Far fewer portfolio managers have applied for a FINMA license than expected. With the transition period finishing at the end of 2022, applying is urgent. Otherwise portfolio managers must sell their business or shut it down.
In light of the Swiss Financial Institutions Act (FINIA), which came into force on 1 January 2020, portfolio managers are required to obtain a licence from the regulator FINMA to carry out their activities. FINIA provides for a generous transitional period of three years for portfolio managers who provided their services before 2020 to submit their application. But this period expires on 31 December 2022 – just a few months from now.
By the middle of 2020, 1,934 portfolio managers had notified FINMA that they intended to apply for a licence. At the end of June 2022, though, just 317 applications had been granted a licence. Numerous other applications are still in the licensing process. In the best case, these applications are either in the process of being reviewed by a supervisory organisation (SO) or awaiting FINMA’s review, which can only take place after the successful affiliation of a portfolio manager to an SO. Overall, however, these figures fall far short of FINMA’s expectations, based on portfolio managers’ notifications in 2020.
In its guidance 01/2022 on the “Timetable for the licensing process for portfolio managers and Trustees”, FINMA calls on all portfolio managers without a licence: “The time to act is now!”. FINMA has made it unequivocally clear that it cannot extend the regulatory deadline of 31 December 2022. It warns that portfolio managers who intentionally provide their services without a licence after 31 December 2022 will face the consequences of the Swiss supervisory and criminal law.
Two-step authorisation process
Before portfolio managers obtain the necessary authorisation from FINMA, an affiliation to an SO is required. One of five SOs approved by FINMA is responsible for ongoing supervision. Therefore, once all the supporting documents and information for the licence application have been submitted to FINMA’s survey platform (EHP), it is initially sent to an SO for a preliminary review.
During the preliminary review, the SO examines the application for both form and content. If the SO determines that the application is incomplete or that individual licensing requirements have not been met, the SO will request the portfolio manager to amend the application. Depending on the quality of the application, several iterations could be necessary to successfully affiliate to an SO. As this review procedure can also take some time, FINMA has recommended that the complete licence application should be submitted to an SO at the latest by 30 June 2022.
Once the SO has confirmed the affiliation, the (amended) application is submitted to FINMA via the EHP. FINMA will then review the application based on its form and content, and is likely that to ask questions that will trigger an additional follow-up procedure.
Only after FINMA considers the application to meet the requirements of the authorisation, will it issue its decision to grant a licence. However, this decision is conditional (e.g. conditional to the amendment of the articles of association and the entry into force of the organisational and business regulations). When the conditions have been met, FINMA confirms its decision has become legally binding.
Selected experiences from supporting applications
In recent years, PwC has supported numerous portfolio managers applying for the FINIA licence. They have ranged from single-person companies to larger asset management companies and family offices.
Broadly speaking, it has proven beneficial to define the future internal organisation clearly and as conclusively as possible at the beginning of the process. To do so, the clients’ type of business and the resources available needed to be considered. This also included an assessment of the risk associated with clients’ business models. The risk model can have a significant impact on the licensing requirements. Consequently, it must also be decided if any functions should be outsourced. Defining the organisational structure at the outset is therefore crucial, as many of the documents to be created must be closely aligned with the internal organisation. Additionally, the organisation should be made as lean as possible.
It's time for any external asset managers who have not yet obtained a licence to now take urgent action.
In general, it has become clear that it is important to tailor supporting documents to the business and its activities. Although templates are helpful and useful, they must be adapted and critically assessed. At the same time, the supporting documents must fulfil all regulatory requirements. From our experience, applicants without significant regulatory experience who acquired templates and then tried to adapt them to their company often found themselves facing a challenge too great to overcome.
The SOs and FINMA scrutinise the business plan submitted as well as the balance sheets and income statements for the first three years after obtaining the application, and the equity requirements based on them. It is therefore of utmost importance to align these documents with the rest of the application and to check their coherence. For example, a large growth in assets abroad without active cross-border business (based on “reverse solicitation”) requires explanation.
Finally, it is advisable to seek professional support from the outset if the applicant has little regulatory expertise. Often applicants invest considerable time and effort preparing an application that the SO rejects based on failures to comply with the formal and material requirements. The only way of rescuing the situation is completely revising the application and its supporting documentation. The cost of doing so is hardly less than seeking support from the beginning.
Alternative options and call to action
So, what are the options for portfolio managers who have not yet obtained their licence and have not even started the process? Next to applying as soon as possible, there are three possibilities: a merger with another financial institution, the sale of the business operations or clients to another financial institution, or withdrawing from asset management activities.
Making a quick decision about the future is crucial, even if the decision is to shut down the business. If, for example, a sale is considered, the negotiating position will deteriorate if the potential buyer knows that obtaining a timely licence is no longer possible and that an exit is inevitable. It follows that portfolio managers who have not yet obtained a licence should now take urgent action – even if they do not wish to continue providing their services.