Compliance

EXCLUSIVE: Regulatory Overhaul Will Turbocharge EAM Sector - FINMA

Tom Burroughes, Group Editor, London, 16 February 2021

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The Swiss Financial Market Supervisory Authority speaks to WealthBriefing about the rule changes that are coming for the country's external asset management sector.

New regulations on Swiss external asset managers will be a global badge of quality, putting this large and varied sector on the same footing as international peers, FINMA, the Swiss watchdog, has told WealthBriefing.

Around 2,100 EAMs have registered under the new rules, and the varied sector is becoming more prominent.

“We want to make sure there’s an adequate standard set of rules for EAMs and that we have high standards that are comparable with other asset management centres,” Kenneth Ukoh, head of portfolio managers and trustees at FINMA, told this news service in a call. “This will enhance the reputation and competitiveness of the Swiss market,” he said. 

In fact, when almost 400 trustees are added to the EAM numbers, and falling under the new regulatory net, this is a significant population of financial players that FINMA has to oversee. 

Swiss EAMs have often been built by breakaway teams of bankers seeking independence, closeness to clients and freedom from bureaucracy. Even so, with pressures across the world to regulate financial services more closely after the turmoil of 2008-09, Switzerland-based EAMs have come under the spotlight. Switzerland, while not an EU member state, is home to many managers serving clients in the EU and in other jurisdictions. Some EAMs focus on serving expat Americans, or other foreign nationals; there are EAMs specialising in debt, private markets, sustainable investment, high-tech, healthcare and specialist equities. Sizes vary in terms of AuM, staff and resources. Some EAMs run IT and operations in-house, others are outsourcing these functions. Industry figures say a number of players are already getting in shape for the new regime.

A new regime to license these institutions, and to require standards of reporting and disclosure, has been introduced by a number of Swiss federal acts – Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The acts came into force at the start of 2020, and they are being implemented over the next couple of years, with FinSA taking full effect by the start of 2022. FinSA contains the code of conduct setting out how financial service providers must comply vis-à-vis their clients, in some ways mirroring the European Union’s MiFID II regime. FinIA standardises the authorisation rules for certain financial institutions. EAMs and trustees must apply for a licence from FINMA by the end of 2022.

“The strengthening of client protection means this puts EAMs on a level playing field with other market participants Thomas Hirschi,” head of FINMA’s asset management division, said. “We also needed these acts to be comparable internationally. It should strengthen the reputation of the financial services sector and indirectly increase competitiveness.”

The conduct of business aspect of the new requirements for EAMs is particularly important as a number of recent cases in the financial services sector in Switzerland have centred around areas such as client suitability, the provision of cross-border services, anti-money laundering and market conduct, he said. “This closes a gap,” Hirschi continued. 

“This is a big market, a very heterogeneous market. We want the FINMA  authorisation to be seen as the necessary high entry level,” he said. “There’s a long transition period for all the players and we don't expect all of them to apply for and get a licence. Their readiness comes up a lot in our interaction with these players and others. We also require information from them on how they intend to implement FinSA.”

This news service has already tracked regulatory and other developments in the space (see here and here). And WealthBriefing is also saluting outstanding practitioners with an awards programme.

Costs count
“Cost is a very sensitive topic for this population [of EAMs]. Some will face challenges in having an adequate control framework in place. They need to prioritise their approach in showing they have a sustainable business going forward,” Ukoh said.

A common theme arising from the various pieces of legislation is that EAMs need to spend on technology and processes to ensure that their reporting and other requirements are up to scratch.

Asked how the Swiss regime compared with the EU’s MiFID II regime, Hirschi replied: “There is an important philosophical difference in how the EU makes its rules. Ours is principles-based, while the EU is more rules-based.”

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