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Stepping into Switzerland’s new regulatory reality

In Switzerland’s new regulatory regime, VQF is one of the self-regulatory organisations (SROs) that will monitor external asset managers (EAMs) once they register with the Swiss Financial Market Supervisory Authority (FINMA). Here, Simon Wälti, VQF’s CEO explains how he sees the future unfolding.

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Q. How should EAMs start to make changes to prepare for the new regulations, recognising that they must register with FINMA by the end of 2022?

SW.
Currently our members are just starting to think about what they will do and how they will do it and if they can do it. I recommend that EAMs think about their current structure, their personnel, and their activities. Look at the business plan for the next five to ten years, and really consider what makes sense, what are our strengths, and what potentially doesn’t make so much sense under the new regulatory regime because the rules of conduct, and the respective procedures and policies, will make it harder for some firms to continue as they are. You have to have a proper profile for each client and test whether a recommended investment is suitable for them. That has to be documented. You must also inform the clients about the potential benefits or risks of a recommendation. At the same time, you have to be an expert in that product area. Key people should have appropriate qualifications and remain up to date with their subject by attending seminars and so on.

Q. Do you expect to see a widespread reorganisation of EAMs?

SW. Interestingly, all EAMs that were in operation at the end of 2019 were required to register their intentions with FINMA by the end of June 2020. Roughly 1,900 EAMs and more than 200 trustees registered. But more than 200 of them said that they wouldn’t continue their business beyond the end of the transitional period. So 10% of the current population are planning to close and maybe sell their assets or just not continue. But the other 90% indicated that they would apply for a licence.

There will probably also be some consolidation but it’s hard to know how much at this stage. Many EAMs are only now thinking about what they want to do. It will be interesting to see how things develop over the next two years, but mergers can be hard because individual businesses have their own philosophies and models. That said, if firms think about what they are best at they may find they want to merge with another organisation that has complementary strengths. Equally importantly, we expect certain activities to be outsourced. For example, risk and compliance will often be outsourced, and there are a handful of specialized companies and law firms in Switzerland that offer these services.

EAMs also need to consider that regulation will certainly bring additional costs when they weigh up their future courses of action. These will include the costs of authorisation by FINMA, affiliation with an SRO and the yearly audit.

Q. How do you plan to conduct supervisory activities?

SW. VQF is setting up an associated company, FINcontrol Suisse, which should have received its licence from FINMA by the time this article is published. After that our members will be able to affiliate themselves with us before applying to FINMA themselves. Some VQF staff will be transferred to FINcontrol Suisse and will conduct audits. We will also rely on external auditors, and may hire some more internal staff depending on how many EAMs choose to be affiliated with FINcontrol Suisse.

In the first two years, there will be a yearly audit. After that, each EAM will receive a risk rating. And then the audits will take place every one to four years, depending on the risk rating of each financial institution.

Up until now the biggest task has been making firms understand why they have to comply with the new regulations, which we have done through seminars. Since COVID-19 that has become more difficult and we have introduced webinars explaining members’ obligations under the new regulations.

Q. To what extent do you think the new regulations herald the end of the small firm of specialist EAMs in Switzerland?

SW. I think it’s still possible for, say, a company of four to six people to be successful and to comply with the law quite easily, provided that they understand their regulatory obligations.