Consultation on New Fintech Regulation

The Swiss Federal Council initiated the consultation on the new Swiss fintech regulation on 1 February 2017 (see Federal Council, Press Release of 1 February 2017, Federal Council initiates consultation on new fintech regulation). The consultation will last until 8 May 2017. The new fintech regulation aims to reduce market entry barriers for fintech companies, to strengthen the competitiveness of the Swiss finance center, and to achieve an innovation-friendly regulatory environment for fintech services in general (see already BR-News of 2 December 2016).

De-Regulation: Risk-Based Approach

The regulation proposed by the Federal Council aims to de-regulate the legal requirements to be complied with by fintech and other firms providing services outside of the normal banking business (Federal Council, Press Release of 1 February 2017, Federal Council initiates consultation on new fintech regulation). Studies revealed that these service providers have usually a lower risk exposure than normal banking service providers. Thus, the application of the requirements to be complied with for obtaining a banking license puts an undue burden on such service providers.

The new fintech regulation includes three elements (Federal Council, Press Release of 1 February 2017, Federal Council initiates consultation on new fintech regulation):

• Extension of the settlement period to 60 days. Pursuant to Art. 5 para. 3 lit. c of Swiss Banking Ordinance service providers that merely serve the purpose of the settlement of client transactions without paying an interest on the deposit are not qualified as deposit institute and must therefore not obtain a banking license. So far, the settlement period set out in this provision was seven days, which is, for example, too short for crowdfunding service providers.
• Creation of an innovation area (“sandbox”): service providers that accept public funds of up to Swiss francs 1 mio. can be exempt from obtaining a banking license. The innovation area should permit companies to test new business models prior to obtaining a banking license.
• “Banking License Light”: Companies that accept public funds up to a maximum of Swiss francs 100 mio. without operating in the lending business should benefit from a banking license with reduced regulatory requirements in the areas of accounting, auditing and deposit protection. Implementing provisions dealing with reduced requirements, for example with respect to minimum capital, own funds and liquidity, should be enacted later on.

Amendment of Statutes and Ordinances

In order to achieve the intended de-regulation and in order to implement the elements mentioned above, the Swiss Banking Statute and the Swiss Banking Ordinance must be amended.

The following amendments to the Swiss Banking Statute are worth mentioning (see the draft amendments to the Swiss Banking Statue, only in German, Vernehmlassungsvorlage Bankengesetz):

• Art. 1b para. 1 (Innovationsförderung (“promotion of innovation”)) incorporates the banking license light for companies that do not accept more than Swiss francs 100 mio. of public funds and that are not operating in the lending business.
• Art. 1b para. 2 sets out that the Federal Council may modify, in particular increase, the maximal amount having regard to the competitiveness and innovation capability of the Swiss financial center. The explanatory report to the draft amendments (Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017, p. 20) mentions that this flexibility is necessary because there are very dynamic developments in the fintech area, in particular with respect to blockchain technologies.
• Art. 1b para. 4 lit. a sets forth that the Swiss Financial Market Authority (FINMA) may, in exceptional circumstances, apply the requirements for the banking license light to companies that accept more than Swiss francs 100 mio. in public funds without operating in the lending business, if the protection of their customers is warranted by specific measures.
• Finally, art. 1b para. 4 lit. b sets out that FINMA may grant the banking license light to companies that are not accepting public funds, but that voluntarily request a license.

The following amendments to the Swiss Banking Ordinance are worth mentioning (see the draft amendments to the Swiss Banking Ordinance, only in German, Vernehmlassungsvorlage Bankenverordnung):

• Art. 5 para. 3 lit. c incorporates the exception for settlement accounts with the extended 60 days settlement period. Such settlement accounts are not qualified as deposit and no banking license is necessary, if the settlement takes place within 60 days.
• Art. 6 para. 2 incorporates the sandbox. No banking license is needed – because the business operation is not qualified as “professional business” – if a company accepts more than 20 deposits, but if the maximal amount of deposits does not exceed Swiss francs 1 mio. However, such companies must not operate in the lending business and they have to inform the depositing customers that they are not supervised by FINMA and that the deposits are not covered by the statutory deposit insurance.

Preliminary Assessment of the New Fintech Regulation

The following assessment must be understood as a preliminary comment. The discussions during the consultation period will shed further light on the new regulation.

• The draft amendments to the Swiss Banking Statute and Ordinance as well as the comments in the explanatory report to the amendments (see Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017, only in German) demonstrate that the Swiss Federal Council and also the other involved authorities are fully aware of the importance of the fintech industry for Switzerland. They have the clear intention to provide fintech companies an innovation-friendly regulatory environment.
• The explanatory report to the draft amendments almost reads as a Milton Friedman paper. The Federal Council mentions that the high regulatory requirements for obtaining a banking license constitute an undue market entry barrier for fintech startups, restrict innovation, prevent disruption of the established industry structures, and affect therefore the international competitiveness of the Swiss financial center and its attractiveness negatively.
• Another positive feature of the proposed regulation is its openness to different business models. The Federal Council explicitly refrained from implementing regulations that are addressing specific business models. It held that already today the business models in the fintech industry are rather versatile and that new business models, which are today not forseeable, will develop (Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017, p. 20). A business model related regulation would within a short period of time lag behind the developments. This openness for different business models of the Swiss-style sandbox and the banking license light differ from regulations in other countries and are an advantage of the proposed regulation (see also Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017, p. 31 and 39).
• The proposed regulations are flexible and companies may even choose between the different options: A crowdfunding platform may be exempt from a banking license a) because its transactions are qualified as settlement and because the accounts are settled within 60 days or b) because it does not accept more than Swiss francs 1 mio. in public funds and qualifies for the license-free innovation area (with the advantage that the accounts must not be settled within 60 days). If the platform wants to have more flexibility, for example if it wants to accept more public funds, it may opt for a banking license light (see Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017, p. 40).

Further information:

• Federal Council, Press Release of 1 February 2017, Federal Council initiates consultation on new fintech regulation
• BR-News of 2 December 2016
• Vernehmlassungsvorlage Bankengesetz
• Vernehmlassungsvorlage Bankenverordnung
• Änderung des Bankengesetzes und der Bankenverordnung (Fintech), Erläuternder Bericht vom 1. Februar 2017