The Turning Tide of Swiss Regulation

With such a heavy and consistent wave of regulation continuing to hit the shores of Europe and the US, with Level 2 of the AIFM Directive marching on in the EU and SEC registrations in process in the US under the Dodd Frank Reform Act, Switzerland has escaped the spotlight for some time. Now FINMA, the Swiss Financial Market Supervisory Authority, is aligning its law more closely with international norms – specifically the AIFM Directive – by seeking to bring in a new tranche of much tighter regulation. The impending regulations, together with talks of a future Financial Services Act , could potentially overhaul the Swiss hedge fund industry, traditionally considered as a ‘light touch’ jurisdiction, making it a very different place in which to do business.

For many years, Switzerland has been seen as a very attractive jurisdiction in which to domicile a hedge fund for reasons of taxation, quality of life, political stability and regulation. However, given the immense change that has occurred and is ongoing in the financial services industry around the world, this situation cannot last forever. Inevitably, Switzerland’s position at the heart of Europe means that it is having to adapt to the world around it and compete to survive and prosper.

A series of new regulations have been proposed by the Federal Council and are about to be put before Parliament, which if approved will give FINMA much greater regulatory oversight of the industry, affecting both asset managers based in Switzerland and foreign asset managers distributing funds in or from Switzerland.

The law will bring managers of foreign collective schemes under prudential supervision and extend to branches of foreign companies, bringing perhaps 200-500 newly regulated management companies under FINMA’s oversight. In addition, significant changes to the distribution of foreign funds, new organizational requirements and new standards for governance are expected.

While the legislation may appear to be significant in the changes it will implement, many hedge fund managers are actually already operating under EU regulations and FINMA’s oversight. Those most likely to feel the burden of compliance will be smaller managers (though there is likely to be a de-minimis rule for the smallest managers) as there are requirements for independent directors and separation of duties that will require a certain minimum size. If the legislation is passed in its current form, FINMA will also be faced with a huge task of regulating hundreds of new funds, a practical and resourcing challenge which will be no mean feat.

Much of the detail of the legislation is still being worked out and there are bound to be modifications as it passes through Parliament. Trade bodies, including the Swiss Funds Association and Swiss Bankers Association, are continuing to flex their lobbying muscles, so there remains a degree of uncertainty as to the eventual form this new law will take. A new draft is expected to be put before Parliament before the end of the month. It is anticipated that this will take into consideration some of the modifications industry pressure has brought about, particularly around distribution and the definition of qualified investors that may exclude many independent asset managers from this revision of the law.. Nonetheless, managers are advised not to delay their preparations in considering how they are likely to be affected by the regulation as the lead time for successful applications to FINMA in 2011 averaged eight months. Whether or not the regulations prove onerous, the challenge managers face remains ensuring that they are fully compliant whilst also remaining attractive and accessible to investors.

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