Regulated Entity
The Swiss regulatory framework is liberal with regard to the provision of banking services on a cross-border basis. Banks and financial institutions domiciled outside of Switzerland may provide their services to Swiss customers on a cross-border basis without triggering a licensing requirement in Switzerland.
In contrast, under the FINMA-Ordinance on Foreign Banks (OFB-FINMA), a foreign bank, meaning any entity organized under foreign law that (a) is licensed as a bank outside of Switzerland, (b) uses the term „Bank“ or „Bankier“ in its company name, purpose or documentation or (c) provides banking services within the meaning of Article 2a of the Federal Ordinance on Banks, will become subject to a licensing requirement under the OFB-FINMA, if it establishes a physical presence in Switzerland within the meaning of Article 2 OFB-FINMA by employing persons in Switzerland that permanently, (i) enter into transactions, manage client accounts or legally bind the foreign bank in a professional capacity (requiring a license as a branch of a foreign bank) or (ii) act on behalf of the foreign bank in another manner, without entering into transactions, managing client accounts or legally binding the entity, namely by forwarding client orders to the foreign bank or maintaining a representation for marketing, advertising or other purposes (requiring a license as a representative office of a foreign bank). Article 52 et seqq. FinIA provide for a corresponding licensing requirement for financial institutions incorporated outside of Switzerland.
In light of this regulatory framework, in the context of an Asset Deal including a foreign bank or a foreign financial institution acting as buyer, it will have to be assessed whether acquisition of the respective assets, liabilities and contracts located in Switzerland will result in the foreign bank or the foreign financial institution establishing a regulated physical presence in Switzerland, triggering a licensing requirement under the OFB-FINMA or FinIA. Whilst each transaction will need to be assessed on a case-by-case basis, the mere acquisition of assets located in Switzerland should not trigger a licensing requirement under OFB-FINMA or FinIA. In contrast, an asset deal under which a foreign bank or a foreign financial institution acquires part of an operational business in Switzerland, including the assumption of Swiss-based employees, the transaction may ultimately lead to the establishment of a regulated physical presence in Switzerland, resulting in a licensing requirement under OFB-FINMA or FinIA. In such a case, the acquiring foreign entity will be required to obtain a license as a branch or representative office of a foreign bank or foreign institution, prior to closing of the transaction.
5) Transfer of Fund Management Contracts – in particular
To the extent that an Asset Deal includes the transfer of fund management agreements, the specific regulatory framework set out under CISA and FinIA will have to be complied with.
a) Approval Requirements at the Level of the Fund
Whilst the approval and notification requirements outlined above apply at an entity level, article 39 FinIA sets out a specific approval process in case of a change of the fund management company of a Swiss licensed fund. As a consequence, in the context of an Asset Deal under which fund management agreements are transferred, ultimately resulting in a change of the fund manager for the underlying fund, it must be ensured that the procedure outlined under article 39 FinIA is complied with.
While article 39(1) clarifies that the rights and liabilities of a fund management company can be transferred to another fund management company, certain regulatory requirements must be adhered to in the context of such transfer. The agreement governing the transfer of the fund management mandates must be concluded in written form or any other form evidenced in text. Further, pursuant to article 39(2) FinIA, the appointed custodian bank of the underlying fund must consent to the respective transfer.
In addition, article 39 FinIA, article 27 CISA, and article 41 of the Federal Ordinance on Collective Investment Schemes (CISO) set out a mandatory approval process which must be adhered to in the context of transferring fund management mandates:
- Publication of the Transfer and Objection: The existing fund manager must notify the investors in the fund of the intended change of the fund management company via the official publication media, in accordance with the fund documentation. The notification must, in particular, specify (i) that the investors have the possibility to raise objections to the intended change of the fund management company with FINMA (article 39(4) FinIA) and (ii) that the investors are permitted to submit a request for a cash redemption to the fund management company in accordance with the applicable contractual documentation Typically, a draft of the publication is submitted to FINMA for a pre-assessment.
- The objection period for the investors starts on the day after publication, and the investors have 30 days to raise any objections against the change of the fund management company with FINMA.
- Approval Process: Upon publishing the notification, the fund management company must submit a formal approval request to FINMA, which must be signed by the current fund management company, the custodian bank, and the new fund management company. FINMA will approve such a request to the extent it concludes that the statutory requirements for a change in the fund management company are satisfied and that the continuance of the fund is in the interest of the investors. Under this assessment FINMA will take into consideration the objections submitted by the respective investors.
b) Approval Requirements for Foreign Fund Management Companies
As outlined above, article 52 et seqq. FinIA stipulates that foreign financial institutions establishing a physical presence in Switzerland must obtain a license as a regulated branch or representative office of the foreign financial institution. However, a special licensing regime applies to fund management companies incorporated outside of Switzerland. Pursuant to article 52(2) FinIA and article 58(2) FinIA foreign fund management companies are prohibited from establishing a licensed branch or representative office in Switzerland. As a consequence, if a foreign fund management company wishes to establish a physical presence in Switzerland, it must establish a local Swiss entity which must then obtain a license as a Swiss fund management company under article 32 FinIA. Therefore, if a foreign fund manager establishes a physical presence in Switzerland by acquiring assets, liabilities, and contracts under an Asset Deal, the foreign fund management company must prior to closing of the transaction establish a local Swiss entity, which must subsequently obtain a license as a Swiss fund management company under article 32 FinIA.
6) Practical Considerations
As outlined above, the Swiss regulatory framework does not provide for a specific licensing, approval or notification requirement which is generally applicable to Asset Deals involving Swiss Regulated Entities. Based on the portfolio of assets, liabilities and contracts transferred under a specific transaction and in consideration of the regulatory status of the involved parties, it will have to be assessed if the Asset Deal in question triggers a regulatory approval or notification requirement under article 8a(1) Banking Ordinance, article 8(1) FinIA or article 29(2) FINMASA, as applicable. Additional regulatory requirements may apply in the context of cross-border transactions or transactions involving fund management companies and/or the transfer of fund management agreements.
Whilst the applicable regulatory requirements may vary depending on the scope of the Asset Deal and the involved parties, the regulatory approval and/or notification requirements set out under the Banking Act, FinIA, OFB-FINMA or CISA, as applicable, must be satisfied prior to closing of the respective transaction. Whilst from a civil law perspective, a breach of the regulatory requirements will not affect the validity of the transaction, an execution of an Asset Deal without obtaining prior FINMA approval or satisfaction of the applicable notification requirements may lead to administrative enforcement action by FINMA.
In view of the applicable regulatory framework, the respective transaction documentation governing Asset Deals involving Swiss Regulated Entities typically includes a closing condition relating to the satisfaction of the applicable regulatory approval and/or notification requirements. Considering that FINMA, in particular under article 8a Banking Ordinance and article 8 FinIA has a considerable degree of discretion when determining the materiality of a transaction and consequently the applicability of the formal approval requirement, in practice it can be advisable to informally reach out to FINMA at an early stage of a transaction to ensure alignment on the applicable regulatory requirements to correctly address the required regulatory steps in the applicable closing conditions.
Alexander Wherlock (alexander.wherlock@homburger.ch)