Posts in "Banking and Finance Law"

Banking and Finance Law

VAT and Cryptocurrency ICOs

January 25, 2023 Comments Off lexpro read

In 2018 the Swiss Federal Tax Administration (SFTA) adjusted its guidelines in respect to the taxation of cryptocurrencies through the use of a value-added tax (VAT). A VAT acts as an incremental goods and services tax at all stages of production.

These updated guidelines (MWST-Info 04) define cryptocurrencies as value units generated on a digital ledger network known as a blockchain. Complex algorithms are solved using a computer’s GPU to generate decentralized tokens that are “minted” and constantly verified by the blockchain network.

Initial Coin Offering and Initial Token Offering

Initial coin offering (ICO) and initial token offering (ITO) allow a company to sell off tokens to raise investment for a specific venture. In exchange, buyers are issued blockchain-verified cryptocurrencies. Assessing VAT taxation against this currency depends on the way it was initially distributed during the ICO or ITO phase. The structure of the initial offering and any benefits that the token-holder receives is relevant when determining its VAT status under the new framework. The SFTA draft (VAT-Info 04) outlines the VAT status between three categories of cryptocurrency:

Payment tokens

Payment tokens act like typical currencies and are used to buy goods and services. As such, the SFTA treats payment tokens as if they were official currency. Rather than an exchange transaction, using payment tokens for market transactions is considered remuneration and depends on the value of the goods or services at the date and time of the transaction in question.

Like the exchange of foreign currencies, when official currencies are used to purchase and sell payment tokens, it is considered a non-relevant exchange for taxation purposes. Commissions, when collected, are considered exempt from VAT.

The platforms of exchange themselves are not entirely exempt from value-added taxation. Swiss exchanges are expected to pay VAT if the trader lives within Switzerland. Suppliers of electronic stores for cryptocurrency known as ‘wallets’ are likewise subject to VAT. If the holder of the cryptocurrency lives in Switzerland, VAT will also apply to the storage of tokens on digital media.

Utility tokens

Utility tokens grant benefits or services to the holder on behalf of the original issuer. Issuing utility tokens are typically considered a service and subject to VAT if the receiving party lives in Switzerland. This does not apply when the benefits granted by the utility token are already exempt from paying VAT.

Asset tokens

Like regular shares, asset tokens represent an entitlement to a proportionate share of a company’s profit, revenue, or other rights specified during the exchange. In relation to uncertified security and derivatives, issuing asset tokens is considered turnover and is thus exempt from VAT.

Mining crypto

The generation of cryptocurrency using a computer’s processing power is known as “mining”. As the computer solves highly-complex algorithms, it submits proof of work to certify and “mint” new units of value. Crypto-miners receive a payout from the blockchain when new tokens are generated, which is not considered as being an exchange of goods or services. Therefore, blockchain payouts are exempt from VAT. The crypto-miner is also paid a transaction commission when the tokens are transferred over the blockchain. This income is treated as income generated doing work in the financial sector and is therefore exempt from VAT.

VAT invoicing

Buying official currencies using tokens requires documentation that proves the date of conversion and the exchange rate. To collect a VAT on goods and services purchased with cryptocurrency, the price of the product is converted into a recognized official currency: receipts for products paid for in cryptocurrency must provide an official price and VAT in both formats. The invoice for a VAT must show official currency values alongside cryptocurrency values and is owed to the SFTA in Francs.

Conclusion

The SFTA’s updated framework boosts the institutional transparency of how cryptocurrency is taxed in regard to value-added taxation. Some tax professionals commend Swiss policy for assuming regulatory leadership aligned with our increasingly connected and constantly innovating global market. Although VAT might annoy some holders of crypto, the improved clarity and dependability of the market greatly benefit Swiss blockchain enterprises.

This article was written based on the SFTA’s first draft of guidelines and before meeting with the Consultative Body. The content of the SFTAs initial draft may vary widely from the final guidelines.

Banking and Finance Law

Regulatory and Legal Considerations for Non-Fungible Tokens (NFTs) in Switzerland

September 15, 2022 Comments Off lexpro read

There has been an increase in the popularity and use of non-fungible tokens (NFTs). There are more and more startups developing and trading NFTs or providing advice on NFTs in Switzerland’s Crypto Valley. Likely, some legal and regulatory issues will still need years of clarification – both for developers and users.

Towards the end of 2014, Justin Biber purchased a non-fungible token (NFT) from the Bored Ape Yacht Club collection for about $1.3 million. The trading of NFTs on platforms such as OpenSEA, Rare and Nifty amounts to hundreds of millions of dollars every week.

What exactly does buying an NFT entail?

NFTs are digital tokens that are anchored on the blockchain and are linked to goods (usually digital). NFTs can be physical or immaterial goods from the real world. There are practically no limits to the possible links, but currently, the focus is on art and gaming accessories.

NFTs must first be created or “minted”, like all tokens. It is not necessary to have any prior technical knowledge to create an NFT on the specialized platforms. An NFT is a unique, special form of token.

An NFT is given an identification number during minting. As well as providing it with information about the work, such as a short description, its design information, ownership information, and transaction history, the software also provides metadata like its location or hash value.

In what way do NFTs help?

Ownership: Until now, digital files could be reproduced indefinitely and interchanged. ERC-721 is the first standard that combines digital and original. NFTs are scarce because they cannot be duplicated and can be printed in only a limited number of copies by the minter.
Market: It is also possible to trade a good once ownership is secured. Previously, there were no markets for goods traded through NFTs. In the future, licensing could potentially cut out middlemen from the economic cycle in-licensing and perhaps one day in real estate and mortgages.
Copyrights: It is now possible for authors to receive a certain percentage of resale proceeds without having to share the proceeds with record companies.

The main risks associated with purchasing or creating NFTs

Preliminary clarifications are not required. It would be ideal if the artist minted his work himself, or if he had legally acquired the rights to mint it. Unfortunately, this might not always be feasible.
Link problems. URL locators allow NFTs to find data anywhere on the Internet. The NFT’s link leads nowhere if the website has problems. There is no centralized control over IPFS, which is a decentralized network for storing files. An IPFS address can be assigned to any file within the IPFS network.
Wallet. An NFT can currently only be created or traded on specialized platforms. A platform may cease to exist or be closed if, for some reason, it is no longer operational. To buy and sell an NFT, like any other type of token, you will need a wallet. You need to check if your wallet accepts NFTs before purchasing.
Confusing copyright rules. When an NFT is acquired, copyrights to the underlying work are not automatically transferred. A license right is only granted for private use, which can be used for personal and non-commercial purposes. A certain amount of revenue is usually allowed per year for commercial use, but sometimes it may be restricted. Thanks to NFTs, the Swiss go-it-alone approach will be a thing of the past. This will also result in Swiss artists being able to enforce their licensing rights. Similarly, EU laws already recognize unbridled royalties on second-hand sales. Royalties cannot depend on the platform on which an NFT is sold.
Terms and Conditions. NFT platforms vary in their rulings regarding licensing rights to material linked to the NFT, some of which state the rights are solely the creators. For example, despite providing free personal licenses to its buyers, the terms and conditions of Bored Ape Yacht Club do not mention or indicate any license fees in their commercial licenses.

Conclusion

We expect that NFTs will become established in a wide range of economic sectors as a result of their many possible applications. NFTs can be applied in an almost infinite number of applications, and the technology is constantly evolving. It is wise for minters and developers of NFT- projects to find out in advance how the Swiss regulations apply to them.

Banking and Finance Law

FINMA and Swiss Regulation on Cryptocurrency

August 4, 2022 Comments Off lexpro read

Presently, Switzerland is a hub of a thousand crypto businesses, thanks to its progressive crypto laws. Also, the Bank of International Settlements (BIS) has its seat in Basel.

The Swiss Financial Market Supervisory Authority, also called FINMA, regulates Switzerland’s financial markets and service providers. Based in Bern, Switzerland, it is an independent institution with control over banks, insurance companies, stock exchanges, securities dealers, and collective investment schemes. It is responsible for preventing money laundering and for resolving financial problems when necessary.

In addition to the licensing and monitoring of the supervised institutions, FINMA ensures that they comply with all the requirements of the laws, ordinances, directives, and regulations, as well as with the conditions for granting licenses that must be met at all times.

An application for a license from FINMA is required if a VASP (Virtual Asset Service Provider) wishes to operate in Switzerland.

Exchanges of cryptocurrencies are legal in Switzerland, provided they are licensed and regulated by FINMA. In Switzerland, exchanges (or, more generally, VASPs, or Virtual Asset Service Providers) are legal and regulated.

Exchanges must conduct Enhanced Due Diligence regarding AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism).

FINMA granted cryptocurrency trading and custody licenses to two financial institutions (FIs) in 2019. By doing so, these banks can maintain business customer accounts and support the wider blockchain economy infrastructure.

Financial Institutions, exchange-traded funds (ETFs), and other financial products and services are incorporating crypto assets into their portfolios and adopting distributed ledger technology. Following Switzerland’s Blockchain Act, two more Financial Institutions were granted licenses in 2020 as a result.

Swiss ICO regulations

Swiss crypto laws are strict when it comes to ICOs. Switzerland is a hot spot for ICOs (Initial Coin Offerings). Its wealth concentration, its connection to financial markets, and other factors contribute to its popularity.

Swiss regulator FINMA adopts the ‘same business, same rules’ approach to ICOs, meaning that new technologies are not treated differently if they perform the same function. As a regulatory body, FINMA believes ICOs can be regulated under existing financial securities laws, however, it has provided insight with its “ICO Guidelines.”

ICOs are governed by legislation relating to money laundering, terrorism financing, securities trading, and CISP law.

Swiss Crypto Tax regulation

In 2020, the canton of Zug passed a law that allowed the residents of the canton to pay their taxes in crypto up to CHF 100,000.

Additionally, the Swiss Federal Tax Administration recognizes Bitcoin, Ethereum, and other popular cryptocurrencies as assets. This means that any profit made out of crypto is subject to taxation and therefore must be declared.

The Swiss Blockchain Act

The Swiss Parliament passed the Blockchain Act in 2020, as a set of amended laws. It will bring the creation of tokenized capital shares, art, and other assets that are traded via blockchain platforms. However, It is important to note, that the Blockchain Act does not involve the Central Bank’s digital currency.

Banking and Finance Law

Overview of the Automatic Exchange of Information (AEOI) Process

June 14, 2022 Comments Off lexpro read

Since 2017, Swiss banks have been conducting Automatic Exchange of Information (AEOI) with their foreign counterparts. Read on to learn how it works.

AEOI: What is it?

The AEOI standard specifies how tax authorities in participating countries exchange data about taxpayers’ cash and custody accounts. Tax transparency is the purpose of the standard. Over 100 countries and jurisdictions, including G20 and OECD member states, have committed to implementing AEOI. However, one exception to this rule is the FATCA standard, which is unique to the US.

AEOI: How it works

AEOI requires a financial institution in country B to report to the national tax authority in country A information regarding cash and custody accounts held by customers in country A. This information is then sent to the tax authority in country A, which compares it against the customers’ returns. Consequently, information is reciprocally flowing between AEOI partners, creating a global information-sharing network.

AEOI has been adopted as the norm

Switzerland is particularly affected by AEOI because it is an international financial center that serves customers worldwide. To ensure compliance with the latest international standards, AEOI was fully implemented. Banks and their customers have thus become accustomed to sharing data across borders.

Since 2018, Switzerland has been sharing information with AEOI partner states on millions of cash and custody accounts. AEOI agreements are now in place with approximately 100 countries, and its network continues to expand. Once additional states meet the international AEOI requirements, information will be shared with them.

AEOI review and refinement

The fact that AEOI has become a global norm makes Swiss financial centers even more sensitive to ensuring a level playing field relative to their rivals. In the context of greater tax transparency, however, special attention must be paid to laws protecting confidentiality, data privacy, legal certainty, and specialization. To ensure a level playing field, the Global Forum of the OECD reviews all participating members and makes recommendations.

During its first review of AEOI implementation, the Global Forum rated Switzerland as generally good but recommended improvements in some areas. Switzerland has since modified its legal basis for AEOI (the AEOI Act and Ordinance), in response to the Global Forum’s recommendations. During the SBA’s argument, it succeeded in minimizing the impact of the amendments on banks. These amendments became effective on 1 January 2021.

An overview of AEOI’s legal foundation

Four elements make up the AEOI standard, which is set out in the OECD’s Standard for the Automatic Exchange of Financial Account Information in Tax Matters.

A treaty or intergovernmental agreement
Common Reporting Standard(CRS)
The commentaries
Implementation Guide

Translated into Swiss law

To become applicable to Switzerland’s banks and tax authorities, the AEOI standard needs to be incorporated into Swiss national law and other regulations. These include:

AEOI Ordinance (AEOIO), which became effective on 1 January 2021;

Amendments to the AEOI Act, effective 1 January 2021;
FTA technical guidelines defining IT requirements.
Updated FTA Guidelines on AEOI, which provide nearly 180 pages of details on how financial institutions should implement AEOI;

Qualification Committee for AEOI

To jointly implement the AEOI standard, the AEOI Qualification Committee was established to facilitate dialogue between the tax authorities and the financial sector. It explains how Swiss AEOI rules are interpreted and standardizes the implementation of those rules.

The Federal Tax Administration (FTA) and the State Secretariat for International Finance (SIF) lead the AEOI Qualification Committee. Also involved are several organizations from affected sectors, including the Small Business Administration.

Banking and Finance Law

The Swiss Anti-Money Laundering Act Projected to Undergo Major Changes in 2022

March 22, 2022 Comments Off lexpro read

The Financial Action Task Force released an annual national report on Switzerland in December 2016. The report rated the Swiss system for detecting money laundering and terrorism funding as generally excellent. But the FATF also found several flaws and advised to address them.

Federal Council (government) authorized the Swiss Federal Department of Finance to develop an initial consultation draft that incorporates the findings and suggestions of FATF’s country report and improves the Swiss financial center’s reputation. September 2018 marked the conclusion of this consultation session.

In June, 2019, the Swiss Federal Council released a report on the proposed amendments to the Anti-Money Laundering Act (AMLA). There has been a lot of talk about the AMLA change during the last two years. On the other hand, the Swiss Parliament finally agreed to enact a new AMLA on March 19, 2021. By the middle of 2022, the updated AMLA and the supporting secondary legislation should go into effect.

Swiss authorities are likely to encounter further pressure in the future to strengthen its anti-money laundering laws.”

An issue in the proposed law was the inclusion of so-called ‘advisers’ in the AMLA’s duty. According to the law, physical or legal individuals who are commercially engaged in connection with the formation, management, or administration of domiciliary corporations and trust and the formation of raising money in this context have been referred to as “advisors.”

In addition, the AMLA would have covered the acquisition and sale of domiciliary corporations and the provision of addresses or buildings as a domicile for a domiciliary firm or trust. This change would have impacted attorneys and notaries in particular. Switzerland’s parliament voted to reject the proposed change, primarily to maintain the attorney-client privilege.

Natural citizens and legal entities that sell things and take cash are subject to the AMLA, as stated in Article 2 of the AMLA, as are financial intermediaries (dealers).

In the course of a business transaction, dealers who take more than CHF 100,000 in cash are required to perform specific tasks under Article 2 of the AMLA. FATF had suggested a $15,000/€15,000 cutoff. On the other hand, the Swiss parliament rejected a plan to lower the cash payment threshold for precious metals and gemstones from CHF 100,000 to CHF 15,000.

The most significant modifications to the AMLA are outlined below in a quick summary.

Verification of the beneficial owner

Financial intermediaries must verify the identification of the beneficial owner according to the AMLA’s Article 4 paragraph 1 to comply with the applicable regulations. For this reason, a formal statement from the client is usually required by the financial intermediary, explaining who the beneficial owner is.

By law, financial intermediaries will now be required to authenticate the identification of the beneficial owner in addition to establishing that person’s identity under the new AMLA. According to Article 4, paragraph 1 of the amended AMLA, a financial intermediary shall do due diligence to identify the beneficial owner and authenticate his or her identity.

According to a government dispatch, depending on the contracting party, the financial intermediary may use a risk-based approach and apply various steps to check the plausibility of the beneficial owner’s information. The financial intermediary’s evaluation isn’t indicated in the message. Just asking for a copy of the beneficial owner’s identification document is not enough to satisfy the legal need to verify the beneficial owner.

Duty to update all business relationships

A financial intermediary is only required to verify or establish an individual’s identification once throughout an ongoing commercial relationship under the present AMLA. The absence of a broad and clear requirement to ensure that customer data is up to date was described as a severe shortcoming by the FATF in its most recent country report on Switzerland.

Now that the AMLA has been changed, it mandates that customer data be verified and updated regularly. No matter how risky, all commercial connections are bound by this commitment. Only when it comes to the frequency and breadth of the review does a risk-based strategy apply.

Customer data must be updated by Articles 3 and 4 of the AMLA and a more general evaluation of the client profile to comply with the obligations imposed by the AMLA. According to the current legal regulations, data and paperwork must be updated as needed. As a result, financial intermediaries with extensive and long-standing customer bases will have to invest a significant amount of time and effort.

Suspicious behavior must be reported.

Article 9 of the AMLA, which requires financial intermediaries to report suspicious activity to Switzerland’s Money Laundering Reporting Office, needs to be revised as well (MROS). Under current legislation, a SAR should be filed if a financial institution has “actual knowledge of or reasonable grounds to suspect” an illegal origin of acquisitions. However, according to case law, the statutory requirement to submit a SAR is triggered by mere suspicion, and thus, the obligation to register a SAR is relatively low in this case.

As mentioned in the parliamentary sessions, the low simple suspicion’ threshold caused legal confusion and led to many SARs and a backlog at MROS. Even more importantly, the Swiss Parliament said that a breach of the obligation of reporting might result in penalties of up to CHF 500,000 and/or professional suspension, necessitating more legal clarity.

To put it another way, if money laundering is suspected, a financial intermediary must examine any tangible or multiple indicators that the assets may have originated from a predicate offense to money laundering, as mandated by Article 6 of the AMLA. Reports are required when suspicions cannot be dispelled, and it is determined that they are well-founded.

Under the new rebuttal procedure, the real compliance obligations of financial intermediaries are not yet evident. According to AMLA article 6, no new explanations have been made, and no way has been specified for their implementation. AMLO-FINMA Article 16 paragraph 1 provides possible investigative methods to provide some advice. This ordinance was published by the Financial Markets Supervisory Authority (FMSA).

The investigation process can include obtaining written or verbal information on the contracting party, the controlling person or beneficial owner of assets, as well as visits to their place of business, consultation of public sources and databases, and, if necessary, information from trustworthy individuals. Consequently, depending on the circumstances, investigations may include, for example:

As required by AMLO-FINMA Article 16 paragraph 2, financial intermediaries must verify the integrity of these investigations and keep records of their findings. In accordance with Article 7 of the AMLA, the documentation must be adequate such that a competent third party may make a trustworthy decision.

Money Laundering Reporting Office Switzerland (MROS)

As a result, the current deadline for MROS processing a report is eliminated by Article 9b of the revised AMLA. In exchange for this elimination, Article 9b grants a financial intermediary the right to terminate their reported business relationship with the SCC if MROS does not notify them within 40 working days after a report is filed under Article 9 paragraph 1 lit.

An intermediary financial wishing may withdraw only substantial assets that law enforcement agencies can track to end the commercial connection (Article 9b paragraph 2 of the revised AMLA). MROS must be notified right once a commercial connection has ended and the date of the termination (Article 9b paragraph 3 of the revised AMLA).

Transparency enhancements for organizations that may be sponsoring terrorists.

For the time being, associations may choose to be included in the commercial register but are not required to do so. If the association has a commercial purpose or is audited because of its economic relevance, it is responsible (Article 61 paragraphs 2 and 69b of the Civil Code).

Suppose associations under Article 60 et seq. of the Civil Code have an increased risk of abuse, such as collecting or distributing assets abroad primarily to benefit charitable, religious, cultural, educational, or social causes. In that case, they will be required to register in the cantonal commercial register in the future to prevent their abusive implementation.

Incorporating these organizations into the business register allows the public access to crucial information, such as the purpose, board members, authorized signatories, auditors, or the organization’s location. A company’s registration in the commercial register is also accompanied by the need to keep accurate financial records in compliance with the Code of Obligations.

In the future, all organizations that are obliged to be registered in the commercial register will be required to retain a list of members with their first and last names or firm name and address, like corporations regulated by the Code of Obligations. There must be a mechanism to access the registry at any time in Switzerland.

The membership registry may only be accessed by a representative who is a Swiss citizen or permanent resident. As long as the association has a Swiss resident on hand, any legal action against it will be investigated without the need for overseas legal aid.

The Federal Council might exempt such organizations from registration if the quantity, origin, purpose, or planned use of the assets gathered or dispersed represent a minimal risk of abuse for money laundering or terrorist funding, according to a new Article 61 paragraph 2ter of the Civil Code.

This clause ensures that organizations that pose a minimal risk of money laundering or terrorist funding are exempt from the need to register under this law. Even though the Federal Council did not include an exclusion to the scope of applicability in its draft of the new Commercial Register Ordinance, the danger of money laundering or terrorist funding was clearly not enhanced.

After the modifications of March 19, 2021, organizations that are already registered must comply with the new criteria for member lists and Swiss representation within 18 months of the amendments taking effect. A representative in Switzerland must be designated within 18 months for existing organizations made mandatory to register.

A new Article 327b in the SCC will be adopted, which punishes willful violations of the obligation concerning the register of members and representation in Switzerland with a fine to effectively enforce the new transparency standards for organizations. Article 153 of the SCC (false statements to commercial registration authorities) already makes it illegal to violate the requirement to register in the business register intentionally, and it is punished by up to three years in jail or a fine.

Outlook

To begin with, the Federal Council, on October 1, 2021, started the consultation process for changes to the Anti-Money Laundering Ordinance and other laws. The proposed modifications to the updated Anti-Money Laundering Act give greater information on the measures.

Banking and Finance Law

Structured Products under FinSA

February 21, 2022 Comments Off lexpro read

The Swiss regulatory environment for structured products has changed considerably as a result of the FinSA and FinSO’s implementation. Certain amendments to structured product regulations are made directly, but the great majority are made as a result of their inclusion in the FinSA’s broader framework. This article discusses the new structured product regulations, as well as a few particular issues.

This part will serve as a primer on the subject.

When the Financial Services Act (FinSA) and the Financial Services Ordinance took effect in January 2020, structured product regulation underwent significant changes. (FinSO). Until 2019, structured products were governed under Article 5 of the Collective Investment Schemes Act (CISA), and the previous Collective Investment Schemes Ordinance articles 3(7) and 4. (CISO). Since these legislative restrictions do not fulfill the criteria of a “collective investment plan,” they cannot be enforced to the fullest degree feasible.

Starting with 2020, Articles 70 and 96 of the FinSA and FinSO, which govern structured commodities, have been repositioned. As a result, relevant parts of CISA and CISO have been eliminated. Because the FinSA and FinSO have made significant modifications to structured product regulation, this is not a simple transfer of previous regulations. Certain modifications are immediately apparent because they are reflected in the applicable regulations. The inclusion of structured products in the FinSA’s broad regulatory framework has a number of less obvious but nevertheless significant repercussions.

Article 94(3)(a) of the Financial Market Infrastructure Act (FMIA), which exempts structured products from derivatives trading limitations, has also been preserved (i.e., clearing, reporting, risk mitigation, etc.).

Structured products have been added to the list of financial instruments permitted for investment purposes according to FinSA article 3(a) (4). As a result, the same laws that govern the sale and distribution of financial instruments, as well as financial services, must apply. The FinSA’s Articles 70 and 96 go into further detail on structured products in addition to the FinSA’s overarching framework. In any event, the previous “ad hoc” system of commodity regulation has been phased down.

Under the FinSA, structured goods are not defined in the same way as they were under the CISA. According to Article 3(a) of the FinSA, “financial instruments” include “capital-protected commodities, capped return products, and certificates” (4). Article 5 of CISA has a similar group of examples. Along with “exchange-traded goods,” this regulation covers all other types of instruments, such as trackers, certificates of reverse convertibles, and warrants.

If there is any uncertainty about whether a product qualifies as a structured product under FinSA’s definition, one of the following options is available:

Verify that the category in which you are interested in one that is recognized by the Swiss Structured Products Association (see FinSO Annex 3, sections 1.2.2 and 3.0).

Consider the following ESMA definition, which we believe is equivalent to Swiss practice: “To give economic exposure to reference assets such as benchmarks or portfolios, an embedded derivative (or derivatives) may be included into a note, fund, or deposit. The term “structured retail products” refers to these financial instruments. They give investors with predetermined pay-offs based on the performance of reference assets, indexes, or other economic indicators.” 2nd Instead of structured products under article 3(a)(4) of FinSA, structured funds and structured deposits are classified as units in collective investment schemes and variable return deposits under article 3(a)(3) and 6 FinSA, respectively. This is a significant difference.

A prospectus is necessary.

Due to the fact that structured products are now deemed financial instruments under FinSA article 3(a), they must be accompanied by a prospectus if they jointly offer any of the following risks:

Additionally, it is a security, as defined in FinSA article 3(b) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA article 3(a) for instruments issued for mass trading in financial markets, as defined in FinSA (b).

The product may be offered openly or via a trading venue, as defined in Article 35(1) of the Financial Services Act.

The prospectus should be written in line with FinSO Annex 3 if all of these requirements are satisfied. (“Minimum prospectus content: Derivatives scheme”). If the requirements set out in article 51(2) FinSA are satisfied, structured product prospectuses may be published prior to submission to the reviewing authority under item 2 of FinSO Annex 7 prospectuses.

This is a private client-only service.

Previously, structured product distributors were required to provide non-qualified investors with a “simplified prospectus” (old CISA article 5(1)(b)). “Guidelines on Educating Investors about Structured Products,” most recently revised in 2014, have been endorsed by INMA, the Swiss Bankers Association, and the Swiss Structured Products Association.

Numerous provisions of the FinSA are triggered by an “offer to private customers” rather than a “distribution to ineligible investors.”Article 3(g) FinSA (as well as article 3(5) FinSO) defines an instrument as an offer if it contains enough information about the terms of the offer and the instrument itself. Individuals who do not match the professional-client qualifications set out in article 4(3) FinSA are referred to in article 4(2) FinSA as private consumers.

Structured products marketed to retail investors must comply with the following criteria:

Given the inclusion of structured products in the FinSA’s fundamental design, issuers must create a Key Information Document (article 58 FinSA; FinSO Annex 9). Articles received on behalf of customers as part of a portfolio management agreement are exempt from this legislation.

The goods must be backed by a regulated institution (financial services act, section 70(1); financial services act, section 96(3)). This offer is not needed to be made by customers’ portfolio managers or investment advisers (as defined in FinSO article 96(1)).

Offerings by “special-purpose entities” as defined in FinSO must be made via a regulated institution, and collateral must be guaranteed by another regulated institution (FinSA article 70(2)), if applicable.

Structured sales and offers are also considered to be a kind of financial service (see below).

Excluding funds, manager services would have two significant consequences.

Non-regulated issuers will initially find it substantially simpler to sell their product via regulated institutions such as banks, securities companies, or asset managers. In other words, unregulated issuers are encouraged to partner with regulated institutions to market their products to their customers on their behalf rather than directly to end consumers.

Additionally, portfolio managers will have relatively unrestricted access to ad hoc structured products issued by third-party issuers on behalf of their clients, as well as their own proprietary structured products. As a consequence, the FinSA’s standards for portfolio managers ensure that customers’ interests are effectively protected (see FinSA articles 6 and ff.).

Distribution and promotion

Structured products must adhere to the advertising rules for financial instruments, which begin with articles 68 and 95 of the FinSA. Article 68(2) of the FinSA demands the inclusion and proper identification of all relevant documents (see also article 68(1) of the FinSA).

In the context of FinSA article 3(c)(1), direct sales of structured products may be considered a financial service (“acquisition or disposal of financial instruments”). It is considered to encompass any action-oriented especially towards individual consumers and directed at the purchase or disposal of a financial instrument within the definition of [3(c)(1) FinSA] as per article 3(2) FinSO. Consumers may be influenced to purchase a certain financial instrument by a variety of activities, according to the FinSO of the Federal Council. Thus, we question FinSO’s article 3(2), which substantially changes the ordinance’s meaning because of FinSA 3(c)(1). Article 3(c)(1) requires that the FinSA be widely implemented. There’s no way to tell for sure, unfortunately.

If the promotion and selling of structured products were deemed a financial service under FinSA Article 3(c)(1) and FinSO Article 3(2), actors would be obliged to adhere to the FinSA Code of Conduct (Article 7 ff. FinSA) and be registered as advisers (article 28 ff. FinSA). The future will reveal if this expansive vision of financial services is maintained or narrowed.

Banking and Finance Law

Parliament Adopts Partial Revision of the Swiss Federal Banking Act on December 17, 2021

January 31, 2022 Comments Off lexpro read

The deposit insurance scheme relies on two pillars: banking regulation and deposit insurance.
One of the main provisions of the banking regulation is that banks need to have sufficient capital and liquidity at all times. If a bank is closed down, a deposit insurance’s role is to ensure that its clients will get their money back fast.

Switzerland’s parliament passed a partial amendment of the Swiss Federal Banking Act (Bundesgesetz über die Banken und Sparkassen) on December 17, 2021. These changes are made to ensure the stability of the financial markets and to protect customers’ bank deposits.

There are three main areas of investment protection addressed by this recent partial revision, which was first proposed by the Federal Council and has now been approved by the Swiss Parliament:

Payment of deposit insurance;
Deposit insurance scheme; and
Improvement of financial market stability.

Insured Deposit Payments (Einlagensicherung)

Per the bankruptcy liquidator’s promise, insured deposits will be paid out (up to CHF 100,000 per customer and bank within seven working days.

Insurance for Deposits

Deposit insurance’s maximum contribution will increase from 6 billion Swiss francs to 1.6% of the insured deposit total (which currently amounts to around CHF 7.4 billion). Six billion Swiss francs is the absolute minimum.

Stability in the financial markets

Permanently depositing high-quality assets or Swiss francs with an independent custodian will safeguard the other half of the banks’ commitment to the deposit insurance program.

This new Swiss Banking Act also includes changes related to bank insolvency and the segregation of securities implemented in the Swiss Federal Act on Intermediated Securities.

What is the goal of deposit insurance, and what advantages does it bring to the bank’s clients?

The purpose of deposit insurance is to offer a bank’s clients sufficient money to cover all their day-to-day living costs within a short period of time in case their bank goes bankrupt. This certainty increases banks’ level of trust and stops a “run on the bank” and its negative impact on society.

Why should the legislation be revised?

Measures like more stringent capital adequacy and liquidity directions and the undertaking of “too big to fail” protocols have further enhanced the stability of the financial sector and the overall security of banks.

As an added security feature, during the 2008 financial crisis, deposit insurance was considerably improved. From that moment, Switzerland’s deposit insurance scheme has had efficacious tools at its disposal that are not available anywhere else. Two of these instruments are

The payment of deposits from the bank’s available liquidity and
The 125% rule which demands banks to hold liquid assets in Switzerland. These assets serve as additional collateral to ensure the payment of their protected and preferential deposits.

How will the proposal affect banks?

Diminishing the time accepted to payout will lead to higher expenditures for banks. Still, these costs should be regarded as one-off implementation costs of around CHF 90 million, followed by expenses of roughly CHF 22 million per year, which will increase the financial sector’s reputation.

In Conclusion

The planned correction is practical, and it would further improve the financial market stability, the security of the banks, and the reputation of the Swiss banking industry.