Swiss Portfolio Managers: Update FINMA Authorisation Practice

Swiss portfolio managers need a FINMA licence by 31 December 2022 at the latest and must be supervised by a supervisory organisation. There are good reasons to submit the application for authorisation already this year. Read more in our last article “FINMA Unterstellung von Schweizer – Praktische Aspekte“.

FINMA’s practical experience, which is explained below, now confirms that asset managers should not wait to submit their application until deadline but should certainly address the licensing requirements relevant to their business model at an early stage.

Some “first movers” are already licensed

In its publication (“First experiences in the asset manager and trustee licensing process”; the link to this publication can be found at the end of this article), FINMA shares its initial experiences and expectations for the potential applicants. So far, 95 applications have been received and 36 asset managers approved (as of April 2021). No applications have yet been rejected, which is a positive development at first glance. However, it must be taken into account that these “first-approved” asset managers include almost exclusively asset managers who are part of a domestic group company (e.g. the bank-licensed Aquila AG) and are thus integrated into a “setting” that FINMA has long known about and monitored. Only eight “independent” asset managers appear (as of the beginning of August 2021) on the FINMA list of authorised asset managers.

Risk-based authorisation practice

FINMA confirms to keep an eye on the riskiest business models to ensure uniform and high-quality standards of Swiss asset managers. Only those applicants who correctly assess, manage and adequately monitor their business risks will receive FINMA’s seal of approval. FINMA therefore demands from applicants “willingness to make the necessary adjustments, e.g. in terms of organisation e.g. in terms of organisation, processes, resources, etc.”. In addition, FINMA expects the filing application to be of a “high quality” and must be submitted via the correct process (in particular prior supervisory organisation).

In any case, FINMA makes it unequivocally clear that “without the implementation of the necessary adjustments (possibly increase resources, separating risk and compliance, outsourcing to external service providers), authorisation will not be granted”.

Separation of risk/compliance and independent Board of Directors (practice examples)

In its publication FINMA sheds some light to two key issues, namely for which business models (i) operational separation of risk and compliance and/or (ii) the appointment of an independent board member is mandatory.

Based on the law the above-mentioned requirements (i) and (ii) do not have to be fulfilled

  • if less than 5 full-time employees or an annual gross income of less than CHF 2 million and if the applicant does not pursue a “business model with increased risks” (requirement (i) does not have to be met);
  • if less than 10 full-time employees and annual gross revenues of less than CHF 5 million and if applicant’s “type and scope of the activity” does not require this (requirement (ii) does not have to be met).

Hence, in addition to the clearly defined thresholds, the legislator cumulatively mentions two conditions that require interpretation (“no business model with increased risks” and “type and scope of activity”), which are neither explained in more detail nor exemplified in the law or in the literature. This leads to legal uncertainty and gives the authorities, FINMA in particular, a great room for discretion. Regarding the election of an independent board member, FINMA adds the phrase “or risky business model” to the legal terminology “type and scope of activity” in its publication and clarifies that it also assesses this aspect mainly from a risk perspective.

In its publication, FINMA states that the interpretation of the term “business model with increased risks” lies within the competence of FINMA and lists several examples for which, in principle, an operational separation of risk control is necessary (even below the thresholds mentioned!). This applies in particular to asset managers, who

  • Manage assets of investment funds and pension funds under the “de minimis rules”;
  • use foreign custodian banks;
  • have a certain heterogeneous foreign client structure or client structure with a focus on a certain foreign region;
  • use investment instruments with potential conflicts of interest;
  • have an unlimited client power of attorney;
  • manage a high volume of investments: AuM > CHF 1 bn.

FINMA also lists examples of what it considers “risky business models” (practically identical to those mentioned above) and further explains for each example the risks and the expectations for the applicants, including whether a separation of risk and compliance from the operating units needs to be made:

  • Involvement of foreign custodian banks;
  • use of investment instruments with potential conflicts of interest;
  • foreign client structures;
  • compensation from third parties (retrocessions, etc.).

While FINMA clearly affirms the separation of risk and compliance functions for the first two examples, the third example (“foreign client structures”) is only a possible reason for separation. FINMA does not provide any information on separation if compensation from third parties (“retrocessions”) is accepted but points out the well-known risks in this regard (no valid client waiver, civil and criminal law risks).

FINMA unfortunately does not explain which cases are to be subsumed under a “heterogeneous foreign client structure or client structure with a focus on a specific foreign region”, although this would be desirable for legal and planning certainty.

“Investment instruments with potential conflicts of interest” is also broadly defined and FINMA mentions the management of investment funds and actively managed certificates (AMC) as practice examples. According to FINMA, these instruments involve fraud risks and collection of undisclosed “double dips” (double charged fees). The question is whether FINMA exceeds its discretion here, as these risks are already regulated by the FinSA rules of conduct (including the duty of loyalty, transparency and accountability) at product and service level.

Whether the above examples also require the additional appointment of an independent board member is not clear from the publication.

Early action is required!

Based on the FINMA publication and the examples mentioned therein, FINMA seems to be restrictive regarding the separation of risk and compliance and the need for an independent board member.

Asset managers who have doubts whether they must comply with one or the other (or even both) requirements should better seek advice at an early stage. Fulfilment of both requirements (or even just one of them) may require additional and costly resources (additional staff or outsourcing solutions, election of additional board members, etc.) and may even spell the end for smaller structures. The decision as to whether the requirements must be met should therefore be clarified at an early stage and not left to “coincidence”. Asset managers who must fulfil these requirements can still make any organisational or procedural adjustments to their business model or look for a suitable or alternative solutions for the specific case. If the “problem” only arises during the authorisation process, it will probably not be possible to find a suitable and sustainable solution (under time pressure).

The FINMA publication referred to above can be retrieved here: