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Prominent Law Firm Provides Comprehensive Guide on Switzerland’s Regulatory Framework

The fintech sector in Switzerland has experienced significant growth in recent years, maintaining its appeal as a hub for financial innovation.

With over 400 active participants in Switzerland’s fintech ecosystem, the landscape is dynamic and diverse, boasting both emerging startups and established enterprises offering digital payment services, automated financial advice, digital asset trading, and more.

Swiss law firm Lenz and Staehelin released on March 21 2024 an extensive guide on the regulatory landscape for fintech activities, highlighting the main laws and requirements companies providing these types of services must comply with.

According to the guide, regulatory oversight of the Swiss fintech sector follows a technology-neutral and principle-based approach, relying on existing regulatory frameworks and stringent compliance requirements designed to ensure financial integrity and consumer protection. These laws include the Swiss Financial Services Act (FinSA) and Swiss Financial Institutions Act (FinIA).

However, several regulatory changes have also been introduced by the Swiss Financial Market Supervisory Authority (FINMA) to facilitate fintech advancement. Most notably, a specialized license termed the “fintech license” or “banking license light” allows businesses to accept deposits of up to CHF 100 million without engaging in traditional commercial banking activities, such as interests on deposits and reinvestments.

Additionally, fintech companies may hold deposits under CHF 1 million without such a license, and no banking license is needed if deposits are held for less than 60 days on a settlement account.

In addition to these rules, AML legislation applies to fintech companies acting as financial intermediaries, mandating compliance with know-your-customer (KYC) rules. Other regulations may also apply including data protection and cybersecurity laws, as well as specific requirements relating to outsourcing.

Robo-advisors in Switzerland

Robo-advisors, which offer online financial advice and investment management, aren’t subjected to specific regulations in Switzerland. However, in a bid to contribute to a fintech-friendly legal environment, FINMA has enhanced the regulatory framework to facilitate client onboarding via digital channels by removing the requirement that asset management agreements have to be concluded in writing. FINMA has also eased the rules of the online onboarding process for new businesses.

Under FinSA, financial service providers need to ensure that client orders are always executed in the best possible way with regard to financial terms, timing of execution and other terms and conditions. Providers must define, in a best execution policy to be reviewed annually, the criteria necessary for the execution of client orders. This includes the price, costs, timeliness and probability of execution and settlement.

Online lenders in Switzerland

Online lenders, also known as crowdlenders, fall under general financial services regulation, including AML legislation.

However, online lenders providing consumer loans must also comply with the Swiss Consumer Credit Act (CCA). Requirements include being registered with the Swiss Canton where they are established or, if activities are conducted on a cross-border basis by foreign lenders, with the Swiss Canton where they intend to perform their services.

Additionally, consumer loans that are obtained through a crowdlending platform must comply with the same consumer protection provided by the law as if they were extended by a professional lender.

Fund administrators in Switzerland

In Switzerland, the authorization or licensing process for investment funds varies based on whether these companies manage Swiss or foreign investment funds and the structure of the investment fund in question.

Open-ended collective investment schemes must be established in the form of either a contractual fund or an investment company with variable capital (SICAV). On the other hand, closed-ended collective investment schemes may only be set up as either a limited partnership for collective investments (LP) or an investment company with fixed capital (SICAF). Both LPs and SICAFs must obtain the relevant license from FINMA.

The Collective Investment Schemes Act further distinguishes open-ended funds based on the type of investments. Accordingly, securities funds, real estate funds, other traditional investment funds and alternative investment funds each follow a different set of rules regarding investment policy and permitted investment techniques.

Marketplaces, exchanges and trading platforms in Switzerland

In Switzerland, marketplaces and trading platforms are regulated by the Financial Markets Infrastructure Act (FMIA) and must seek authorization from FINMA as either a stock exchange or a multilateral trading facility. For the trading of digital assets, the distributed ledger technologies (DLT) trading facility authorization allows individuals to participate in such a trading facility without an intermediary.

FMIA differentiates between two primary asset classes: derivatives and securities. Derivatives involve additional obligations such as clearing through a central counterparty, using authorized trading facilities, and adhering to position limits for commodity derivatives. For cryptocurrency platforms, exchange activities in relation to virtual currencies are subject to AML rules.

Authorized stock exchanges and multilateral trading facilities are required by FMIA to implement appropriate self-regulation, implement rules on orderly and transparent trading, and monitor trading in order to detect violations of statutory and regulatory provisions. The rules on best execution as well as the general principles on fees also apply.

Finally, most FINMA-supervised institutions must also meet certain organizational requirements regarding market integrity. The requirements include investigating trades that may involve unlawful market behavior, the handling of insider information in a way that prevents unlawful market behavior and allows for its detection, as well as the monitoring of employee transactions.

High-frequency and algorithmic trading in Switzerland

Algorithmic trading, which relies on computer algorithms to automate order execution based on predefined parameters, is regulated under FMIA. High-frequency trading, a subset of algorithmic trading characterized by rapid order transmission and short-term trading strategies, is subject to regulations under both FMIA and FMIO.

Stock exchanges, multilateral trading systems and organized trading systems supporting these types of trading must have the proper systems in place. Requirements include ensuring orderly trading, the ability to identify orders generated by algorithmic and high-frequency trading, as well as the ability to temporarily suspend or restrict trading if there is a significant price movement in the short term.

Insurtech in Switzerland

Currently, there is no specific legislation tailored to govern insurtech business models in Switzerland. Consequently, any regulatory implications for insurtech models are evaluated based on the overarching principles governing the provision of insurance services.

The Insurance Supervisory Act (ISA) distinguishes between three kinds of insurance: life insurance, indemnity/non-life insurance and reinsurance. A key rule is that life insurers can only offer casualty and sickness insurance besides life insurance. Additionally, mandatory sickness insurers follow a completely different regulatory regime under Swiss law. Moreover, different rules apply with regard to capital requirements.

Regtech in Switzerland

Regtech, a subset of fintech, focuses on leveraging technology and software solutions to assist companies in meeting regulatory requirements and ensuring compliance in a cost-effective and comprehensive manner.

Switzerland doesn’t have any specific legislation governing regtech. However, regulated financial service firms using regtech providers must adhere to general outsourcing requirements. Additionally, depending on the nature of the services provided, regtech providers are required to comply with service-level agreements, ensuring performance and accuracy.

Blockchain in Switzerland

Swiss regulators generally apply existing rules concerning risks, liability, intellectual property, AML and data privacy to blockchain and DLT. Regarding initial coin offerings (ICOs), FINMA focuses on the economic function and purpose of the tokens, as well as whether they are tradeable or transferable, in order to classify them.

The regulator categorizes tokens into payment tokens (cryptocurrencies), utility tokens, and asset tokens, with each being subject to varying legal and regulatory frameworks.

On September 25, 2020, the Swiss Parliament approved a new legislation known as the DLT Law. Amendments include a civil law change aimed at increasing the legal certainty in the transfer of DLT-based assets; the possibility of segregation of crypto-based assets in the event of bankruptcy; and a new authorization category called DLT Trading Facilities which allow for the provision of DLT-based asset trading, clearing, settlement and custody.

Fraud in Switzerland

In Swiss law, fraud primarily pertains to criminal conduct as defined in the Swiss Criminal Code (SCC), with potential liability for corporations under specific conditions. To constitute fraud under the SCC, the perpetrator must deceive the victim, act maliciously, act willfully with the intention of unlawfully gaining financial benefit for themselves or others, and induce an error in the victim, leading to actions detrimental to their financial interests or those of others, resulting in damage.

Apart from this broad concept of fraud, other criminal offenses under the SCC relevant in commercial contexts encompass behaviors like forgery, mismanagement, bribery, corruption, and money laundering. Swiss financial market laws may also include provisions concerning fraudulent conduct and impose organizational measures such as fraud prevention and detection.

Featured image credit: Edited from freepik