A slow Bern

The Swiss authorities’ public consultation regarding the possible introduction of a substantive Swiss trust law ran from 12 January 2022 until 30 April 2022. The Swiss and Liechtenstein STEP Federation, several STEP branches in Switzerland and the Swiss Association of Trust Companies (SATC) (collectively STEP/SATC) created a joint working group to jointly provide responses to that consultation.[1]

Rather than focusing solely on the draft Swiss trust law text in the public consultation, the Swiss authorities unexpectedly also consulted, as part of the same consultation document, on proposals to codify the taxation of trusts. This was unfortunate as most public consultation responses only focused on the unpopular tax proposals rather than the draft trust law itself. STEP/SATC were among the few organisations to provide a detailed consultation response covering both topics.

The position taken by STEP/SATC was to support, in principle, the introduction of a Swiss trust law but to strongly reject the tax proposals. STEP/SATC took the view that:

• if the tax proposals are not decoupled from the trust law proposals; and
• if the tax codification proposals are not abandoned in their entirety; then              
  • STEP/SATC should reject the draft Swiss law proposals (because both topics are bundled together).

STEP/SATC further proposed that the current taxation rules/guidelines for trusts, which have proven themselves over time, be maintained, specifically the existing tax circulars on the subject. Many other industry groups and cantons also rejected the unpopular tax proposals but, as noted above, provided less or no coverage of the draft trust law in their responses.

In addition to the positions taken, as described above, STEP/SATC also made proposals for the improvement of the draft trust law text and requested clarification on several matters, as follows:

• Limitation of trustee liability: in the draft text, there is no similar protection to art.32 of the Trusts (Jersey) Law 1984.
• Perpetuity period: the draft text includes a perpetuity period of 100 years.
• The inclusion of purpose trusts in the draft text.
• Clarification on whether there is an  obligation to have financial accounts and an audit of trusts where certain size thresholds are not met (meaning the thresholds already included in the Swiss Code of Obligations).
• Clarification on whether the proposed ability for a beneficiary to renounce their beneficiary status is both revocable and irrevocable.
• Clarification concerning the ongoing liability of a former trustee upon a change of trusteeship. The draft text would appear to result in an outgoing trustee remaining jointly and severally liable with the incoming trustee for a period of three years after the transfer of trusteeship. This point obviously needs to be resolved if trustees are to consider using Swiss trust law.

On 15 September 2023, the Swiss Federal Council (the Council) announced the conclusions of the public consultation. They confirmed that there is currently insufficient political consensus to be able to proceed with the Swiss trust law project at this time and noted that the tax proposals were clearly rejected. Consequently, the Council has proposed to parliament that the entire project be shelved.

Although parliament has the final say on the matter, it is very likely that it will follow the Council’s proposal.

A couple of conclusions from the most recent developments are:

• Although it is very unlikely that the Swiss trust law project shall progress at this time, that does not mean that it is definitely abandoned. The Council noted that there is currently insufficient political consensus, but that does not close the door for it to be reconsidered at a later date.
• The current taxation rules/guidelines for trusts shall not be replaced by the unpopular tax proposals.

Swiss trust licensing update

The Swiss Financial Institutions Act (FinIA) and the related Financial Institutions Ordinance came into force on 1 January 2020. A transitional period was granted until 31 December 2022, by which time a professional Swiss trustee that falls into scope of the law:

• should be able to show proof that they are subject to supervision by a federally approved supervisory organisation (SO);[2] and
• must have sent their licence application to the Swiss Financial Market Supervisory Authority (FINMA).

As long as the trustee sent their licence application to FINMA before 31 December 2022, then it can continue in operation while FINMA deals with the application.

Of the 387 trustees who announced in June 2020 that they may need a FINMA licence, only 165 actually made the licence application by the 31 December 2022 deadline.[3] Therefore, more than half of the initial announcements did not make licence applications. According to the information provided by the entities themselves, some of the reasons for this level of drop-out include:

• trustees who are below the legally defined threshold of ‘professional activity’ (there are thresholds below which a FINMA licence is not required);
• trustees who have left the Swiss trustee arena (e.g., retirement, liquidation of the trust company, merging with another trust company, cessation of trustee activity within Switzerland, etc.); and
• entities not subject to authorisation due to exception or exemption (private trust companies or dedicated trust companies).

As of 31 December 2022, only 28 trustees had received their FINMA licence. At the time of writing, 61 trustees had received their FINMA licence. Many trust companies have not yet received their licence, including most of the larger trust companies. This is a reflection of the fact that FINMA received a large number of applications just before the 31 December 2022 deadline (i.e., FINMA needs the necessary time to study and process all of those applications) rather than being an indicator of any specific problems with those applications. Although FINMA has not communicated when it expects the initial licensing phase to be complete, it is very possible that the process will only be complete in 2024.

Another interesting fact is that none of the five federally approved SOs have attracted a critical market share of trustees. Only two SOs have more than a 20 per cent market share, and the range for all five is 14–26 per cent individually. It appears that the majority of trustees elected to be supervised by the SO most closely linked to the self-regulatory organisation (SRO) by which they were previously supervised for anti-money laundering (AML) purposes. The SOs are a newly created concept in response to the new Swiss trustee licensing law and are generally spin-outs from existing SROs.

As with most regulators, FINMA has announced that it takes a risk-based approach to authorisation of trustees, ranging from lower-risk (typically small single-member companies) and medium- to high-risk trust operations. The higher the risk or more complex the business model of the Swiss trustee, then the more independence and professional qualification requirements are needed by FINMA. For medium risk and above, the risk-control functions should be separate from the client-facing staff, and high risk requires a largely independent senior management body. In practice, many trustees have responded by outsourcing the internal control and AML functions.

FINMA has indicated that it considers the following categories as indicators of higher risk:

• trustee-specific risks: e.g., the holding of non-bankable assets and the use of a large number of governing laws for trusts;
• FinIA risks: e.g., the delegation of essential tasks abroad, such as investment management and trust accounting; and
• AML risks: e.g., foreign custodian banks and owning group companies abroad.

Conclusion

The Swiss trustee licensing regime is well underway, although it is likely to still take several more months before FINMA will have finalised the authorisation process of existing trustees, given that it received many applications close to the 31 December 2022 deadline.

With regards to the draft Swiss trust law, the Council has proposed to parliament that the entire project, i.e., both the Swiss trust law text and the unpopular tax proposals, be shelved. Therefore, the current taxation rules/guidelines for trusts remain intact, which STEP/SATC welcome. Time will tell whether the Swiss trust law text is revisited at a later date once political consensus is more likely to be reached, but certainly at this time it seems very unlikely that it shall be progressed for several years.