On 2 November 2016 the Swiss Government presented a new fintech strategy. The Federal Department of Finance (FDF) is instructed to prepare a consultation draft legislation. The new strategy is supported by all other relevant financial market authorities, such as the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank.
Purpose of the Fintech Strategy
The Swiss financial services industry endured some significant setbacks in the previous years. Even though Swiss financial institutes are still amongst the leading financial services providers in the world, other countries have closed the competitive gap and are becoming strong contenders. The Swiss authorities, including the Swiss Government, are convinced that a dynamic fintech industry is indispensable for the quality of Switzerland’s financial centre and its future competitiveness (Swiss Government press release of 2 November 2016).
The Swiss Government is aware that „Digitisation in the financial business is advancing rapidly and has given rise to different business models in the fintech area. Accordingly, the requirements of these players for low barriers to market entry are different. The Federal Council is striving for a future-oriented solution which is as comprehensive as possible.“ (Swiss Government press release of 2 November 2016).
On 20 April 2016 the Swiss Government asked the FDF to assess the impact of the existing regulatory framework for fintech services (FDF, Background Documentation of 2 November 2016). The FDF came to the following conclusion:
- Fintech companies are currently – with respect to financial market regulation – affected by the Swiss Banking Act and the Ordinances thereto as well as the Swiss anti-money laundering law.
- Depending on the services provided by a Company, it is required to obtain a banking license. This might, in particular, be the case for payment services providers or services in the area of blockchain technologies (for example, traders, ATM operators, and depositories for virtual assets and currencies).
- The Swiss Banking law is primarily addressing banking institutes that do not only accept, but also lend money. These institutes have a substantial risk exposure and the need for regulation is not contested. The requirement of a banking license for fintech companies that are only providing limited banking services is a regulatory overkill and increases the barrier to market entry significantly.
Based on this assessment, the Swiss Government concluded that a quick development of an innovation-friendly regulatory environment for fintech services is of utmost importance.
It should be emphasized that the FINMA has already published on 17 March 2016 its own ideas for a fintech-friendly regulatory framework (see BR-News of 18 April 2016). The ideas of FINMA are incorporated in the new strategy.
Three Pillar Approach
The new Swiss fintech strategy consists of three pillars (FDF, Background Documentation of 2 November 2016):
- Specific regulatory adjustments in the current regulations
- Innovation area („sandbox“)
- Fintech license (with lower regulatory requirements than the banking licence)
Specific Regulatory Adjustments:
Under the Banking Ordinance (BankO), service providers that solely serve the purpose of the settlement of client transactions and on which no interest is paid are not qualified as deposit institute (Art. 5 para. 3 lit. c of the BankO). Currently, FINMA sets a timeframe of seven days for such settlement accounts. Such a short timeframe is not appropriate for crowdfunding projects. The fundrasing for such projects takes more time. The timeframe is also too short for business models that hold money on own accounts only on a temporary basis.
FDF proposes that the timeframe be extended to 60 days. That extended timeframe would be applicable for all service providers and not only for fintech companies.
FDF is planning to execute further assessments regarding necessary regulatory adjustments.
Authorisation-Exempt Activities („Sandbox“):
The current banking law permits the acceptance of funds from less than 20 people without a banking license. Fintech services are generally provided to more than 20 people. FDF proposes an expansion of that authorisation-exempt activity. This adjustment permits new market entrants to check the efficiency and workability of their business model before obtaining a license.
In the future the acceptance of funds should be exempt from authorisation, if the funds do not exceed a total value of CHF 1 million. If the funds exceed that amount or if more than 20 public depositors are involved, an approval by FINMA is required (a Fintech license).
Other countries have already set up regulatory sandboxes. A regulatory sandbox was initiated in the UK in May 2016. Singapore followed the example and a similar sandbox is planned in the USA (FDF, Background Documentation of 2 November 2016). The approach proposed by the FDF differs from those sandboxes. Contrary to the mentioned countries, the Swiss authorities do not decide about the inclusion of companies in the sandbox. Furthermore, the Swiss authorities do not (mandatorily) guide the companies in the sandbox. Companies benefiting from the Swiss regulatory sandbox are solely required to make transparent to their customers that they are not supervised by FINMA.
FDF proposes that a new license category be developped for companies that do not carry out typical banking business. These companies may perform certain banking activities, but they have a much lower risk exposure.
The new license category will be restricted to the deposit-taking business. Deposit lending is prohibited for such companies. Companies that are eager to obtain such a fintech license must comply with the following requirements:
- The accepted public deposits must not exceed a total value of CHF 100 million. As long as protection of the individual client is ensured by special guarantees, FINMA may authorise a higher threshold.
- The deposits must be held on one or more accounts in the name of the license holder and may not be invested or interest-bearing.
- The minimum capital is 5% of the accepted public funds, but no less than CHF 300,000. The capital can be paid in cash or in kind.
Other countries already adopted business-specific approaches. Some EU countries, such as Germany, France and the UK have enacted specific legislation dealing with crowdfunding, including specific license requirements for such activities (FDF, Background Documentation of 2 November 2016). The Swiss fintech license is not related to a specific kind of fintech activity. Any company that complies with the requirements set out above may obtain such a special category license.
FDF will prepare a consultation draft with the proposed legislative adjustments by January 2017 (FDF, Background Documentation of 2 November 2016).
As mentioned, the FDF will assess as a permanent task on whether further regulatory adjustments are needed. Such adjustments may include clarification with respect to the legal treatment of digital currencies and digital assets based on the blockchain technology. A report will be provided to the Swiss Government by the end of 2017.
In addition to the efforts of the FDF and actually already some times ago, FINMA has implemented a fintech desk as contact portal for fintech companies (email@example.com or +41 31 327 16 16 (Monday to Friday: 08.00 – 12.00)). It further provides on a regular basis fintech-specific regulatory information on its website (https://www.finma.ch/en/authorisation/fintech/).
Finma also entered into a cooperation with the Monetary Authority of Singapore (MAS) in order to further increase the innovation and the development of an innovation-friendly regulatory framework (see information on www.finma.ch). In addition, the Swiss Nationalbank is also following the developments in the fintech industry and is in a permanent idea exchange with other authorities and the industry (see Thomas J. Jordan, Presentation of 26 September 2016, Die Finanzmarktinfrastrukturen im Spannungsfeld zwischen Stabilität und Innovation).
Finally, it should be taken into consideration that financial market regulation is solely one set of legal provisions that affect fintech services. Data protection laws will, for example, gain a substantial impact on fintech activities. Fintech services such as robo advisors, but also other services that will increasingly use artifical intelligence are dependent on big data or – in the fintech industry – smart data. With that respect it is rather regrettable that the newly enacted EU data protection ordinance does not set out a comprehensive framework for big data activities. In Switzerland a revised data protection act should be ready for consultation at the end of December 2016. So far, the proposed provisions do not include a comprehensive framework for big data activities. The proposed provisions might rather increase the burden for big data activities in Switzerland. It would be a „Monty Python“-worth approach, if the Swiss Government adjusted the financial market regulation in order to boost innovation in the fintech industry, but is on the same time increasing the regulatory burden for big data activities, which are essential for future fintech business models.
- Swiss Government press release of 2 November 2016
- FDF, Background Documentation of 2 November 2016
- BR-News of 18 April 2016
- Swiss Banking Ordinance
- Fintech-related information on www.finma.ch
- Thomas J. Jordan, Presentation of 26 September 2016, Die Finanzmarktinfrastrukturen im Spannungsfeld zwischen Stabilität und Innovation