An expanding toolkit

For centuries, Switzerland has been one of the world’s leading private client financial centres. Trusts with Swiss trustees have been widely used for decades, and two recent regulatory and legal developments are likely to increase that interest. This article provides an overview of both developments and highlights the involvement of STEP members in both projects.

New trustee regulations

The first development is the recently implemented Swiss trustee regulations. The legal text is contained in the Financial Institutions Act (FinIA) that was adopted by the Swiss parliament on 15 June 2018 and the related Ordinance of 6 November 2019 on Financial Institutions (FinIO) issued by the Federal Council. Both came into force together on 1 January 2020.

The introduction of FinIA extends the supervision of Swiss trustees and overseas trustees who operate in or from Switzerland (e.g., those who are employed through a Swiss branch) beyond anti‑money laundering (AML) regulation in cases where the trustee activity is undertaken on a commercial basis and where the following thresholds are met: gross earnings of more than CHF50,000 per year or 20 relationships.

There are two levels of supervision inherent in the new Swiss trustee regulations. The Swiss Financial Market Supervisory Authority (FINMA) is the highest supervising body and trustees must be authorised by FINMA in order to carry out their activities. FINMA delegates ongoing supervision tasks to the five FINMA‑approved supervisory organisations (SOs). Thus, the issuance of licences and rulings is reserved to FINMA, whereas the day‑to‑day interaction for the trustees will be with the SO of their choice. This is obviously a two‑tier level of regulation, so FINMA and the SOs have committed to coordinate their supervisory activities in order to avoid duplication and unnecessary cost.

The SOs are spin‑offs from existing self‑regulatory organisations (SROs). Prior to the introduction of FinIA, Swiss trustees had the choice to be regulated for AML purposes either by an SRO or by FINMA directly; going forward, the joint SO‑FINMA model described shall regulate Swiss trustee activity and AML matters together.

Each trustee must first affiliate to an SO before making its FINMA licence application. It is this point that has slowed the issuance of FINMA trustee licences, because most trustees have been awaiting more information from the newly formed SOs regarding their set‑up and way of working before making a decision about which SO to affiliate to. It is likely that one or two SOs shall become the market leaders for trustee regulation, whereas the others will focus more on the larger population of portfolio managers, and this shall only become clear over time (being a first mover may not be an advantage in this case).

Partly in light of the fact that the SOs are still in the process of commencing their activities, FinIA includes a transition period that runs to 31 December 2022 (for trustees who had already commenced their activity prior to 1 January 2020), by which date every Swiss trustee must have filed their licence application to FINMA. Therefore, it is likely that most trustees shall affiliate to an SO late in 2021 or in the first six months of 2022. Certainly, FINMA is expecting a surge in FINMA licence applications in the second half of 2022.[1] Therefore, it is likely that the issuance of most FINMA licences shall continue well into 2023 (trustees can continue to operate until the issuance of a FINMA application decision if they continue to be regulated by an SRO). At the time of writing, FINMA has not yet authorised any trustees and has so far only approved 75 portfolio managers.

As a brief overview of some of the more important practical aspects of the regulations:

• FINMA has adopted a risk‑based approach to licensing and expects that not all applicants will receive a licence under their current structure, i.e., some organisational changes may be necessary to be granted a FINMA licence. Where FINMA considers a trustee to have a high‑risk business model, closer scrutiny will be given on an ongoing basis and certain safeguards may need to be adopted, e.g., to separate the risk management and internal audit functions from operations, even if the thresholds noted in the law are not met. The risk assessment will determine if annual audits are required (they can be extended to four‑year cycles in lower‑risk cases).
• Swiss trust companies and the persons leading them must demonstrate irreproachable business conduct. Furthermore, 10 per cent or more shareholders must enjoy a good reputation.
• Financial requirements: each trustee must have CHF100,000 fully paid‑up share capital (in cash) and must have adequate collateral, some of which can be held in professional liability insurance. Each trustee must have sufficient own funds amounting to at least one‑quarter of the fixed costs (e.g., personnel expenses, rent) reported in the most recent financial statements. Capital adequacy must be maintained at all times.
• The word ‘trustee’ can only be used in a company name if the FINMA licence is obtained.
• Umbrella/lead licensing is not permitted in the present law (although, STEP has provided a list of selected jurisdictions worldwide where this is possible).

Substantive trust law

The possible introduction of a Swiss substantive trust law is another exciting development for Switzerland. Until now, Switzerland has not had its own trust law, but rather foreign trusts have been recognised in Switzerland since the entry into force on 1 July 2007 of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. Therefore, any Swiss trustee‑managed trusts operate in circumstances where a foreign governing law has been chosen (e.g., Jersey, the British Virgin Islands, the Cayman Islands, etc.). A Swiss trust law would allow for Switzerland to be added to that list, so providing a level playing field and reinforcing Switzerland’s place as a financial centre of worldwide importance.

At the time of writing, the draft law is expected to be published for public consultation in November 2021.[2] Thereafter, the timeline and process is not yet known: there may be a referendum on the subject, and the timeline for parliamentary approval of the final law is not definitively known. It is therefore possible that the new law could enter into force in 2023, but perhaps 2024 is a more reasonable timeframe.

STEP’s involvement

STEP has been active in both the process of introducing the Swiss trustee regulations and the possible introduction of a Swiss substantive trust law. Regarding the former, STEP (jointly with the Swiss Association of Trust Companies) has provided written input to the draft law and ordinances, with several submissions being acted upon. For example, trustees no longer need to be affiliated to an ombudsman service and the family ties exemption has been widened. Further, a working group of Fabianne de Vos Burchart TEP, Konrad Häuptli, Philippe de Salis TEP and the author has had meetings with FINMA regarding the implementation process from a trustee’s perspective.

In the case of the potential Swiss substantive trust law, David Wallace Wilson TEP, Christian Lyk TEP and Professor Luc Thévenoz sit on the Federal Office of Justice working group as external experts and have been heavily involved in the writing of the draft law.

Conclusion

In summary, both developments strengthen Switzerland’s competitive position as a centre for wealth management. The Swiss trustee regulations provide a FINMA seal of approval of quality and make the option of using a (regulated) Swiss trustee even more attractive than before.

Anyone using a regulated Swiss trustee will know that the financial, personal conduct, organisational and operational aspects of Swiss trustees’ activities are supervised by a FINMA‑licensed SO on an ongoing basis. If the potential Swiss substantive trust law enters into force, it shall further strengthen Switzerland’s position: a local law would be entered into the Swiss Code of Obligations, so providing another option to worldwide families when organising their affairs.