Swiss Trustees' Regulation: 10 years waiting period for what result?
It took about 10 years to score the try of the initiative of the Swiss Association of Trust Companies (SATC), resulting in the belated but welcomed inclusion of trustees in the Federal Act on Financial Institutions (FinIA). At first, only independent portfolio managers were in scope but this has now changed. The new law should be enacted at the beginning of 2018 or in the course of 2019 at the latest.
For memory, SATC was set up by dozen of trust companies following the ratification by Switzerland of the Hague Convention on Trust and the introduction of Tax Circular 30 of 2007 on the taxation of trusts. This association wanted to promote certain ethical, quality and professional standards in the trust industry and ensure adherence to them by its members who had to observe a set of Regulations and a Code of Conduct. It is worthwhile noting that, historically, trustees’ activities were not subject to any specific regulations, apart from Swiss anti-money laundering and terrorism financing legislation. This situation contrasted notably with the requirement for trustees to obtain a licence prior to conducting trust business. Such licensing system was applicable in most of the competing international financial centres.
The introduction of the FinIA is a welcomed development in that it reinforces the credibility and attractiveness of the Swiss trust industry toward high net worth families and their advisors. These are sophisticated individuals who consider the reputation and robustness of the regulatory framework of the jurisdiction of their trustees as an important criteria of any trustee’s selection process. It also contributes to the positioning of Switzerland as a modern and truly well regulated wealth management centre.
But what is the FinIA and does it meet the trust professionals’ expectations?
FinIA has always been presented as a legislative package together with the Financial Services Act (FinSA). This suggests that their provisions are applicable to both portfolio managers and trustees. Actually, we are of the view that only the FinIA should apply to trustees’ activities sensu stricto. The current stage of confusion in this regard is unfortunate. Indeed, trust companies’ competences, internal organization, risk management processes and business models are not remotely close to those of portfolio managers. We expect the final bills to clarify this issue.
FinIA governs the requirements for acting as a financial institution and it encompasses trustees. FINMA will supervise trustees, even though the day-to-day supervision will be carried out by a to be created supervisory organization (SO). This body will also be subject to the supervision of FINMA and will be issuing the authorizations enabling trustees’ to carry out their activities in Switzerland. The obtaining of such authorization, coupled with trustees’ supervision by FINMA, are positive developments. It meets international standards. Of note, is the establishment of a cascade authorization system, whereby the holder of an authorization considered as “superior” can exercise other financial market activities without applying for an additional authorization. Typically a bank could operate as portfolio manager, which does make sense given the similarity of risk exposures, competences and internal organization required for conducting the business. However, that parallel can’t be made between banking and trustees activities! We hope that this point will be addressed before the enactment of the bill so that all financial institutions acting as trustees will have to obtain a prior authorization to do so. This is the case in most competing regulated jurisdictions. It would also be in the best interest of the banks themselves. Indeed, one could find disproportionate the withdrawal of a banking licence in the event the trustee subsidiary company would have breached the provisions of the FinIA.
Single Family Offices and Private Trust Companies shouldn't be in scope of the FinIA. The position of the Multi family offices is more ambiguous and it would be good to clarify without delay the uncertainties surrounding that point given the number of family offices operating in Switzerland. Moreover the position of lawyers and notaries acting as trustees should also be looked at since they are out of scope of FinIA provided that the activity is subject to professional secrecy. The day-to-day management and administration of trust structures by lawyers and notaries are often a residual part of their practice. For that reason, these activities shouldn't be exonerated, except in certain specific situations. Otherwise one would deviate from the rationale of the law, which is to apply the same regulatory requirements to all financial services providers. Finally, individuals and companies acting as trusts’ protector should not be subject to the FinIA.
Several provisions in respect of internal organization have been introduced, taking into account the types of activities, size and risk profiles of the financial institutions. Minimum requirements applicable to trustees could be enacted by FINMA in respect of governance, risk management and control systems, outsourcing and the management of conflict of interests. In addition, the trustees’ SO could establish more detailed internal regulations as well as a Code of Conduct. The current Code of SATC would be a good starting point.
Other welcomed novelties are the requirement for the persons responsible for the management and administration of trust companies to provide guarantee of irreproachable business conduct, to enjoy a good reputation and have the specialist qualifications required for their functions.
Finally the FinIA introduces the obligation to subscribe to a professional indemnity insurance policy. This is relevant in a sector becoming increasingly complex and litigious, with claims for breach of trust against trustees often in millions of Swiss francs.
Once the above-mentioned ambiguities are lifted, the FinIA must be considered as an inevitable and proportioned evolution of the legislation applicable to trustees in Switzerland. It is less stringent and more pragmatic than many similar legislations coming from the Channel Islands or the Caribbean. However, its implementation will generate additional cost and may affect the business sustainability of some of the smaller players in the market. This should in turn further boost the wave of consolidation currently taking place in the Swiss market. Unfortunately this is the cost to pay for reinforcing the credibility and attractiveness of the Swiss trust industry as a whole.
Published by BSL, November 2017 Issue