This article was taken from the recent IR Global – Meet the Members publication
The Swiss parliament is currently finalising the legislative framework for what is commonly called a Fintech or banking licence light.
The new regime, which is expected to become effective in 2019, is aimed at simplifying crowdfunding and payment processing services and other business models that include the acceptance of funds from the public and are therefore currently governed by banking regulation. The effective date of the new regulation will also signal the launch of a number of challenger banks in Switzerland.
The Fintech licence will apply to any deposit taking institution if deposits do not exceed a total of 100 million Swiss francs. This threshold may be exceeded if the protection of depositors is ensured with ‘special arrangements’, like, for example, an insurance or a higher capital charge. A second requirement for the Fintech licence to apply, is that the institution shall not ‘invest the deposits nor pay interest.’ While the prohibition to pay interest is relatively straightforward, the exclusion of investments raises more difficult issues.
It can be inferred from the legislation, that the legislator wants to prevent Fintechs from engaging in term transformation or from taking on major credit, liquidity, or interest risks without being properly capitalised. This does not mean, however, that a Fintech operating under this licence will be permitted to hold funds exclusively on a deposit account.
Regulatory requirements applicable to Fintechs operating under a Fintech license are considerably less burdensome than those for banks. Fintechs are still required to be adequately organised, have proper risk management and effective internal controls and have a management and a board meeting fit and proper requirements. Fintechs will have to dispose of adequate capital the amount of which will be determined by an ordinance to be adopted by the Federal Council; the minimum capital required will probably be 10 million Swiss francs. The accounting standards to be complied with by Fintechs will be determined by general corporate law, not the more demanding banking law standards or international accounting standards. Last, but not least, Fintechs will not be covered by deposit insurance. Of course, Fintechs do have to comply with anti-money laundering regulations including know-your-customer duties.
Both with relation to its scope and the duties and obligations under the Fintech licence, much will depend on the exact wording of the ordinance to be adopted by the Federal Council. This ordinance is currently being prepared and is expected to be released for public consultation after the final vote of parliament. While the parliament has expressed a clear wish to create more freedom for Fintechs to test new business models, the government as well as FINMA, the financial sector supervisory authority, are obviously concerned about the risk of the current regulatory system being undermined by start-ups subject to a considerably lighter regulatory regime. Moreover, incumbents are voicing increasing concerns about an uneven playing field. It is therefore perfectly possible that the Federal Council ordinance or the supervisory practice applied by FINMA will undo much of the new liberties parliament intended to vest with innovative new players in the financial sector.
An aspect of the new Fintech regime which may be even more problematic is the obvious orientation towards very specific business models, i.e. crowdfunding and payment services. While it is true that a regulatory regime for payment service providers is long overdue, Fintechs are doing business in many other fields of financial services, including in the credit, investment, and advisory business. There they will have to continue to either comply with excessively burdensome and innovation-stifling regulations, or design their business model in such a way that they can avoid regulation. None of these approaches is really desirable.