Market conditions for fintech oﬀerings in Switzerland are generally considered favourable, particularly with relation to:
Fintech market growth (value chain) and expansion (range of products and services) in Switzerlandhas accelerated from what was already a high level. According to the Swiss Venture Capital Report 2020, the total amount of money invested in the fintech industry rose sharply by 91.8%, against the previous year; reaching CHF360.3 million. A high number of funding rounds also raised over CHF3 million Swiss francs. For the fintech industry, decisive considerations remain financing and fundraising. Since 2015, the legislature's focus has been on adapting the applicable legal and regulatory framework to the needs of the fintech sector (see 2.4 Variations between the Regulation of Fintech and Legacy Players), which has contributed to the increasingly dynamic Swiss fintech sector. Further legislation is entering into force shortly, particularly in the blockchain area (see 12.2 Local Regulators’ Approach to Blockchain).
The Swiss fintech landscape has evolved significantly over the past few years and Switzerland remains an attractive base for innovators in the financial sector. There are currently more than 200 active players — both emerging and incumbent — in Switzerland's fintech ecosystem, whilst the total number of fintech-related businesses is much higher. Most of their business models focus on the financial market sector, notably:
A considerable number of these businesses offer their products and services to incumbent financial institutions and/or oﬀer co-operation opportunities to digitalisation projects.
The fintech market in Switzerland is dominated by start-ups that are mainly financed through venture capital. A co-operation strategy between established providers of financial services and emerging players is frequent in Switzerland. While no general displacement trends can be identified at present, it is apparent that the value chain of established providers of financial services is under scrutiny and subject to (internal and/or external) challenges. These include those based on new technology-driven products and services developed by emerging companies that have the potential to disrupt the value chain of many established players. Established financial service providers generally have the financial and organisational resources required to adapt their business processes gradually, both to avoid this displacement and get high market visibility. Conversely, only a relatively small number of emerging companies can rely on a trusted brand or a financial market licence (eg, a bank). In August 2019, FINMA granted for the first time banking licences to two fintech players (Seba and Sygnum), operating in the field of DLT-based assets.
Swiss law is generally technology-neutral and principle-based. Accordingly, fintech companies based in Switzerland generally have considerable regulatory latitude compared with other jurisdictions. The Swiss Financial Market Supervisory Authority (FINMA) has initiated regulatory changes allowing fintech companies to further develop, thereby contributing to an even more fintech-friendly legal environment. The risk-based and technology-neutral amendments are designed to lower market entry barriers. Recent legislative projects, including the implementation of a new regulatory licence type, commonly referred to as a "fintech licence" or "banking licence light", have created an adequate, technology-neutral regulatory framework for any business that needs to accept deposits of up to CHF100 million from the public without engaging in typical commercial banking activities (see 2.5 Regulatory Sandbox).
Alongside these specific fintech-dedicated measures, the general applicable legal and regulatory framework applies to fintech companies and is summarised below (see also 2.9 Significant Enforcement Actions).
The solicitation and acceptance of deposits from the public on a professional basis is, as a matter of principle, an activity restricted to Swiss banks and triggers the obligation to obtain a full-fledged banking licence from FINMA. Under the Banking Act, the term "deposit" broadly encompasses any undertaking for own account to repay a certain amount. Deposits are deemed to be "public" as soon as: (i) funds are solicited from the "public" (as opposed to being solicited from banks or professional financial intermediaries, institutional investors, shareholders, employees or other related persons); or (ii) as soon as funds from more than 20 depositors are accepted. As a result of this approach, most business models relied upon by, for instance, payment systems, payment services providers, crowdfunding or crowdlending platforms are considered to involve the solicitation and acceptance of deposits and may fall within the scope of the Banking Act and, therefore, trigger licensing requirements.
That being said, in the event that deposits of not more than CHF1 million (see 2.5 Regulatory Sandbox) are held by a fintech company, no banking licence will be needed. Similarly, if the deposits are held for less than 60 days on a settlement account (without any limitation in terms of amounts), no banking licence will be needed. All other deposit-taking activities require either a fintech licence for deposit-taking activity not exceeding CHF100 million or a full-fledged banking licence. It is also worth noting that funds linked to means of payment, or to a payment system, are exempted from the qualification as deposits, provided that:
Although this exemption may provide some relief to card payment services and online or mobile payment services, it requires a model strictly tailored in a way that ensures any funds stored on user accounts are limited to the purchase of goods and services (as opposed to allowing peer to peer transfers, withdrawals, transfers to the user's bank account, etc) and never exceed CHF3,000 per customer.
Anti-money Laundering Legislation
Under Swiss law, any natural or legal person accepting or holding deposit assets belonging to others, or assisting in the investment or transfer of such assets, qualifies as an intermediary according to the Federal Anti-Money Laundering Act (AMLA). This includes persons who carry out credit transactions (in particular in relation to consumer loans or mortgages, factoring, commercial financing or financial leasing) and who provide services related to payment transactions. This applies to many upcoming business models, such as those involving mobile payment, blockchain and related applications, cryptocurrencies, automated investment advice, crowdfunding or peer-to-peer lending. Based on this broad scope, many — if not most— fintech companies qualify as financial intermediaries and are generally subject to anti-money laundering obligations, including compliance with KYC rules.
A fintech company that is subject to AMLA is required to join a self-regulatory organisation (unless otherwise supervised by FINMA – eg, as a bank). Compliance with Swiss anti-money laundering regulations is relatively easy to achieve and should not represent a significant entry barrier. However, dealing with the associated costs (which can be substantial and a subsequent key aspect in certain business models) requires careful planning and, possibly, the adaptation of envisaged business models. This applies particularly, to fintech companies providing alternative finance (eg, crowd investment) platforms, payment services and the professional purchasing and selling of virtual currencies.
Swiss Financial Services Act, Swiss Financial Institutions Act
The new Swiss Financial Services Act (FinSA) and Swiss Financial Institutions Act (FinIA) entered into force on 1 January 2020. While the purpose of FinIA is to provide a new legal framework governing most financial institutions (ie, asset managers, trustees, managers of collective assets, fund managers and securities firms), the objective of FinSA is to regulate financial services in Switzerland, whether provided by a Swiss-based business or on a cross-border basis in Switzerland or to clients in Switzerland. The rules are largely based on EU directives – the Markets in Financial Instruments Directive (MiFID II), the Prospectus Directive and Packaged Retail Investment and Insurance-Based Products (PRIIPs) – with adjustments made to reflect specific Swiss circumstances.
In a nutshell, with regard to fintech, the new legal framework may involve additional regulatory requirements to the extent that fintech companies may have to provide financial services in Switzerland or to Swiss clients (application of FinSA) or provide asset management services or other regulated services (application of FinIA and new licensing requirements).
There are no specific rules on the amount of fees that fintech companies may charge their customers. However, Swiss law providesfor a number of disclosure obligations in relation to fees with respect to financial services, including the following:
For the sake of completeness, we note that FinSA also provides for certain rules against abusive conduct by financial service providers (such as third-party distributors of the products) that are relevant in the context of fees. For example, a financial service provider may not invoice a price that differs from the effective execution price when processing client orders.
Since 2015, the legislator's focus has been on adapting the applicable legal and regulatory framework to the needs of the fintech sector.The Swiss legislator has subsequently introduced three measures within Swiss banking legislation aiming at promoting innovation in the financial sector:
In addition to the regulatory sandbox (see 2.4 Variations between the Regulation of Fintech and Legacy Players), under the fintech licence, financial services providers are allowed to accept public deposits provided that:
This fintech licence involves less stringent regulatory requirements than a banking licence. Strict banking equity ratio requirements, as well as the liquidity requirements, do not apply. In addition, leaner minimal capital requirements apply. In this context, the minimum equity capital of companies benefitting from such a licence must amount to 3% of the public funds (deposits) and must, in any case, reach a minimum of CHF300,000. In December 2018, FINMA issued guidelines for the fintech licence highlighting the information and documentation an applicant must submit when applying for one. These include a list of all participants holding a direct or indirect interest of 5% in the applicant, information on the governing bodies as well as various explanations of the activities of the company with a business plan for three financial years. To be clear, the fintech licence is not a banking licence and companies operating under such a licence do not qualify as a banking institution and may not use such a designation. In this context, the client deposits are not covered by the Swiss deposit protection regime and the clients must be comprehensively informed in advance of this fact, as well as of the risks resulting from the business model. In March 2020, FINMA granted the first fintech licence to a company offering accounts and related services to Swiss customers on a pure mobile app basis (Yapeal).
FINMA is generally responsible for the authorisation, supervision, enforcement and documentation of most activities that are subject to Swiss financial market laws. This includes the supervision of outsourcing arrangements (see 2.7 Outsourcing of Regulated Functions). The supervision is risk-based, which means examinations depend on the risk posed by the respective financial market participant. The applicable laws are enforced by FINMA making use of the administrative measures under supervisory law where necessary. FINMA’s powers include precautionary measures or measures to restore compliance with the law, withdrawing authorisation, liquidating unauthorised companies, issuing industry bans and ordering the disgorgement of profits generated illegally. It can also publish final decisions naming those involved. Since naming companies or individuals is restricted by law, FINMA generally only publishes information on ongoing or completed enforcement proceedings if there is a particular public interest, eg, to protect investors, creditors or policyholders.
Besides FINMA, criminal prosecution authorities and self-regulatory organisations are also involved in enforcing financial market laws. Where irregularities fall under criminal law, FINMA may file a complaint with the competent authorities (Federal Department of Finance, Office of the Attorney General and cantonal prosecutors). There are other authorities such as the Competition Commission the Federal Data Protection and Information Commissioner which may also enforce the relevant laws.
The outsourcing of significant business areas of regulated entities is subject to certain requirements. In essence, Swiss financial market law sets forth three different outsourcing regimes.
Each entity subject to one of the above outsourcing regimes continues to bear responsibility for the outsourced business areas, so it must ensure the proper selection, instruction and control of the supplier. Further, it is a common requirement in all outsourcing regimes to conclude a written contract with the supplier which sets out, among other things, clearly allocated responsibilities as well as audit and inspection rights. If a significant function is outsourced, the service provider is subject to information and reporting duties to, and audits by, FINMA.
Regulated entities subject to FINMA Circular 2018/3 Outsourcing (Outsourcing Circular, which applies to banks, insurers, managers of collective assets, fund managers and securities firms) must comply with the detailed measures set out in the Outsourcing Circular, including:
Regulated entities subject to FinIA may only delegate tasks to third parties who have the necessary skills, knowledge, experience and authorisations to perform that task.
FINMA regulated entities, as well as the persons responsible for their management, must provide guarantees of irreproachable business conduct. Furthermore, regulated entities, as well as their statutory auditors, are required to notify FINMA of any events that are of material relevance to FINMA's supervision. Therefore, to a certain extent, fintech providers that are FINMA regulated also act as gatekeepers.
From a civil law perspective and as a general principle, a fintech provider would be liable for damages negligently or by wilful misconduct by such provider in breach of applicable law or contractual obligation. Under Swiss civil law, however, liability can be limited or even excluded to a large extent by contractual agreement. Civil liability would thus have to be assessed for each individual case.
FINMA has executed several enforcement proceedings in the fintech industry, in particular in the case of initial coin offerings (ICOs) that were suspected of acting as a bank without being authorised to do so (ie, accepting deposits from the public without a banking licence, see 2.2 Regulatory Regime). According to the most recent annual report of FINMA, approx. 60 investigations in the ICO arena have been opened and more than half thereof have been closed. According to FINMA, in ten cases criminal proceedings with the competent prosecutor have been initiated in relation to anti-money laundering regulations and in three cases FINMA has opened enforcement proceedings. In addition, FINMA notices more Swiss companies offering secondary market related financial services based on blockchain. Only in very few cases did FINMA make individual enforcement cases public:
FINMA also maintains a warning list on its website of individuals and entities who are presumed to carry out unauthorised activities under the financial market regulations.
The processing of personal data by private persons and federal bodies is regulated in particular by the Data Protection Act and the Data Protection Ordinance. These apply, with some exceptions, to the processing of data relating to natural persons as well as – contrary to most other jurisdictions – legal entities. Personal data must be protected against unauthorised processing by appropriate technical and organisational measures. Such protection has been specified with respect to the storing, processing and transferring of client data in the banking sector (Annex 3 to FINMA Circular 2008/21 Operational Risks). It should be noted that Swiss parliament has adopted revised data protection legislation which, however, has not yet entered into force. While the technical requirements remain in essence unchanged, there are considerable organisational and administrative requirements, as well as significant sanctions, foreseen. However, the timeline with respect to the entering into force of such amendments is not yet determined.
With regard to cybersecurity, non-binding guidelines with respect to minimum security requirements for telecommunications services have been issued by the competent regulator; the Federal Office of Communications (OFCOM). However, there is no cross-sector cybersecurity legislation in Switzerland that would generally be applicable to fintech companies.
Most notably, the following additional authorities and organisations are foreseen in Swiss financial market regulation.
Furthermore, there are many private for-profit and not-for-profit organisations active in the fintech industry, eg, to define industry standards. Most notably, the Swiss Bankers Association has defined several standards applied by banks, eg, on opening corporate accounts for distributed ledger technology (DLT) companies.
Although no specific rules on the conjunction of unregulated and regulated products and services apply, financial services providers are required to take appropriate measures to avoid conflicts of interest. As a general principle, most regulated entities (eg, asset managers, managers of collective assets, insurers) are also required by law to pursue activities only related to their respective regulatory status. FINMA may, however, grant exemptions subject to applicable laws.
In Switzerland, financial advisors that provide financial advice or investment management online, so-called "robo-advisers", are growing in popularity. In particular, millennials between the ages of 24 and 35 are expected to constitute the customer base of online investment solutions, since they often adopt new technologies quickly and prefer self-service approaches. There are several companies that pursue a robo-adviser business model, and are hence based on mathematical rules or algorithms that allocate, manage and optimise clients' assents.
On automated investment advice, there are no specific applicable rules or regulations. As mentioned above, Swiss law is generally technology-neutral and principle-based. FINMA actively contributes to a fintech-friendly legal environment. FINMA regards innovation as key to Switzerland’s competitiveness as a financial centre, but adopts an essentially neutral approach to certain business models and technologies. FINMA has therefore been enhancing the regulatory framework to facilitate client onboarding via digital channels and has reviewed whether specific provisions in its ordinances and circulars disadvantaged some technologies and concluded that very few such obstacles existed. Therefore, FINMA has adopted its guidelines for asset management and has removed the requirement that asset management agreements have to be concluded in writing. Also, FINMA has eased the rules of the onboarding process for new businesses via digital channels.
See 3.1 Requirement for Different Business Models.
Under the new FinSA, financial services providers need to ensure that client orders are always executed in the best possible way regarding financial terms, timing of execution and other terms and conditions. Providers 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. Upon the request of the client, the financial services provider evidences that the respective customer trades have been executed in compliance with this criteria. Regulatory best execution requirements do not apply in relation to institutional clients.
Crowdlending refers to loans for funding companies or individuals, which are consequently categorised as borrowed capital. Crowdlending is also known as peer-to-peer (P2P) or social lending because funding is provided by individuals or companies that are not financial institutions or financial intermediaries. Referring to the distinguishing criterion mentioned above to differentiate sub-types of crowdfunding, participants (funding providers) receive a payment in return for their funding made available to the project developer (borrower), typically in the form of interest, although participating loans or bond/note issuances are also possible. The amount of the interest or return payment varies depending on the risk of the project and borrower, but typically represents a lower interest charge for the borrower than in traditional bank lending. There are a number of crowdlending-based businesses in Switzerland which provide loans for both private persons and companies.
As a general principle, crowdlending offerings are subject to the general financial services regulation including the AML legislation, as applicable (see 2.2 Regulatory Regime). In addition, under the Swiss Consumer Credit Act (CCA), only authorised lenders are entitled to provide consumer credit. Registration must be obtained from the lender’s Swiss Canton of establishment or, if the activity is conducted on a cross-border basis by a foreign lender, with the Swiss Canton in which the lender intends to perform its services.
Certain amendments to the consumer credit legislation came into force on 1 April 2019. Consumer loans that are obtained through a crowdlending platform are now required to comply with the same consumer protection provided by the law as if they were extended by a professional lender. Certain implementing provisions in the Consumer Credit Ordinance have also been adopted, such as access to consumer credit information systems and professional indemnity insurance requirements for crowdlending platforms.
See 4.1 Differences in the Business or Regulation of Loans Provided to Different Entities.
See 4.1 Differences in the Business or Regulation of Loans Provided to Different Entities.
With regard to loans and loan syndication, it is predominantly banks that are active in the relevant market in Switzerland. There are a number of reasons for this, one being the Swiss tax law rules commonly referred to as the "Swiss non-bank rules". The basis for these rules is that under Swiss domestic tax law, payments by a Swiss borrower under a bilateral or syndicated financing are, as a rule, not subject to Swiss withholding tax. This, however, requires compliance with the Swiss non-bank rules. In a nutshell, these rules require that:
To ensure compliance with the Swiss non-bank rules, a number of provisions are included in facility agreements with Swiss borrowers, guarantors or security providers. This includes, depending upon the structure, assignment and transfer restrictions that limit the ability of the lenders to sell down the facilities to more than a specified number of non-bank lenders.
In Switzerland, the payment market has changed remarkably during the last few years. Since the first market entry of a mobile payment app, the Swiss market has seen several market entries and a rapid consolidation process. There are many electronic payment systems which are, at least, partially based on classic credit or debit card payment schemes; adding technology to facilitate payments at the point of sale in the context of e-commerce or, in some cases, between individuals (P2P). In addition to credit and debit card-based payments, some payment apps can be linked to traditional bank accounts with partnering banks. While the user experience is similar, the payment is in this case executed as a bank transfer – ie, the payor allows the payment service provider to deduct the relevant amount from the payor’s bank account and to transfer a corresponding amount to the recipient’s bank account (often routed via a bank account of the payment service provider, subject to a fee). These systems are often bank-operated or bank-sponsored and may therefore be less constrained in regulatory matters.
New legislation came into force on 1 January 2020 that provides, inter alia, that a non-Swiss financial services provider acting on a cross-border basis is subject to Swiss rules of conduct as well as, under certain circumstances, registration requirements in Switzerland for its client advisors. Client advisors of foreign-based financial services providers are required to register in a Client Advisors Register in Switzerland prior to being able to offer financial services or products in Switzerland. In this context, the registration requirement does not apply at the level of the financial services provider, but at the level of the individuals qualifying as “client advisors” of that financial services provider.
Regarding AML obligations, the Swiss regime (see 2.2 Regulatory Regime) only applies to financial intermediaries that have a physical presence in Switzerland and, as a rule, does not extend to foreign institutions active on a purely cross-border basis. As an example, payment service providers conducting their activity exclusively via electronic channels or the internet, for instance, are typically not subject to AMLA. That being said, irrespective of the application of AMLA, the general prohibition against money laundering under criminal law remains applicable.
The authorisation or licensing process for investment funds differs depending on whether Swiss or foreign investment funds are concerned. Regarding Swiss investment funds, it is further relevant how the investment fund is structured.
In essence, the Swiss regulatory regime distinguishes between open-ended and closed-ended collective investment schemes. The main differences between open-ended and closed-ended collective investment schemes are the different rules regarding the redemption of shares/units of collective investment schemes and different legal structures. 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 (LP) for collective investments or an investment company with fixed capital (SICAF). The CISA 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.
Both the limited partnership for collective investment schemes and the SICAF must have obtained the relevant licence from FINMA. In doing so, both the limited partnership agreement of the limited partnership for collective investment schemes and the articles of association and the investment regulations of the SICAF are subject to FINMA’s approval.
In addition, fund managers also require FINMA's authorisation under the new FinIA (see 2.2 Regulatory Regime).
See 6.1 Regulation of Fund Administrators.
Marketplaces and trading platforms are regulated by the Financial Markets Infrastructure Act (FMIA). Under the FMIA, organised trading facilities for the multilateral trading of securities and other financial instruments require authorisation from FINMA. Trading facilities can seek authorisation as either a stock exchange or a multilateral trading facility. Furthermore, authorised banks, marketplaces (ie, stock exchanges or multilateral trading facilities) and securities firms may also operate an organised trading facility without additional authorisation.
Payment systems are also regulated by the FMIA. They are, however, not subject to authorisation from FINMA, unless the authorisation of the payment system is necessary for the proper functioning of the financial market or the protection of financial market participants. Most recently, the Libra Association applied for a licence as payment system for its stablecoin-based payment system with FINMA.
With respect to the trading of digital assets, the recently adopted DLT/blockchain legislation will introduce DLT trading facilities as an additional regulatory status (see 12.2 Local Regulators’ Approach to Blockchain). As the main difference to current regulation, the new authorisation as a DLT-trading facility will allow individuals to participate in such a trading facility without an intermediary.
The FMIA essentially differentiates between two asset classes:
With respect to derivatives, the FMIA foresees additional obligations, eg:
By deﬁnition, decentralised systems are particularly vulnerable to anonymity risks. Indeed, in contrast to traditional financial services, virtual currency users’ identities are generally unknown, although in most cases they are only pseudonymous and there is no regulated intermediary which may serve as gatekeeper for the mitigation of money laundering and financing of terrorism risks. The majority of virtual currencies, such as Bitcoin or Ether, have anonymity or pseudonymity by design, meaning that an individual user’s identity is not linked to a certain wallet or transaction. However, while a user’s identity is not visible on the relevant distributed ledger underpinning the virtual currency infrastructure, information on transactions – such as dates, value and the counterparties’ addresses – are publicly recorded and available to anyone. For the purposes of their investigation and prosecution work, enforcement authorities are therefore able to track transactions to a point where the identity may have been linked to an account or address (such as wallet providers or exchange platforms).
Swiss AML legislation does not provide for a definition of virtual currencies. However, since the revision of the FINMA AML Ordinance in 2015, exchange activities in relation to virtual currencies — eg, money transmission with a conversion of virtual currencies between two parties — are subject to AML rules.
The FMIA requires authorised stock exchanges and multilateral trading facilities to implement appropriate self-regulation, which is binding on the respective participants. SIX Swiss Exchange, as the dominant stock exchange, issues respective Listing Rules which have been amended as per 1 January 2020 to reflect the new financial market regulation (see also 2.2 Regulatory Regime).
The FMIA requires authorised stock exchanges and multilateral trading facilities to implement rules on orderly and transparent trading and to monitor trading in order to detect violations of statutory and regulatory provisions. The detailed rules are thus issued by the relevant trading facility, eg, SIX Swiss Exchange. Further, best execution rules apply (see 3.3 Issues Relating to Best Execution of Customer Trades).
Under the FMIA, organised trading facilities for trading securities and other financial instruments require the respective FINMA authorisation (see 7.1 Permissible Trading Platforms), which includes strict limitations – eg, on authorised participants in such a trading facility. The new DLT trading facility will, to a certain extent, allow for P2P trading of digital assets (see 7.1 Permissible Trading Platforms).
See 3.3 Issues Relating to Best Execution of Customer Trades.
The rules on best execution (see 3.3 Issues Relating to Best Execution of Customer Trades) as well as the general principles on fees apply (see 2.3 Compensation Models).
The FMIA is designed to ensure the transparency and effectivity of the securities markets. Therefore, the FMIA sets forth two cases of unlawful market conduct.
if the person knows or should know that such behaviour gives false or misleading signals regarding the supply, demand or price of securities admitted to trading on a trading venue in Switzerland.
In addition, most FINMA-supervised institutions must also comply with certain organisational requirements with regard to market integrity which FINMA has detailed in its Circular 2013/8 Market Behaviour. The requirements include, inter alia, to further investigate trades that — based on obvious indications — may constitute unlawful market behaviour, to organise the handling of insider information in a way that avoids unlawful market behaviour and enables its discovery, to ensure that persons deciding on securities and/or derivatives transactions do not have access to insider information and to monitor employee transactions.
Algorithmic trading is based on computer algorithms which automatically determine the triggering and the individual parameters of an order (such as time, price or quantity). High frequency trading is a subcase of algorithmic trading, has very low delays in order transmission and a usually short-term trading strategy. Its distinctive feature is a high number of order entries, changes or deletions within microseconds.
With the Financial Market Infrastructure Act (FMIA) and the associated implementing ordinance of the Federal Council, the Financial Market Infrastructure Ordinance (FMIO), the necessary measures were taken in Switzerland to counter the negative effects of algorithmic trading and high-frequency trading. The regulation created complies with international standards and is based on EU law.
Specifically, stock exchanges, multilateral trading systems and organised trading systems must ensure orderly trading. In particular, they must ensure that their trading systems are in a position to temporarily suspend or restrict trading if there is a significant price movement in the short term as a result of an effect on this market or a neighbouring market (so-called circuit breakers). It must also be possible to identify orders generated by algorithmic trading.
In addition, traders who engage in algorithmic trading and high-frequency trading are subject to various obligations. In particular, they must ensure their systems cause no disruption to the trading venue and are subject to appropriate testing of algorithms and control mechanisms. Further, certain transparency requirements apply (see 8.2 Requirement to Register as Market Makers When Functioning in a Principal Capacity). Finally, it should be emphasised that higher fees may be charged for typical high-frequency trading techniques.
Pursuant to FMIO, authorised trading facilities are required to impose upon all participants an obligation to notify the trading facility of the use of algorithmic trading and to flag all orders made by algorithmic trading.
In addition, a market participant requires authorisation as a securities firm by FINMA pursuant to FinIA if:
The transparency requirements in relation to algorithmic trading apply to all market participants alike (see 8.2 Requirement to Register as Market Makers When Functioning in a Principal Capacity). In addition, funds and fund managers are subject to the respective regulatory regime (see 6 Fund Administrators), while dealers may qualify as securities firms (see 8.2 Requirement to Register as Market Makers When Functioning in a Principal Capacity). The FinIA foresees that authorisation as either a securities firm or as a fund manager is, in principle, alternative in nature.
Under Swiss law, there is no specific regulation of programmers and programming. However, the FMIA requires marketplaces, inter alia, to identify and monitor algorithmic and high-frequency trading (see 8.1 Creation and Usage Regulations) which may indirectly affect programmers and programming.
Under Swiss law, which is generally technology-neutral and principle-based, there is no legislation specifically referring to financial research platforms. Accordingly, financial research platforms based in Switzerland have considerable regulatory latitude compared with other jurisdictions. Hence, regulatory implications, if any, for specific financial research platforms must be assessed under the ordinary principles governing the provision of services (including financial services) in Switzerland.
See 9.1 Registration.
See 9.1 Registration.
The insurtech market in Switzerland is growing rapidly, including due to organisations pursuing business models that are based on general challenges faced by incumbent insurance institutions (eg, new regulatory frameworks, the inﬂow of alternative capital, and the ongoing low interest rate environment). In general, incumbent insurance institutions have lower barriers when entering the insurtech market as they already have the corresponding licences and are able to focus on the development of the technology.
To date, there is no legislation specifically referring to insurtech business models. Hence, regulatory implications, if any, for specific insurtech business models must be assessed under the ordinary principles governing the provision of insurance services, in particular as regards maintaining the protection objectives of insurance supervision by FINMA.
Swiss insurance supervisory law contains specific provisions for different types of insurance in several aspects. Under the Insurance Supervisory Act (ISA), three categories of insurance are differentiated: life insurance, indemnity/non-life insurance and reinsurance. Most importantly, insurers providing life insurance are not allowed to provide any other insurance except for casualty and sickness insurance. Different rules also apply with regard to capital requirements. Further, a completely different regulatory regime applies to insurers providing mandatory sickness insurance pursuant to Swiss law. While FINMA is the competent supervisory authority under ISA, the Federal Office of Public Health supervises insurers providing mandatory sickness insurance.
Regtech is a subset of fintech focusing on technologies that may facilitate the delivery of regulatory requirements in a cost-effective and comprehensive way. Regtech refers to technology and software created to address regulatory requirements and help companies stay compliant by leveraging software and automation to close compliance gaps and to monitor and detect risks on a permanent basis.
To date, there is no legislation specifically referring to regtech. FINMA has generally been welcoming to technology applications that support supervised entities in complying with regulatory requirements. It is expected that, once and where there is a market need, FINMA may define technical standards and formats.
The use of regtech providers by regulated financial services firms is subject to the general requirements on outsourcing (see 2.7 Outsourcing of Regulated Functions). In addition to terms required by outsourcing regulation, a regtech provider would, depending on the specific services involved, be required to comply with a service-level agreement and provide for service credit payments and other remedies in order for the customer to assure and enforce performance and accuracy.
Distributed ledger technologies (DLT) such as various blockchain implementations have been the focus of many public and private initiatives. First, traditional fundraising techniques and processes have been challenged in the last couple of years by the emergence of a new form of capital raising by start-ups in the form of initial coin offerings (ICOs) or token-generating events based on DLT. With the advance of this technology, the focus is now shifting on tokenising more traditional assets such as shares and other securities. In this respect, some Swiss companies have already issued shares on the blockchain and FINMA has granted the first two banking and securities firms licences to blockchain service-providers Seba and Sygnum. Driven by the fast-moving industry, traditional players such as banks are also increasingly offering services in relation to digital assets and blockchain related businesses. Several players such as the Swiss Bankers Association, Crypto Valley Association and the Capital Market and Technology Association promote the growing blockchain based business model for traditional and new players alike.
In Switzerland, first and foremost, the general rules apply with regard to risks, liability, intellectual property, AML and data privacy.
As to the application of the existing regulations on ICOs, FINMA published corresponding guidelines on 16 February 2018. Generally, FINMA focuses on the economic function and purpose of the tokens, as well as whether they are tradeable or transferable, in order to classify the tokens broadly into three archetypes which are payment tokens (including cryptocurrencies), utility tokens or asset tokens. The classification of the tokens has an impact on the applicable legal and regulatory framework (see 12.3 Classification of Blockchain Assets). Since then, FINMA has issued further guidelines on money laundering on blockchain and, most recently, on stablecoins.
The Swiss Federal Council published a report in December 2018 on the legal framework for blockchain and distributed ledger technology in the financial sector. The report noted that Swiss legal framework is, in principle, well-suited to deal with new technologies. Thereupon, the Federal Council initiated a consultation process on selective adjustments of federal law to adapt for developments in distributed ledger technology.
On 25 September 2020, the Swiss Parliament adopted new legislation in order to increase legal certainty by removing hurdles for DLT-based applications and limiting risks of misuse. In a nutshell, the legislative amendments include:
Overall, these legislative amendments are expected to increase market access to fintech companies in the DLT/blockchain field by improving legal certainty and removing certain regulatory barriers. While the core provisions in civil law will enter into force in February 2021, the remaining provisions will enter into force later in 2021, together with certain amendments to several implementing ordinances yet to be adopted by the Swiss Federal Council.
According to FINMA's own guidelines, the following three tokens can be differentiated:
Other players have used other classifications adapted to the particular case at hand.
See 12.2 Local Regulators’ Approach to Blockchain.
Currently no specific rules on the trading of digital assets apply, but a new licence for DLT trading facilities is foreseen to enter into force later in 2021 (see 7.1 Permissible Trading Platforms).
Since there is no specific regulation, the general regulation of funds applies (see 6 Fund Administrators).
Transactions in cryptocurrencies may be carried out on an anonymous basis and related money laundering risks are accentuated by the speed and mobility of the transactions made possible by the underlying technology. KYC principle is the cornerstone of AML and CFT due diligence requirements, generally imposed on financial institutions whose AML/CFT legislation is aligned with international standards (see 2 Fintech Business Models and Regulation in General). KYC requires that financial institutions duly identify and verify their contracting parties (ie, customers) and the beneﬁcial owners (namely when their contracting parties are not natural persons) of such assets as well as their origin. Together with transaction monitoring, KYC ensures the traceability of assets (ie, a paper trail) and allows the identiﬁcation of money laundering and financing of terrorism indicia. With respect to DLT/blockchain applications, one of the challenges is that KYC and other AML/CFT requirements are designed for a centralised intermediated financial system in which regulatory requirements and sanctions can be imposed by each jurisdiction at the level of financial intermediaries operating on its territory (ie, acting as gatekeepers). By contrast, virtual currency payment products and services rely on a set of decentralised cross-border virtual protocols and infrastructure elements, neither of which has a sufficient degree of control over, or access to, the underlying value (asset) and/or information, meaning that identifying a touch-point for implementing and enforcing compliance with AML/CFT requirements is challenging.
Under Swiss law, there is no specific definition of Decentralised Finance (DeFi). The aspects of DeFI specifically regulated under Swiss law is the area of DLT/blockchain already described above (see 12.2 Local Regulators’ Approach to Blockchain).
Banks in Switzerland have embraced the open banking concept. Innovative business models are being implemented, notably with regard to relevant banking infrastructure. Such infrastructure may include open banking interfaces (APIs), identity and security management, information and transaction platforms, finance management systems and financial compliance systems. To date, there is no legislation specifically referring to open banking. Hence, regulatory implications for specific open banking applications must be assessed under the ordinary principles governing the provision of financial services, in particular when maintaining the protection objectives of the supervision of financial institutions by FINMA.
Given the importance of digital transformation for banks and the size of the established financial sector in Switzerland, Fintech organisations in the field of banking infrastructure can draw on a large pool of potential customers. The challenge of meeting customer expectations as well as its financial aspects (in terms of revenue increase and reduction of operational costs) has accelerated the implementation of open banking, including when based on Bank as a Platform (BaaP) solutions.
Open banking raises several concerns in the areas of, for example, data protection, IT security and Swiss banking secrecy. The success of open banking in Switzerland will thus be highly dependent on transparent information for clients, obtaining the relevant consents and waivers as well as adhering to the highest standards of IT security. Swiss banking secrecy and the lack of a common standard for open banking may be reasons for the slow adoption of open banking in Switzerland, despite an increasing number of open banking initiatives from several private actors.
The Swiss Bankers Association published in July 2020 its working paper 'Open Banking – An overview for the Swiss financial centre', which gives an overview of the Swiss market based approach to open banking without mandatory requirements for data sharing. It encourages its members to take an active role in open banking.
The regulatory environment for fintech in Switzerland is constantly evolving to accommodate new technologies and to make Switzerland an attractive country for fintech businesses. Accordingly, various companies using technologies – ranging from classic process digitisation, artificial intelligence and data analytics to new distributed ledger technologies – to either improve traditional business strategies or advance new approaches have recently emerged. Swiss fintechs are mainly active in the areas of robo-advice/-management, (mobile) payment, crowdfunding and financial market infrastructures such as crypto-related exchanges.
In September 2020, Parliament adopted the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the "DLT bill"). This blanket act will adapt various federal laws such that Switzerland can continue to develop as a leading, innovative and sustainable location in the blockchain and DLT area.
The resulting amendments of the DLT bill to the Swiss Code of Obligations (CO), the Federal Intermediated Securities Act (FISA) and the Federal Act on International Private Law (FAIPL) entered into force as of 1 February 2021. Summarised, these provisions allow for the introduction of ledger-based securities that are represented in a blockchain. The remaining provisions of the DLT bill – in particular, introducing a new licence for DLT trading facilities – are expected to enter into force on 1 August 2021.
Furthermore, the Federal Department of Finance has proposed DLT-specific amendments to various ordinances (the "DLT ordinance"). This proposal is currently in consultation and the final version is expected to enter into force on 1 August 2021.
Swiss Fintech Market
Switzerland has developed into a major driver of the global fintech movement. Accordingly, 10% of all global European fintech businesses are located in Switzerland. Within the Swiss market, Zurich has a leading role and accommodates almost half of the Swiss-based fintech businesses. Out of all Swiss fintech businesses, 30% offer financing-related services. Switzerland has become one of the leading international hubs for digitisation and innovation in the financial sector and continues to drive national and international development in this sector.
(Robo-) Investment Management/Advice
For some years, many Swiss providers have been active in the fields of investment management and advice, with a strong focus on the areas of environmental, social and corporate governance (ESG)-oriented investments, social investing or robo-management/advisory models.
On 10 November 2020, the Swiss Financial Market Supervisory Authority (FINMA) started a public consultation proposing systemically important banks and large insurance companies making their climate-related financial qualitative and quantitative risks transparent. In content terms, the regulatory approach is based on the internationally recognised recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
The predominant robo-service model in Switzerland is automated asset management, with investment advice and hybrid business models offering access to personal client advisers proving to be the exception in the robo-adviser market. The products offered are frequently limited to cost-effective, diversified financial instruments, specifically retrocession-free exchange-traded funds (ETFs). With the Financial Services Act and the Financial Institutions Act having entered into force on 1 January 2020, such advisory and management business models have become the subject of a much stricter and heavier regulation in Switzerland, consisting of duties of conduct, a client adviser registration duty and an investment manager licence requirement, with transitory periods ending in December 2021/2022.
Distributed Ledger Technologies, Cryptocurrencies and Tokens
Switzerland is the home of the so-called Crypto Valley, with over 900 crypto-related companies and around 4,800 employees, already including six unicorns: Ethereum, Cardano, Dfinity, Tezos, Polkadot and Libra/Diem.
The term "cryptocurrency" is used for a monetary system that is based on cryptographic principles whereby cryptography describes information security and encryption based on mathematical calculations. The entire set of data on the holders and movements of such cryptocurrencies is stored on thousands of servers simultaneously in an encrypted form. Transactions are thus stored decentrally, which makes it almost impossible to falsify transactions. The described system constitutes the blockchain. One of the most popular examples of such a cryptocurrency is the decentralised database named Bitcoin.
However, the crypto environment also comprises other digital information units, namely tokens such as Ether, Tezos and Ripple.
In view of the early crypto-projects of Ethereum, Xapo and Bitcoin Suisse in 2013, FINMA started early on with crypto-related regulatory questions and has already issued, as one of the first regulators, in 2017 its first circular regarding initial coin offerings (ICOs), followed in 2018 by its today internationally renowned guideline regarding initial coin offerings, including the qualification of tokens under Swiss law.
According to this guideline, there are three types of token.
The individual token classifications are not mutually exclusive. Both asset and utility tokens can also, at the same time, be classified as payment tokens (referred to as so-called hybrid tokens).
Additionally, FINMA issued in 2019 another guideline regarding stable coins. Accordingly, stable coins are qualified on a case-by-case basis and money laundering, securities trading, banking, fund management and financial infrastructure regulation can all be of relevance.
The big ICO wave in 2016–17 is definitively over in Switzerland and everyone is wating for the tokenisation of all types of assets and the entrance of the first fully regulated financial market infrastructures enabling trading of asset tokens, in particular for institutional investors. On the other side, decentralised finance (DeFi) projects trying to avoid traditional regulations are much hyped at the moment in Switzerland, causing the legislator and FINMA to have a close look at such models and assess potential regulatory approaches.
The term "tokenisation" describes the process of bringing tangible and intangible assets and contractual claims on the blockchain. These assets are then digitally represented by a token and usually qualify as security under Swiss law.
The tokenisation of assets offers numerous benefits. Inter alia, trading hours are no longer limited, costs for such transactions decrease significantly, real-time delivery-versus-payment mechanisms are possible, human errors can be almost entirely prevented and investments are opened to smaller investors as these tokens can be designed in smaller denominations. As a consequence, financial instruments such as shares and bonds can also be issued more easily. Furthermore, particularly with regard to start-ups, it is easier to obtain financial resources with the help of tokenisation.
In addition to the forms of certificated securities, uncertificated securities and book-entry securities, the new DLT bill introduced, as of 1 February 2021, the possibility to create ledger-based securities in an electronic register; eg, a blockchain. With these new ledger-based securities, asset tokens can be created and transferred in a fully legal-certain way under Swiss law.
In order to ease the very strict and complex rules of the Swiss banking regulations for banks conducting the interest-difference business by taking (short-term) deposits and granting (mid/long-term) loans, the Swiss legislator introduced in 2019 a new fintech licence allowing companies to accept public deposits of up to CHF100 million in a professional capacity. However, the deposits must be kept in custody in the interest of the clients and may neither be invested nor bear interest during this period. The requirements of the existing Swiss Banking Act (BA) apply mutatis mutandis to the new fintech licence holders. Compliance with these requirements is monitored within the ongoing supervision by FINMA, which is also responsible for the supervisory sanctions of misconduct.
The following organisational requirements apply. The board of directors must consist of at least three members, of which no less than one third must be independent; ie, not part of the executive board (Article 14d paragraph 1 of the Swiss Banking Ordinance, or BO). As regards the executive board, no minimum number of members is required but various challenging responsibilities exist, such as development of a risk management system and establishment of an internal control system. The corporate governance requirements are similar to the ones of the banking licence. Furthermore, the common accounting standards according to the Swiss Code of Obligations (CO) must be met. Moreover, the domicile and main activity must be in Switzerland.
With regard to the capital requirements, the following prerequisites must be met.
The minimum capital must consist of 3% of the public contributions received, in any case no less than CHF300,000. The capital must be fully paid in and held permanently (Article 17a, BO). However, the complex rules regarding capital adequacy and liquidity of banks are not applicable.
Despite its name, the new licensing category is not limited to certain fintech business models or to the fintech area itself. Although the primary purpose of the new regulation was to lower the market entry barriers for fintech companies active in the area of crowd-lending, the provision generally applies to all "persons who are active in the financial sector" (see Article 1b paragraph 1, BA). This also means that companies outside the fintech sector may obtain a fintech licence. Only two fintech licences have been granted by FINMA so far, to Yapeal and to SR Saphirstein.
The DLT bill will extend the scope of the fintech licence presumably as of 1 August 2021 to providers of pooled crypto custody wallets.
Crowdfunding has recently grown in importance and can be used to provide, inter alia, start-ups, business ideas and further projects with a sufficient financial basis in different ways: equity within crowd-investing, debt within crowd-lending, financial support in exchange for a small consideration (crowd-supporting) or no consideration (crowd-donating). Crowd-lending models shall disintermediate, in particular, the classic credit/debt markets dominated by banks. Accordingly, even small contributions of a large number of supporters/donors/investors/lenders shall allow projects to prosper.
Cryptocurrency lending describes the lending of digital assets through crypto exchanges or different lending sites with an interest rate. This way of lending has increased significantly during the past few years. Cryptocurrency lending works in the same way as peer-to-peer (P2P) lending, namely by connecting borrowers and lenders but via an online crypto lending platform. The lenders receive their assets as soon as the borrower repays the loan, which is backed either by physical or intangible assets such as cryptocurrencies. Cryptocurrency lending can also be used for margin lending, whereby a borrower lends a part of the funds made available by the lender in the hope that it will increase in value before he or she will repay it with an interest rate.
There is no specific type of licence for such crowdfunding or cryptocurrency lending activities. Depending on the basic principles of FINMA of “same risks same rules”, “substance over form”, “principle-based financial market laws” and “level-playing field”, the specific set-up needs to be assessed on a case-by-case basis and can therefore typically require a banking, fintech or investment manager licence, or a licence as a collective investment scheme or financial market infrastructure.
Custody of Crypto-Based Assets
The DLT ordinance proposes a new regime regarding the need for a fintech licence when offering pooled custody services for certain types of crypto-based assets.
Generally, the pooled custody of crypto-assets, which cannot be separately allocated to each owner at every given moment in time, is considered a public deposit, which generally requires a banking or fintech licence, depending on missing separation or separation only on book records level.
Now, it is also proposed that the custody of certain types of crypto-assets within a collective deposit with separation only on book records level instead of on technical blockchain level (pooled crypto wallets) is subject to a fintech licence. However, the custody of a utility or an asset token held in the aforementioned manner will continue to not require a banking or fintech licence.
Moreover, it is proposed that assets booked as credit balances on client accounts of securities or precious metal traders, asset managers, a DLT trading system pursuant to Article 73a of the Financial Market Infrastructure Act (FMIA) or similar undertakings and used solely for the settlement of client transactions do not qualify as crypto-based assets if (i) no interest is paid thereon and (ii) they are not client accounts of securities dealers when the settlement takes place within 60 days.
It remains to be seen if the proposed expansion of the fintech licence will be included in the final version of the DLT ordinance.
Mobile Payment and Crypto Debit/Credit Cards
Finding wide acceptance remains a key issue in the payment environment – regardless of being used in the fiat currency or the crypto world. Therefore, mobile payment services and (crypto) debit/credit cards are expected to make fintech accessible to society at large and bridge the gap between traditional financial and digital currencies. The mobile payment sector has especially improved and extended significantly, with major players such as the Swiss-based businesses TWINT, ZAK, Yapeal and neon, in addition to the recent introduction of Apple Pay and Samsung Pay by larger banks.
Such payment systems are generally not subject to a licensing requirement under the FMIA, as long as they have not yet grown big enough to substantially influence the financial system in Switzerland. If such payment systems allow for the user to store funds on their accounts, a banking licence or equivalent regulations might be necessary, as FINMA has stated with regard to the Swiss-based Libra/Diem project.
Conclusion and Outlook
Although the recent acceleration as regards the fintech movement is sometimes regarded as a threat to the traditional banking sector at large, these technologically motivated changes are welcome in Switzerland. The past year has brought many developments in the fintech sector. They show that fintech is able to open up new opportunities not only to customers but also businesses. However, for banks and other financial institutions to also benefit from such changes, they must adjust their business models accordingly. Therefore, Swiss banks have started, in particular, a strong open-banking initiative called b.link, led by SIX Group.
Still, the fintech sector has not come to a halt but continues to develop new approaches and solutions. The current pandemic has led to improvements in this sector and demonstrated the value and benefits for wide parts of society of such developments. For example, the increased need for cashless payments could be met by the rapid developments in the fintech sector.
Finally, with the first amended acts of the DLT bill entering into force in February and August 2021, it remains to be seen how these provisions will be applied in practice and to what extent the resulting opportunities will be utilised and implemented in existing and new projects driven by fintech. Definitively the subject of hype are DeFi projects mainly based on DLT, which put regulation and FINMA to the test.