Fintech regulation in Switzerland

Switzerland is now working on limiting barriers in its financial market oversight in light of the forthcoming vigorous growth of the Fintech field. A framework of measures includes a Fintech license in Switzerland. This new “banking license light” type is designed to allow for the deposit business to be run up to a certain amount under simplified terms. This new condition should be applied based on the FinSA and the FinIA.

The present state of affairs

In line with the effective market regulation, many Swiss organizations in the field of financial technologies fall within the ambit of the Banking Act and would, respectively, need to apply for a banking license from FINMA. Particularly, establishments with business structures centered on taking customer funds as a core activity are targeted, for example with crowdfunding. The immense operational costs regarding a banking license restrain many companies from positioning in the Swiss market. Thus, the Federal Council in the cooperation with the Parliament now aims to set up a workable legal mechanism for companies in the field of Fintech.

The Sandbox

In 2017, the Swiss government’s executive branch proposed an extended authorization-exempt area, known as a regulatory sandbox. Under this regime, FinTech institutions are permitted to take deposits from their customers up to CHF 1 million without obtaining a banking license for as long as the assets are neither used for investment purposes nor interest-accrued. As a consequence, such companies can test whether operating in that particular market makes sense financially before expanding their activities and applying for a banking license. The sandbox is accessible to all Swiss market participants, has no time limits, and does not require prudent oversight by FINMA. For transparent operation, AML provisions are applicable.

Swiss Fintech license

Provided that the deposit scope of CHF 1 million is being over, the new mechanism adopted in the domain of FinSA and FinIA shall require a banking license “light”, allowing for depositary business (an institution that neither offers investment services nor pays interests) up to the amount of CHF 100 million under simplified terms. The respective amendments of the Banking Act are now discussed in parliament.

Terms and conditions for Fintech license in Switzerland

• Institutions operating under the license “light” have no permission to use the deposited assets in investment purposes or pay interest on them. They are not eligible to use the word “bank” in the respect of their activities.
• The maximum amount of the assets for the license “light” will be established at CHF 100 million. However, the Council has the mandate to adapt this threshold value to the forthcoming development of the FinTech field. Likewise, FINMA can exempt some institutions under certain terms in particular cases, provided that customer protection is properly guaranteed by hardware.
• The confidentiality clause is in line with art. 47 Banking Act applies an approach “mutatis mutandis”, alongside the due diligence measures against the illicit circulation of funds and funding of terroristic operations.

Exemptions for the Fintech license

• The general standards of the Swiss Code of Obligations are applicable which are more lenient compared to the accounting and auditory standards of the Banking Act.
• The audits can be conducted either by an auditing firm authorized by the Federal Audit Oversight Authority (FAOA) or by an auditor subject to less strict authorization rules.
• The provisions on deposit insurances are not applicable. To guarantee customer security, the licensees are required to notify the clients about the missing deposit insurance prior to placing a deposit.
• The minimum level of capital obligations should be established at 5% of the taken deposits, but no less than CHF 300,000. This is far below the obligations effective for organization acquiring traditional banking approvals.

Fintech perspectives

The launch of amended Fintech regulation in Switzerland will greatly lower the barriers for institutions which accept client deposits. This might bring a positive effect on crowdfunding, or blockchain-based institutions among others. Additionally, new provisions will enhance the attractiveness of the financial market and its competitiveness. Organizations taking funds are advised to determine which license type they require prior to launching their business activity in Switzerland.