fintech

FINMA implements new fintech rules in circular on public deposits with non-banks


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The revised Banking Ordinance of 30 April 2014 regarding new financial technology (fintech) regulations entered into force on 1 August 2017. The revision reduced some of the barriers to market entry for fintech firms. The purpose of the proposed revisions is to enhance the competitiveness of Switzerland as a major fintech hub and to create an appropriate regulatory framework for fintech companies providing services outside traditional banking business by taking into account the specific risk profile of their business models and service offering.

The amendments to the ordinance include two important changes:

– an enhanced settlement account exemption which extends the maximum holding period for funds on settlement accounts – without qualifying as client deposits – to 60 days; and

– an innovation sandbox allowing fintech companies to operate without a banking licence, even with holding deposits from clients up to CHF 1 million.

However, in order to provide a level playing field, the rules are not limited to fintech companies, but are available to all players operating in the financial market in Switzerland (ie, existing financial service providers).

The Swiss Financial Market Supervisory Authority (FINMA) now specifies its supervisory practice in connection with the new fintech regulations regarding the sandbox and the timeframe for settlement accounts. This entails amendments to Circular 2008/3 (entitled “Public deposits with non-banks”), which are subject to ongoing consultation due to end on 16 October 2017.

Settlement account exemption

As a general rule pursuant to the regulatory framework, before becoming operative any market participant accepting deposits from the public on a commercial basis must, in principle, obtain a banking licence. There is an exemption from the term ‘deposits from the public’ with respect to client funds accepted on (non-interest bearing) settlement accounts for the purpose of settlement of client transactions. However, since FINMA has restricted the maximum holding period under the existing exemption to seven days, it was of limited use and thus too restrictive for fintech companies. The new rules in the ordinance extended the maximum holding period on settlement accounts from the previous FINMA practice of seven days to 60 days, allowing, for example, processing payments in batches by payment service providers and longer settlement periods for crowdfunding platforms or certain initial coin offerings.The changes resulting from the revised regulations need to be incorporated into the circular and clarified as necessary. With regard to the exemption for settlement accounts, the partially revised circular states that securities dealers are not constrained by the 60-day settlement deadline explicitly specified in Article 5(3)(c) of the ordinance. It also clarifies that the exemption for settlement accounts covers business models involving forwarding (eg, money transmitting, crowdfunding or debt collection services).

Innovation sandbox

As a second element of the new regime, an innovation area or ‘sandbox’ has been created which allows the acceptance of funds from clients or third parties of up to CHF 1 million without FINMA’s prior authorisation. Thus, the holding of public funds below CHF 1 million no longer qualifies as ‘operating on a commercial basis’. The new exemption requires that such funds are neither invested nor interest bearing. Deposits may be invested and interest bearing if they are intended to fund a commercial or industrial main activity (ie, raising funds by way of crowdlending in order to finance a commercial business is allowed, but is capped at CHF 1 million, unless structured and documented as a bond issue). In addition, the investors or depositors (ie, the persons providing the funds) must be informed (in writing or otherwise in text form) before making any transfers to the recipient that the latter is not supervised by FINMA and the funds do not therefore fall under the deposit insurance regime (ie, are protected by the Swiss depositor protection scheme) (for further details please see “Protection of deposits with banks and savings banks” and “Federal Council – banking deposit protection scheme and segregation of custody assets“).

With regard to this licence-exempt space, the partially revised circular provides details in connection with the CHF 1 million limit, the ban on interest and investment, as well as the concept of a commercial or industrial main activity. Further, it also explains how such institutions are obliged to inform their clients and how they must proceed when exceeding the CHF 1 million limit.

Planned amendment of Banking Act

The third element of the proposed fintech regime – providing for a new type of licence for fintech companies – will require an amendment of the Banking Act, which has already been addressed by Parliament in the context of its debate on the Financial Services Act and the Financial Institutions Act. The Council of States (in December 2016) and the Commission of the National Council (in August 2017) have advocated that a new authorisation category be created for smaller market participants that accept public funds of up to CHF 100 million, provided that they do not invest or pay interest on such funds. For the new authorisation category, a simplified authorisation procedure and operating requirements relative to the existing banking licence regime in accounting, auditing and deposit protection have been proposed. The Financial Services Act and the Financial Institutions Act are expected to enter into force no earlier than 1 January 2019. Therefore, these changes are not yet part of the partial revision of the FINMA circular.

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