Relations between Switzerland and the EU

To achieve improved access to that market, the sector has in the past pursued a number of mutually independent approaches: 

• Bilateral agreements: These allow for improvements to market access with individual, strategically important EU countries. So far, Switzerland has reached an agreement with Germany on a simplified exemption procedure. Negotiations are also currently under way regarding an agreement with the UK to improve Swiss banks’ access to the UK market.
• Equivalence strategy: Key elements of Swiss financial market regulation are recognised as equivalent to EU regulations. However, the relevant recognition procedures are currently one-sided, inefficient and, in some cases, heavily politicised.
• Financial Services Agreements (FSAs): A financial services agreement would cover the entire Swiss financial sector, including insurers. Furthermore, a key component of an FSA in the traditional sense would be extensive alignment of Swiss financial market legislation with EU regulations. For this reason, an FSA is not the chief objective at present.
• Onshore presence in EU countries: A number of Swiss banks have established subsidiaries in the EU, but EU customers continue to be primarily interested in cross-border services provided from Switzerland.

The sector is currently focusing on the following approaches: 

• Finding practicable market access solutions, both at the EU level and bilaterally with individual Member States. The Swiss banking sector is firmly committed to the institution-specific approach, which aims to open the EU market up to interested institutions by having them register with the EU supervisory authorities.
• Putting the existing procedures for recognising equivalence in the financial sector on a more stable and reliable foundation, while at the same time targeting improvements in the current equivalence regime.

 The institution-specific approach

By international standards, market access for banking and securities services from the EU into Switzerland is very open. Conversely, however, there is currently little or no access for the active provision of cross-border banking and securities services from Switzerland, either at the EU level or in most Member States of the EEA. Market access at the EU level is subject to ever tighter restrictions. The current rules limit the cross-border provision of services for EU investors to instances of passive “reverse solicitation” – in other words, situations where customers seek out services exclusively on their own initiative.

The institution-specific market access approach should be pursued further, in order to maintain and further expand cross-border business with customers in the EU. Institution-specific – or, from a regulatory perspective, licence-based – access to the EU market involves interested Swiss banks registering once with a central EU authority (the European Banking Authority or European Securities and Markets Authority) and being issued with a passport allowing them to actively provide banking and securities services throughout the EU/EEA. The scope of access would extend to all relevant customer categories, including private clients, and would cover providing services to existing customers as well as soliciting and acquiring new customers domiciled in the EU/EEA.

When registering, Swiss banks would individually undertake to accept and comply with the relevant EU law when serving EU customers. That would include the EU rules of conduct with regard to investor protection, market integrity and a level playing field. In addition to primary supervision by FINMA, registered Swiss banks would be subject to oversight by an EU authority when engaging in cross-border activities in the EU. The details would have to be set out in a cooperation agreement between the Swiss and EU supervisory authorities. The Federal Council also acknowledged that the institution-specific approach is a viable solution in its draft Assessment of Swiss-EU relations dated 9 December 2022 (page 21).

One model might be the accord reached between Switzerland and Germany establishing an exemption procedure. Germany offers banks outside the EEA the option to obtain licence exemptions under the applicable German laws and regulations. A memorandum of understanding between the Swiss and German supervisory authorities also grants Switzerland access to more far-reaching licence exemptions granted by the German supervisory authority BaFin. Institutions that have obtained such an exemption can actively acquire and serve German customers on a cross-border basis without going through an institution licensed in Germany, but are broadly required to adhere to German regulations. Additionally, their cross-border business is reviewed by Swiss audit firms, while BaFin has some audit powers of its own.

A potential alternative would be to set up an EU registration system of the kind that already exists in countries such as the US. The US Investment Advisers Act of 1940 allows Swiss financial institutions and their advisors to offer their portfolio management and advisory services cross-border on American soil. Institutions wishing to do so must register with the US Securities and Exchange Commission (SEC) or a state supervisory authority. Here too, registered financial institutions and their investment advisors must comply with US law in their dealings with US customers.

Equivalence procedures

In the interests of safeguarding and improving access to the EU market, the focus in the near term will remain on equivalence procedures. Such recognition is essential to EU market access for the entire Swiss financial sector.

Relations between Switzerland and the EU are very close and multifaceted, with more than 120 agreements signed in the past 25 years. The two are very close trading partners. This high degree of interconnectedness puts Switzerland in an exceptional situation vis-à-vis the EU in that it trades much more intensively with the EU than other third countries do. Swiss banks are subject to competent and comprehensive financial market supervision in Switzerland that is also recognised by the EU. On top of this, Swiss legislation is designed to be equivalent to EU law in areas that are relevant for market access. Switzerland enjoys a high level of political and financial stability by international standards.

For all of these reasons, the EU should recognise Switzerland as a reliable trading partner and give it priority treatment in matters of equivalence. The industry wants full recognition of the equivalence of Swiss financial market regulation where provided for under EU law and where it is important for Switzerland. It argues that the EU’s politicians should assess equivalence using a reliable, clearly defined and principles-based process. The pending equivalence procedures should be concluded as swiftly as possible on the EU side, particularly in cases where the technical process was concluded long ago by the competent authorities.

From the banks’ perspective, legal uncertainty currently stems from the existing procedures for achieving EU equivalence not being defined clearly or reliably enough. There are no specific timelines, for example, nor is there a uniform benchmark for equivalence. There is no right to equivalence; it is instead a political decision taken by the European Commission. In addition, the scope of the existing EU third-country equivalence regime is restricted to certain activities, customer categories (professional clients) and products.

In June 2019, the European Commission allowed its temporary recognition of the equivalence of Switzerland’s stock exchange regulation for the purposes of Article 23 of the Markets in Financial Instruments Regulation (MiFIR) to lapse. This prompted the Swiss Federal Department of Finance (FDF) to invoke its contingency measure to protect the Swiss stock exchange infrastructure as of 1 July 2019. The EU still did not recognise Swiss stock exchange regulation as equivalent, and on 17 November 2021 the Federal Council therefore extended the validity of the contingency measure until 31 December 2025. At the same time, it launched the consultation on incorporating the contingency measure into the Financial Market Infrastructure Act (FinMIA). Even after this is done, the measure will remain temporary and will initially apply for a period of five years, with the option to deactivate it at any time.

The SBA finds it regrettable that, for political reasons, recognition of stock market equivalence was not renewed. It therefore shares the Federal Council’s assessment. The arbitrary linking of technical recognition of equivalence with the progress made in the negotiations for a framework agreement is incomprehensible. We believe that Switzerland – just like other third countries – should be granted equivalence with no time limit, especially since technical equivalence has been acknowledged by the EU authorities.

We also believe that further decisions on equivalence in other areas are of great importance. These should be finalised as swiftly as possible. The key pending equivalence procedures are as follows:

• Article 67 of the Alternative Investment Fund Managers Directive (AIFMD) relates to the extension of the EU passport to third countries, i.e. other countries as well as Switzerland. A favourable decision would result in the admission of Swiss alternative investment funds throughout the EU, with their management and marketing subject to uniform regulation in all EU Member States. This would open up new opportunities for Swiss-based business that have up to now been the preserve of locations inside the EU (primarily Luxembourg and Ireland). ESMA gave positive advice on extending the passport to Switzerland back in July 2016. The Commission’s political decision is still pending and could remain so for years due to a possible review of the AIFMD.
• Articles 46 and 47 of MiFIR relate to the direct cross-border provision of services to professional clients in the EU from a third country. A favourable decision would make it possible to provide investment services to eligible counterparties and “per se” professional clients throughout the EU without the need for any branches in the EU. Swiss institutions would benefit from EU passporting for third countries, which would significantly enhance their scope for providing cross-border services. Luxembourg, an EU Member State, offers an interesting precedent in this regard, having deemed Swiss financial market regulation and supervision to be equivalent for this very purpose under its national regime in June 2020. More information is available here.
• Article 13 of the European Market Infrastructure Regulation (EMIR) relates to recognition of Swiss derivatives regulation. A favourable decision on equivalence would mean that it would be sufficient to meet certain obligations (such as clearing, risk mitigation and reporting) under Swiss law rather than having to ensure compliance with EMIR. This is referred to as substituted compliance. For intragroup transactions, it would even result in an exemption from certain obligations under EMIR (in particular with regard to clearing and risk mitigation).
• Article 25 of the Central Securities Depositories Regulation relates to the processing and settlement of securities transactions by providers in third countries. Recognition of equivalence in this area allows central securities depositories from third countries to provide custody services for customers in the EU. This process is also relevant with regard to member states of the European Economic Area. SIX SIS is the central securities depository not only for Switzerland, but also for Liechtenstein, and therefore performs functions centrally for the Liechtenstein financial centre. Equivalence is a prerequisite for continuing to provide these services.