FINMA recently granted the first licences to independent asset managers. As the deadline for the submission of licensing applications for most asset managers and trustees is approaching fast, it is worth taking a closer look into some aspects of the licensing process.
The introduction of the Swiss Financial Institutions Act (FinIA) has given rise to a fundamental change in the regulatory landscape for asset managers and trustees in Switzerland. Under FinIA, asset managers and trustees are now subject to a licensing requirement from FINMA and prudential supervision by a supervisory organisation. The financial industry has eagerly awaited a glimpse into what FINMA will focus on when assessing licence applications. With the first licences recently granted by FINMA, this is becoming clearer.
As FinIA entered into force on 1 January 2020, the licensing requirement for asset managers and trustees applies as of this date. There are, however, different transitional relaxations, including:
- Asset managers and trustees that founded their businesses prior to 2020 have until 31 December 2022 to affiliate with a supervisory organisation and submit a licensing application.
- Asset managers and trustees that founded their business from 2020 onwards are required to affiliate with a supervisory organisation and submit a licensing application by 6 July 2021.
To date, FINMA has received around 100 licensing applications, of which 58 asset managers and trustees have since been granted a licence. However only three of these were independent asset managers, with the remaining 55 firms being group companies of a Swiss financial institution. FINMA expects to receive around 2,500 licensing applications from asset managers and trustees by the end of 2022.
FINMA applies a risk-based approach when assessing the licensing applications. While simple business models are assessed in a standardised form, business models entailing increased or higher risks require further, in-depth examination, e.g. regarding appropriate risk-mitigating measures. Hence, there is no one-size-fits-all approach.
FINMA considers the following non-exhaustive criteria to assess whether a business model entails increased risks:
1. Cooperation with foreign custodian banks
FINMA identifies, among others, anti-money laundering risks when a Swiss asset manager or trustee cooperates with a foreign custodian bank.
Therefore, FINMA expects that such a cooperation is aligned with the business model or strategy of an asset manager or trustee, and that associated risks are appropriately addressed in the policies, processes and controls. Furthermore, as a consequence of the risks associated with a cooperation with a foreign custodian bank, FINMA expects an asset manager or trustee to separate its risk and compliance functions from operational units.
2. Use of financial instruments with potential conflicts of interest
FINMA identifies, among others, conflicts of interest and transparency risks, and fee layering risks (so-called ‘double dip’) when a Swiss asset manager or trustee uses its own financial instruments.
Therefore, FINMA expects that the use of an asset manager’s own products is appropriately disclosed, and potential conflicts of interest are adequately mitigated and addressed in said asset manager’s policies, processes and controls (including e.g. a percentage limit for its own products). Furthermore, as a consequence of the risks associated with the use of its own financial instruments, FINMA expects an asset manager or trustee to separate its risk and compliance functions from operational units.
3. Foreign client structures
FINMA identifies, among others, liability risks and regulatory risks (violation of market access rules) when a Swiss asset manager or trustee is servicing foreign clients.
Therefore, FINMA expects that such cross-border risks are adequately addressed in an asset manager’s policies (e.g. country manuals) and that relationship managers have the necessary knowledge and expertise (e.g. regarding the client domicile, language and legal restrictions), and receive periodic training. Furthermore, as a consequence of the risks associated with foreign client structures, FINMA expects an asset manager or trustee to evaluate a separation of its risk and compliance functions from operational units.
4. Compensation from third parties
In the event that an asset manager or trustee receives any kind of compensation from third parties (e.g. retrocessions/inducements from custodian banks), FINMA expects that clients are pre-informed (in line with art. 26 FinSA) and have duly waived their entitlement should the asset manager or trustee intend to retain such compensation.
Based on the experience gained by asset managers that have already submitted a licensing application, asset managers and trustees should pay special attention, among others, to the reporting of outsourced activities, their corporate signatory rights, extended (or even unlimited) authorisations on client accounts and/or the documentation of client domiciles (i.e. segregation between beneficial owner domicile and contracting party domicile).
Course of action
The licensing process is complex and requires external support in most, if not all, cases. Among others, organisation, policies, processes, controls, service contracts and client documentation have to be adapted to the new regulations. For this purpose, many asset managers and trustees may be tempted to rely on templates established by external service providers.
Furthermore, a mapping of the business model with an IT application and the implementation of a portfolio management system should be evaluated, where these are not already in place.
The licensing application should be prepared swiftly, if this has not yet been submitted. The licensing process roughly consists of the following steps:
- Registration on the FINMA platform (online tool)
- Completion of the application questionnaire (in the online tool)
- Affiliation with a supervisory organisation
- Submission of the licensing application via online tool
- Preliminary assessment by the supervisory organisation
- Assessment by FINMA
All in all, the licensing process is clearly structured and can be done completely online (i.e. no signature required).