Switzerland has long been renowned as a place of both political and economic stability, with both its geography and its neutrality having contributed to it becoming a world-leading banking and wealth management centre.
Since 2007 (when Switzerland ratified the Hague Convention on Trusts) this has included the provision of trusts and trustee services via banking institutions and independent trust companies.
These have, until now, been regulated for anti-money laundering purposes, with trust companies subject to the rules of the Swiss financial regulator (Finma) or an approved self-regulatory organisation, which is in turn under the direct supervision of Finma, writes Saffery Champness’ Daniel Hawson.
Why reform things now?
Back in 2007, it was decided that trust regulation would be re-visited at a time when and if the Swiss government reconsidered the regulation of independent asset managers – a time which, in 2019, finally arrived.
The moment was opportune for a host of reasons, not least the significant increase in the number of asset management firms in Geneva as many bankers left the large institutions and established multi-family offices.
This shift took place as tax transparency and information exchange continued to gain pace, globally; assisted by advances in technology, including the rise of more stringent reporting and disclosure requirements; such as the common reporting standard (CRS), Fatca and the most recent EU Directive on cross-border tax arrangements (DAC6).
In this context, new regulations were agreed at the Swiss Federal level in November 2019 to confirm and establish a uniform competitive environment for financial intermediaries and to improve client protection, with trustees now falling under the definition of financial institutions provided within a new Financial Institutions Act (FinIA).
What’s changed?
Within the new regime, which came into effect on 1 January 2020, trustees are subject broadly to the following requirements:
- An annual audit, which may be extended to once every four years subject to the submission of an annual conformity report;
- Fit and proper staff and trustees who are of good reputation and suitably qualified;
- Effective management which is in Switzerland and exercised by at least two qualified persons, and which displays good corporate governance providing internal risk and control mechanisms and documentation; and,
- Entities providing trustee services must have a paid-up share capital of CHF100,000 (£79,425, $103,710, €93,035).
All trustees acting on a professional basis in Switzerland will need to obtain a license to carry out their activities, including foreign trustees maintaining a presence in Switzerland.
Overall supervision will be provided by Finma, with day-to-day oversight delegated to a Finma-established supervisory body.
Existing trustees have six months – until 30 June 2020 – to inform their supervisory they are carrying out trust business, and will then have up to two years (ie until 31 December 2022) to obtain their trust licence from Finma.
What are the implications?
The effects are likely to be significant.
The cost of doing business is almost certain to increase. More regulation always requires more time – both in terms of pure administration and liaison time dealing with the regulator – and often investment, in order to comply.
This is set alongside the investment already needed to manage requirements of the new reporting standards.
Certainly, not all of these associated costs can, or should, be passed on to clients.
This will likely have two results for the market. On the one hand, further consolidation is almost certain, with the larger and specialist professional firms having the economies of scale to help them successfully shoulder the regulatory burden while delivering quality services to clients.
On the other hand, we may also see a rise in outsourcing, with smaller entities relying more heavily on technically savvy and larger external service providers in order to help them, and their clients, navigate the regulatory minefield.
Regardless, clients will want confidence that those establishing and managing their trusts are fully compliant with the new standards.
The road ahead
The new regulatory system represents a significant vote of confidence in the trust industry by the Swiss authorities. This will be reinforced further by the expected roll out of Swiss trust law possibly during 2020.
There will certainly be a few teething problems, not least because the legislation has been drafted primarily in relation to asset managers and may not perfectly dovetail into the trust world initially.
Uncertainties may arise and solutions will need to be sought, but the famous Swiss pragmatism will no doubt rise to the occasion.
One thing, though, is clear.
With this show of commitment to the trust and fiduciary services industry, Switzerland has further consolidated its position as one of the pre-eminent jurisdictions for banking and financial services.
This article was written for International Adviser by Daniel Hawson, client director of Saffery Champness’ Geneva office.
