The rapid evolution in FinTech has not only attracted the attention of the Swiss Financial Market Supervisory Authority (FINMA) but eventually pushed the Swiss government to propose FinTech specific amendments to the Banking Act and other financial laws. On 1 February 2017 the Federal Council opened a consultation on new draft regulations designed to reduce barriers to entry for FinTech firms and to strengthen the attractiveness of the Swiss financial markets.
As of today Swiss law does not have a concept of a “banking licence light” or in general any regulation that takes into account the specific requirements of FinTech companies. On a case by case basis dealings with the FINMA have so far often been geared at finding solutions which allows the FINMA to consider a FinTech firm to be outside of the regulatory scope – the quite prominent case of XAPO described below being one of them.
The draft amendments of the Federal Council do not regulate specific business models but rather set-out a legal framework suitable for all existing and future FinTech companies as well as other actors satisfying the legal conditions. The three major amendments are:
1. Deadline extension for settlement accounts
Accounts held for clients that are used purely for execution operations are currently not deemed to be bank deposits and hence not subject to a banking licence provided that the funds are kept for not more than 7 days. Unfortunately, the timeframe is unsuitable for crowdfunding models which if the crowdfunding period lasts for more than 7 days would be caught by the requirement to have a banking licence. Therefore, for FinTech firms that are not securities dealers, the Federal Council proposes to extend the period to 60 days.
2. Creation of an innovation zone
Under the Banking Act, anyone holding 20 or more deposits from the public or requesting deposits from the public is deemed to be a bank and hence required to obtain a banking licence. This requirement has a negative effect on innovation as start-ups are mostly unable to go through a costly and long authorisation process. As a result, the Federal Council recommends exempting innovative companies from requiring such a banking licence. They should be able to take more than 20 deposits from the public provided that the total amount held does not exceed CHF1m.
3. Introduction of a new category of banking licence, the so-called “FinTech licence”
FinTech companies tend to favour passive operations and not to reinvest the funds they hold. Current requirements for a banking licence are therefore unsuitable and lighter requirements should apply for FinTech companies that hold not more than CHF 100m non-interest bearing funds (not reinvested), in particular in respect of accounts disclosure, auditing and deposit guarantees. The Federal Council shall be entitled to amend the cap if necessary.
While the amendments should mostly affect the Banking Act and the Banking Ordinance, some provisions in the Auditor Oversight Act, the Money Laundering Act and the Financial Market Supervision Act should also be affected.
4. Practical relevance
The need for this new orientation is reflected in the difficult licencing process of XAPO, a FinTech company operating a bitcoin wallet and auxiliary services, such as a bitcoin debit card, out of Switzerland. Whilst their initial set-up could have been seen to require a banking licence, XAPO managed to structure its business model in a close to two year process with FINMA so that it can operate out of scope of banking regulation. But it remains a recognised financial intermediary for money-laundering purposes. At the same time the approval of the Swiss regulator is subject to XAPO meeting certain conditions. Perpetuating the approach to find tailored solutions would have been time and money consuming for applicants as well as for FINMA, distracting it from other supervisory tasks, and not in all cases may such solutions be found.
By adopting a “one-size-fits-all” model, Switzerland should stand out from other rival jurisdiction. For instance, while the Swiss sandbox is open to all players, is not supervised by the FINMA and is not limited in time, the United Kingdom only allows limited actors in their particular scheme, for a limited time and under close supervision of their supervisory body.
These modifications may facilitate the creation of FinTech start-ups and stimulate their development in the next years thus creating interesting business opportunities for the Swiss legal sector. A steady interest should therefore be kept in future developments.