08 Apr 2016 Structuring a Traditional Swiss Private Bank
The Swiss private banking model is based of two regulatory licenses. A banking license will allow the bank to take deposit from the public and extend credit (by exposing its balance sheet) to refinance or bank or to finance customer. A broker dealer license will allow the bank to operate private banking and asset management operations, including by trading on a professional basis as agent on behalf of customers and becoming clearing member of clearing houses and regulated exchanges. This allows the private bank to operate accounts for these customers for the settlement of securities transactions, and hold securities of these customers in safekeeping or in their own name with third parties. The brokerage license will allow the bank to underwrite securities. Because the broker dealer license encompasses the type of work many private banking and asset management undertake, a private bank will inevitably have to apply and obtain both the banking license and the broker dealer license.
FINMA will carefully scrutinize each application for a license, including the proposed business plan, the corporate structure, the structure of the shareholding, the capitalization and of the proposed balance sheet and reserves, the proper organization of the business, the internal control system in place, the fit and properness of the key employees, and the technology system.
Regarding the corporate structure, in 2014, a number of Swiss private banks changed their corporate structure from partnership wherein the partners had unlimited liability to become a private stock company (société anonyme). The reasons provided for the change in structure include: (i) protection against judicial action, which is ever increasing in the current environment; and (ii) protection of the banker’s property for the future. A persuasive reason for a private bank to move from the traditional, partnership structure to become a private stock company is also due to the fact that internationally, banks are limited liability companies and/or private stock companies, and not companies where partners are personally liable as is the case for a limited partnership in Switzerland. Because such a structure is particular to Switzerland, often the structure is not recognized internationally, and Swiss private banks has difficulties registering abroad.
While the Banking Ordinance states that the minimum capital required in order to create a bank is CHF 10,000,000.00, FINMA usually requires a minimum of CHF 20,000,000.00 when a project starts from scratch. The capital must be fully paid up. When the capital exists through contributions in kind, the value of the contributed assets and the amount of liabilities must be verified by an authorized audit company. These requirements can only be altered by FINMA for banks which are affiliated with a central entity which will guarantee the bank’s liabilities. In addition to the minimum capital requirements set out above, the Capital Adequacy and Risk Diversification for Banks and Securities Dealers of 1 June 2012 requires a bank to have a particular capital buffer in place.
Section 42 CAO sets out minimum capital requirements for credit, market and operational risks (known as Pillar 1). Additionally, banks must hold a capital buffer in accordance with Section 43 CAO and additional capital pursuant to Section 45 CAO to ensure that the minimum capital requirements are met even in adverse circumstances (Pillar 2). In respect of Pillar 2, FINMA determines the additional capital buffer based on the bank’s total assets, assets under management, privileged deposits and required own funds
FINMA usually prefers that the shareholders of a bank comprise of corporate shareholders, however individual shareholders will not necessarily be blocked. FINMA will generally accept family members being shareholders in the same bank so long as the business case presented shows that the bank’s aim is to generate profits apart from the wealth of the involved family shareholders. FINMA will usually require that the bank be profitable without taking into account of the revenue generated by the wealth of the shareholders deposited with the bank.
The internal organization of the bank will very much depend on its business plan and the banks’ business line. Below is an organizational chart of a bank typically off ering private banking services. FINMA will ensure that all processes are in place and well documented.
FINMA will carefully review the internal control system. The bank will need to implement between others (i) independence rules relating to the board (one third of board members must be independent from shareholding and management; the majority of board members must not carry on operational tasks); (ii) a clear independent reporting line to ensure good corporate governance; (iii) chinese walls between operation, risk management, back offi ce and compliance; (vi) four eyes principles (only double signatory powers); (v) secondment of key functions; (vi) a proper archiving and reporting system; and (vii) an internal audit function. All processes must be clearly documented.
In terms of minimum staffi ng on the set-up of a bank, neither the banking laws, nor FINMA requires a certain number of staff members. However, FINMA must be convinced that the staff allocated to front and back offi ce, compliance and auditing, IT and other similar services is suffi cient for the structure proposed.
In terms of minimum staffi ng on the set-up of a bank, neither the banking laws, nor FINMA requires a certain number of staff members. However, FINMA must be convinced that the staff allocated to front and back offi ce, compliance and auditing, IT and other similar services is suffi cient for the structure proposed. The amount of staff allocated to all sectors of the bank should demonstrate that the bank can start up and be running with that number of staff . Section 3(2)(c) of the Banking Act states that those persons in charge of administrating and managing the bank must be of good reputation and ensure irreproachable conduct. In addition, the members of the bank’s management must be domiciled in a location that allows them to manage the bank eff ectively and properly assume their responsibility. A Swiss bank must be managed out of Switzerland.
The board of directors of a bank, which is the governing, supervising and controlling body, is responsible for the regulation, establishment, maintenance, monitoring and regular supervision of an appropriate internal control function which reflects the size, complexity, structure and risk profile of the institution. The board of directors must consist of at least three members. Every request for a license will have to be prepared by a legal team and FINMA will request the applicant to appoint an independent audit firm to assess the quality of the application. The timeline to start preparing a banking license and receive a license by FINMA takes approximately between twelve to twenty-four months. The timeline for the issuance of a license as a broker-dealer is shorter.
ORGANIZATIONAL CHART OF A BANK TYPICALLY OFFERING PRIVATE BANKING SERVICES
About the Author
Dominique Lecocq is the Managing Partner at lecocqassociate. He was admitted to practice in Switzerland. He graduated from the School of Law of the University of Geneva in 1999 and obtained a Master of Laws in Securities and Financial Regulation from Georgetown University in 2005. Before founding lecocqassociate, Dominique served with the London office of Radcliffes Solicitors, in 1998. In 1999 he worked as a foreign associate with Pinheiro Neto, Advogados, in São Paulo, Brazil. From 2000 to 2004, he joined the Regulatory and Capital Market Practice Group of Pestalozzi law firm in Geneva and Zurich as an associate. In 2005, he interned with the Commodities Futures Trading Commission in Washington DC. Finally, from 2005 to 2007, he served with the Corporate Finance and Regulatory Practice Group of Schellenberg Wittmer, in Geneva. He founded lecocqassociate in 2007 and now has three offices: a law firm in Geneva, and advisory presence in Malta and in the United Arab Emirates. Dominique continuously publishes in the regulatory banking and insurance, as well as the collective investment schemes, fields.
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About the Firm
lecocqassociate is a boutique Swiss law firm with its main office in Switzerland, and with corporate and finance regulatory presence in Malta and United Arab Emirates, specialized in selected areas, including regulatory banking, collective investments, corporate finance, regulatory insurance, Islamic finance and private equity.