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19 November 2010
On October 22 2010 the Financial Market Supervisory Authority (FINMA) issued a position paper on legal and reputational risks in cross-border financial services. The paper applies to all supervised institutions (banks, securities dealers, insurance companies and licence holders pursuant to the Federal Act on Collective Investment Schemes) which engage in cross-border financial services business.
The concept of 'cross-border financial services' encompasses all activities, services and product ranges which are offered to clients resident in a third country – that is, traditional offshore business from Swiss-based institutions – as well as services provided to foreign clients by foreign-based subsidiaries or branch offices of Swiss financial institutions.
FINMA states that the legal and reputational risks involved in cross-border financial services have increased noticeably in recent years, as demonstrated by certain high-profile cases (eg, the UBS Case). The business models of many wealth-management banks have traditionally been strongly focused on cross-border services for private clients resident outside Switzerland.
The paper calls on supervised institutions to comply with foreign supervisory law and to define an appropriate service model for each target market. FINMA has clearly indicated that in future, it will make more regular assessments of whether supervised institutions are aware of the risks inherent to their cross-border operations and whether they are taking appropriate measures to mitigate these risks. In this regard, the position established in the paper will also be reflected in FINMA's future enforcement practice.
Legal and reputational risks
The paper outlines the legal and reputational risks as identified and analysed by FINMA:
Under the Insurance Supervision Act, the granting of a licence by FINMA to conduct insurance business requires any applicant to supply its cross-border services in compliance with foreign supervisory legislation.
Although there is no general equivalent provision for banks, in its position paper FINMA considers that breaches of foreign legislation may also violate certain Swiss supervisory rules.
As part of their licensing requirements, on an ongoing basis banks must have an administrative organisation in place which is commensurate with their business activities and ensure the proper conduct of their business activities at all times. They must lay down rules or internal guidelines outlining their approach to risk management, the relevant responsibilities and procedures for approving risky transactions. Pursuant to the Swiss Banking Ordinance, banks must identify, mitigate and monitor their operational and legal risks. An effective system of internal control must be set up.
On the basis of these rules, FINMA now requires banks to assess thoroughly the legal and reputational risks associated with their cross-border operations. In conducting such assessments, banks must familiarise themselves with all their target markets and the foreign legal provisions which apply to them. The actual activities must be checked for compliance and the associated risks must be identified, mitigated and monitored. Appropriate measures must be taken to mitigate and eliminate risks.
Banks may thus decide to dispense with cross-border services in certain target markets or with the provision of services to certain categories of client. They may also issue guidelines on business operations that are permitted or proscribed in the target countries. Measures such as staff training can be promoted. Remuneration schemes must be structured in such a way as to promote, rather than penalise, proper compliance. Where necessary, cross-border or onshore licences should be obtained or appropriate disclosures made to foreign supervisors.
FINMA does not regard the outsourcing of the management of client relationships to external asset managers to be an effective means of mitigating or eliminating risk. Due care must therefore be exercised in selecting and instructing such partners.
FINMA expects to be informed immediately if any bank is affected by significant legal and reputational risks in connection with cross-border activities or is contacted by foreign authorities regarding such matters.
FINMA's position paper is intended to be reflected in the Swiss regulator's future enforcement policy. This may mean a significant change of FINMA's traditionally liberal attitude towards cross-border transactions out of Switzerland. It also remains to be seen whether such a change will be observed in FINMA's supervision of cross-border transactions into Switzerland.
For further information on this topic please contact Christophe Rapin or Christophe Pétermann at Lachenal & Le Fort by telephone (+32 2 646 02 22), fax (+32 2 646 75 34) or email (email@example.com or firstname.lastname@example.org).
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