Finma Portrait EN by BBF.CH

A portrait

Published by: Swiss Financial Market Supervisory Authority FINMA Einsteinstrasse 2 CH-3003 Bern Tel. +41 (0)31 327 91 00 Fax +41 (0)31 327 91 01 info@finma.ch www.finma.ch Design:

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Marion Nitsch, Zurich

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Contents

Supervision is a seal of approval for the financial sector

Rigorous supervision

Supervisory approach: FINMA’s powers

Supervisory instruments: FINMA’s tasks

Supervision in practice: FINMA’s day-to-day supervisory work

Independent decision-making

Independence: autonomy within a clearly defined framework

Regulation: entirely focused on the supervisory goals

Audit firms: working for FINMA

Responsible action

A desire to dig deeper

Social skills are a must

Finding the right solutions

Looking back: the birth of FINMA

Contact 40 What information does FINMA provide?

Supervision is a seal of approval for the financial sector The financial sector is an essential part of the economy. To function properly, however, it requires banking and insurance industries to be well run. For that reason, it is among the most heavily regulated sectors worldwide. Oversight of the financial sector calls for robust, professional and independent supervision.

The events of 2008 reminded us that crises emanating from the financial system have a much greater impact than those in other sectors. This is true right across the globe and especially in Switzerland. The Swiss financial sector is particularly large by international standards, comprising some 300 banks, more than 200 insurers and several thousand investment funds. As a result, any market failure is bound to hit the economy hard, so the fundamental policy principle of minimum state interference in market mechanisms must be weighed against other important factors. Switzerland needs a robust and independent supervisory authority that is equipped with the powers and instruments needed to fulfil its mandate professionally and effectively. FINMA protects financial market clients against insolvencies among institutions, unfair business practices and unequal treatment. In cooperation with the Swiss National Bank, FINMA monitors the stability of the financial system. FINMA endeavours to identify risks to the system and ensure that these are avoided or mitigated. At the international level, FINMA plays a vital role in representing the interests of the financial market and supervision in dealings with foreign partner authorities, including its work as a member of international standard-setting bodies. FINMA strives to maximise transparency for all market partici pants and to minimise the negative effects – the external costs – of economic decisions. Its aim is to prevent the markets from failing wherever possible. If banks and insurers are supervised well, indi-

viduals and companies alike have more confidence in the financial sector, which has a positive effect on the overall economy. Banks, insurers, exchanges and funds are all part of the increasingly interconnected global financial system. It is therefore a major advantage that FINMA, being an integrated financial market supervisory authority, can analyse and assess the attend ant risks from a holistic perspective. By successfully protecting both individual clients and the system as a whole, it can help to enhance the Swiss financial sector’s competitiveness and repu tation. Professional, credible and independent supervision thus acts as a seal of approval for the sector.

Rigorous supervision

FINMA acts as a supervisory authority, protecting financial market clients and ensuring the smooth functioning of the Swiss financial sector. It performs its supervisory tasks using the instruments of licensing, supervision, enforcement and regulation. In so doing, it pursues a risk-based approach that provides for continuity and predictability. FINMA fosters dialogue with supervised institutions, authorities, professional associations and other key institutions both nationally and internationally.

Supervisory approach

FINMA’s powers FINMA is endowed with sovereign authority over banks, insurers, exchanges, securities dealers and funds. It licenses, supervises and intervenes when corrective action is required. It also regulates where necessary.

As a rule, the first step is to obtain a licence. Anyone wishing to accept deposits from investors, write insurance policies or set up funds needs FINMA’s approval to do so. The ‘licensed by FINMA’ label is only granted to those who meet the legal requirements. Inadequate organisation, undisclosed ownership structures and a questionable reputation are all factors that could result in an application being rejected. Once granted a licence, the financial market participant can commence operations under FINMA’s watchful eye, although the degree of attention it actually receives varies in line with the legal basis: from intensive supervision at one end of the spectrum to registration without ongoing supervision at the other. It is therefore not always easy to gauge what ‘licensed by FINMA’ actually means in a given situation. This is why FINMA is committed to improving transparency, so that financial market clients know what kind of licence each institution has and how intensively it is supervised. FINMA’s work centres on forward-looking prudential supervision. Banks, insurers and other supervised financial intermediaries must at all times have sufficient capital and liquidity at their disposal, and their risks under control. They must also ensure that those in senior management functions meet FINMA’s high demands in terms of specialist qualifications and personal attri butes. FINMA does not oversee every financial institution with the same intensity. In order to set the right priorities in supervision,

it follows a risk-based approach. Large, interconnected institutions that engage in risky operations and could jeopardise the stability of the entire financial system in certain circumstances are deliberately monitored more intensively than their smaller counterparts, where the risks are less severe and not system ically important. Based on their size, complexity and risk structure, FINMA assigns banks, insurers and collective investment schemes to one of six different risk categories, ranging from extremely large and complex institutions with very high risk to small market players with low risk and those for which there is no prudential supervision. But what happens if, in spite of FINMA’s vigilance, something does go wrong? What if a bank runs up a huge loss or an insurer loses its grip on its investment risks? Where supervisory law has been violated, FINMA steps in. It begins enforcement proceedings in order to get to the bottom of the problem and attempt to restore compliance. The proceedings conclude with a ruling. Organisational corrections or the disgorgement of profits may be demanded, and specific individuals prohibited from practising a given profession to ensure that the same mistake is not made again. Insider trading and unequal treatment on exchanges are also investigated and sanctioned, where errors have occurred. In extreme cases, this can lead to the licence being revoked or the institution being liquidated. Any party affected by a FINMA ruling is entitled to contest it before the courts. When they do so, either

the Federal Administrative Court or the Federal Supreme Court has the final say. Why does FINMA have such far-reaching powers? Its mandate is to protect creditors, investors and policyholders. It actively encourages financial institutions, for example, to provide their clients with sufficient information on financial products and clearly explain any inherent risks to them. Much supervisory work is aimed at making sure that supervised institutions remain financially stable and have enough capital at their disposal to bear losses in the event of a crisis. If this fails and an institution becomes insolvent or even bankrupt, FINMA’s primary task is to protect clients’ interests. It must ensure that companies which are no longer able to survive can exit the market in the most orderly fashion possible.

Prudential supervision aims first and foremost to ensure that solvency is guaranteed, adequate risk control is in place, and proper business conduct is assured at individual institutions. It thus also contributes indirectly to the financial markets’ ability to function and to the competitiveness of Switzerland’s financial sector. Prudential supervision of banks, insurance companies and other financial intermediaries is based on the licensing requirement for a specific type of activity, ongoing monitoring of compliance with the licence conditions and other factors that are subject to regulation.

Supervisory instruments

FINMA’s tasks FINMA acts to protect the interests of creditors, investors and policyholders and ensure the proper functioning of financial markets. It performs its supervisory tasks using the instruments of licensing, supervision, enforcement and regulation.

Licensing

Supervision

Individuals and legal entities need a licence from FINMA to carry out a variety of financial market activities. Anyone who meets the legal conditions is entitled to apply for a licence. However, not all licences are alike: some entail prudential supervision while others are merely a one-time authorisation for an activity that is not subsequently monitored by FINMA. The financial market legislation attaches requirements of varying strictness to the different forms of licence.

FINMA’s supervisory activities are consistently guided by its statu tory remit to protect creditors, investors and policyholders, and ensure the smooth functioning of the financial markets. FINMA adopts a risk-oriented approach, deliberately monitoring less risky areas less intensively while taking a much more rigorous line with areas that are crucial to the protection of individuals and critical functions. The law sets out various levels of supervisory intensity and tasks.

Enforcement

Regulation

FINMA deals with violations of the law and other shortcomings. It enforces supervisory law using the measures the law provides. Enforcement is about determining whether supervisory law has genuinely been violated. FINMA’s rulings can be contested before the courts.

FINMA is committed to internationally compatible and principle- based regulation in which the quality of financial market participants and their services is the top priority. Regulation should allow FINMA to intervene at the right time and in the right place with the right means to enforce supervisory law in a credible manner. This enhances the reputation and competitiveness of the Swiss financial sector.

Licensing What FINMA does

What FINMA does not do

–– FINMA licenses banks, securities dealers and insurers, which are then subject to ongoing supervision.

–– Not every financial intermediary licensed by FINMA is subject to ongoing and intensive prudential super vision by FINMA.

–– FINMA licenses fund management companies, custodian banks, fund asset managers and foreign fund representatives, all of which are then subject to ongoing supervision. –– FINMA authorises Swiss funds and foreign funds that are distributed to non-qualified investors in or from Switzerland. –– FINMA licenses financial market infrastructures such as exchanges, central counterparties and central securities depositaries. –– FINMA licenses financial intermediaries outside the banking sector that are not members of a self- regulatory organisation.

–– FINMA licenses directly subordinated financial intermediaries only in connection with the prevention of money laundering. –– FINMA registers insurance brokers but does not subject them to ongoing supervision. –– FINMA does not license independent investment advisors and asset managers who are not employed by banks. –– FINMA does not license pension funds.

–– FINMA recognises self-regulatory organisations with regard to combating money laundering.

Enforcement What FINMA does

What FINMA does not do

–– Where rules have been violated, FINMA ensures that compliance is restored.

–– FINMA does not conduct criminal proceedings or impose criminal sanctions.

–– The measures at FINMA’s disposal range from reprimanding a supervised institution for a violation of the law to revoking its licence or liquidating the company. FINMA can prohibit individuals from practising a specific profession and demand disgorgement of profits made in violation of supervisory provisions.

–– FINMA is not responsible for disputes under civil law.

–– FINMA files criminal complaints with the prosecution authorities where it has knowledge of criminal activ ities, offences or violations of financial market laws. –– FINMA conducts restructuring proceedings. –– Where restructuring is not possible, FINMA aids the company’s orderly exit from the market via bankruptcy. –– FINMA conducts proceedings in cases where shareholdings are not correctly disclosed. –– FINMA intervenes against market abuse such as pro hibited exploitation of insider information. –– FINMA takes action against illegal financial intermediaries.

–– FINMA does not have the power to impose fines. –– FINMA does not conduct investigations to find unauthorised institutions. It only intervenes when it has specific indications of unauthorised activities. –– Where a foreign institution operates in Switzerland via a branch or subsidiary, FINMA can only take action against the organisational units domiciled in Switzerland. It is not authorised to impose measures on the foreign parent company.

Supervision What FINMA does

What FINMA does not do

–– FINMA ensures that supervised institutions comply with laws, ordinances and circulars.

–– FINMA does not supervise fund distributors.

–– FINMA verifies that supervised institutions meet licensing requirements at all times. –– FINMA carries out on-site inspections. –– FINMA monitors quantitative aspects such as capital and solvency as well as qualitative factors such as corporate governance and risk management.

–– FINMA does not subject directly subordinated financial intermediaries to comprehensive supervision with regard to money laundering. –– FINMA does not supervise independent investment advisors and asset managers who are not employed by banks. –– FINMA does not supervise pension funds.

–– FINMA supervises branches of foreign financial institutions. –– FINMA continuously monitors compliance with due diligence obligations to combat money laundering. –– FINMA acts as the supervisory authority with regard to the disclosure of shareholdings in institutions listed on the exchange. –– FINMA supervises public takeover bids. –– FINMA is in regular contact with foreign supervisory authorities. –– FINMA provides administrative assistance.

Regulation What FINMA does

What FINMA does not do

–– FINMA uses its specialist expertise to assist in the drafting of laws and Federal Council ordinances.

–– FINMA does not itself create the legal framework within which it operates (laws and Federal Council ordinances).

–– FINMA plays an advisory role in the parliamentary process, sharing its supervisory perspective and commenting objectively on the impact of regulatory projects. –– FINMA can issue its own ordinances and circulars. These set out in detail how it deals with supervised institutions. –– FINMA is responsible for recognising industry organisations’ self-regulatory regimes.

Supervision in practice

FINMA’s day-to-day supervisory work Specialist expertise and financial market knowledge, credibility and international networks, effectiveness and a sense of proportion: these are the essential prerequisites for professional supervision of the financial sector.

Specialist expertise and financial market knowledge Most of FINMA’s staff are qualified specialists. For instance, the actuary who joined FINMA from a multinational insurance group three years ago.1 He checks whether the complex mathematical models the insurers use to capture and assess their risks are economically plausible. FINMA has developed the Swiss Solvency Test (SST) as a benchmark for this purpose with the aim of measuring insurers’ financial strength in a consistent and risk-based way. FINMA’s SST team has to be in a position to gauge whether companies have an accurate view of their risks. Supervised companies’ estimates do not always correspond with

1 All examples given in this section are fictitious but could easily be true in an identical or similar form.

those of FINMA. If this is the case, the SST experts must explain using logical and well-founded arguments why FINMA is unable to approve the internal SST model or can only approve it subject to certain conditions. For the banking industry, FINMA has banking specialists and qualified auditors who understand complex bank business as well as trained mathematicians and physicists who analyse the risk models employed to calculate capital adequacy requirements. This is the only way to judge whether supervised financial institutions comply with the legal requirements and have enough

‘Solvency I’ was the common method of testing solvency for a long time, but it did not account sufficiently for an insurer’s actual risk situation. This prompted supervisory authorities around the world to come up with new testing instruments such as ‘Solvency II’ in the EU. In Switzerland, the SST came into force on 1 January 2011. It assesses investments and insurance liabilities in a systematic and consistent manner. It is also risk-based, meaning that the greater the risk taken on, the greater the amount of capital required.

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FINMA doesn’t allow you to fall into a routine. It offers a dynamic environment at the sharp end of the financial sector that both demands and encourages continual training on the part of its staff. Thanks to my years of experience in the industry, I can take care of the day-to-day tasks, so my boss is free to concentrate on managing the division. Senior manager, 58,

equity capital to withstand even major crises without suffering damage or calling on state aid. FINMA’s specialists in all fields not only base their work on auditors’ reports and data provided by supervised institutions, they also interact regularly with their management. If necessary, they visit firms in person to verify that the requirements of supervisory law are being met. In the mortgage business, for example, samples of dossiers are examined to check whether lending policies are prudent and internal processes are stable. It is often the case that mortgages are granted to people who could encounter financial difficulties if interest rates rise, and this does not come to light until the client dossier is consulted directly. Moreover, defaults on loan

Insurance division

repayments can also cause problems for the banks themselves. It is therefore important to ensure compliance with the rules on financial sustainability, loan-to-value ratios and amortisation contained in banks’ internal directives. Financial sustainability criteria and lending limits must be defined and adhered to. Where FINMA identifies deficiencies during its on-site inspections, it notifies the management – verbally at first, then in a written report. When it demands corrections, these are agreed to in almost all cases.

Every year, FINMA conducts several dozen on-site inspections at banks. These are known as supervisory reviews. In accordance with the risk-based supervisory approach, the large institutions in risk categories 1 and 2 are reviewed several times a year. FINMA normally reviews the medium-sized institutions in category 3 at least every two to three years, while banks of this size that are in difficulty and thus have a low rating from FINMA are reviewed annually. Smaller institutions are reviewed on an ad hoc basis when irregularities arise.

Credibility and international networks In the years since it was formed from its three predecessor authorities, FINMA has evolved into an integrated specialist authority that is well-established and respected. It is widely recognised among the general public, politicians, the media and financial market participants in Switzerland. Those being supervised do not always agree with those responsible for their supervision. FINMA treads a fine line between various interests that sometimes contradict each other. The industry occasionally criticises its decisions and what it sees as excessively strict supervision. The politicians to whom FINMA is ultimately accountable through parliament have voiced concerns over everything from a lack of rigour to overregulation. Internationally, FINMA is valued as an equal partner and is seen as possessing both strong expertise and effectiveness. FINMA is actively involved in decision-making bodies as well as over 100 working groups and subcommittees of the Financial Stability Board (FSB), the Basel Committee on Banking Super vision (BCBS), the International Association of Insurance Super visors (IAIS) and the International Organization of Securities Commissions (IOSCO). FINMA invests a great deal of hard work and resources into analysing developments, playing a part in inter

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national bodies and thus helping to advance financial m arket supervision. This is instrumental in strengthening the Swiss financial sector’s global standing. National and international cooperation are also important for FINMA in its everyday supervisory work. This is illustrated by the case of an Internet-based firm that accepted deposits from the public without a licence. FINMA’s attention was drawn to it by a cantonal public prosecutor’s office. The suspicion was that investors had been lured by the promise of unrealistically high returns. FINMA’s investigations revealed that the firm was nothing more than a pyramid scheme, the main aim of which was to make the owner rich. He had transferred most of the money abroad through a fund construct. The foreign supervisory authorities responded to FINMA’s request for administrative assistance within a few days. FINMA decided to liquidate the unlicensed company. In its capacity as the bankruptcy authority, it was able to seize and sell a number of properties and various luxury items held in Switzerland in the owner’s name. As a result, investors were repaid a reasonable share of the money they had thought to be lost forever.

My job is very diverse. I work in supervision and I investigate money laundering and financial crime. As far as combating money laundering is concerned, I deal with a lot of cases in western Switzerland because French is my first language, involving everything from banks and insurers to directly subordinated financial intermediaries. Lawyer, 40, Markets division

FINMA is responsible for initiating and conducting restructuring and bankruptcy proceedings against banks and securities dealers. It also has responsibility for initiating and conducting bankruptcy proceedings involving insurance companies and certain licence holders under the Collective Investment Schemes Act (CISA).

Effectiveness and a sense of proportion Financial market supervisors need finely honed specialist skills and market know-how for their day-to-day work. However, there is more to their task than understanding the capital structures and investment portfolios of large insurers and banks. They must also defend FINMA’s position with sound arguments when negotiating with experienced lawyers and economists at large corporations, and respond to the arguments they put forward. If no agreement can be reached, FINMA can issue a ruling to enforce the applicable regulations. In the fund industry, for example, the job description of FINMA’s fund specialists entails having to understand complex structured fund products and verify whether the individual funds’ investment policies comply with the CISA. FINMA also licenses and supervises fund management companies and asset managers of collective investment schemes, which must have appropriate organisational structures and good corporate governance. FINMA takes action if they do not meet these requirements. An example of this is a foreign real estate fund that was intended to be offered to Swiss retail investors. On examining the application for authorisation, FINMA discovered that the fund was experiencing liquidity problems because many invest ors in other countries had redeemed their units in the wake of the financial crisis. The provider in question wanted to offer the foreign real estate fund to retail investors in Switzerland as quickly as possible so as to gain access to fresh money. FINMA’s

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supervisors refused to grant authorisation for distribution in Switzerland despite the provider exerting considerable pressure on it to do so. However, a tough, assertive attitude is not always the right way. FINMA is committed to a sense of proportion and can opt for more lenient measures in individual cases after weighing up all the circumstances. It makes full use of the discretion granted to it by the law. A small bureau de change, for instance, came onto FINMA’s radar because it had converted unusually large sums of cash from euros into Swiss francs on a number of occasions. The owner had deliberately executed the transactions without a receipt in order to circumvent control mechanisms. FINMA intervened on the grounds of suspected money laundering. Its specialists questioned the man twice. He admitted that he had executed the foreign exchange transactions, totalling several hundred thousand euros, as a favour for an old friend. FINMA could have liquidated the company and even prohibited the man from practising that profession, but over many years of running his bureau de change he had previously done no wrong and proved to be cooperative and apologetic for his misdeed. Bearing this in mind, FINMA concluded that a prohibition would be an unnecessarily harsh punishment. Instead, it demanded disgorgement of the profits made on the transactions, reprimanded the man and made it clear to him that his business would be closed down if he violated the rules a second time.

A lawyer working in FINMA’s Enforcement division can’t afford to be diffident. You have to stand firm, even when you’re up against highly trained people who are sometimes experts in financial market law. At the same time, it’s imperative that you remain calm, polite and quick-witted while you’re doing your best to get the job done. Lawyer, 36, Enforcement division

FINMA supervises Swiss and foreign collective investment schemes. All Swiss funds must be authorised by FINMA, whereas foreign funds only need to be authorised if they are to be distributed in or from Switzerland to non-qualified investors. FINMA authorises over a hundred Swiss and several hundred foreign funds in a year.

Independent decision-making

FINMA is functionally, institutionally and financially independent, and performs a sovereign function in the public interest. It operates in an environment characterised by the diverging interests of various stakeholders. It preserves its autonomy and acts on the basis of its statutory remit, reaching its decisions independently and in a manner appropriate to the circumstances.

Independence

Autonomy within a clearly defined framework FINMA started work on 1 January 2009 and was granted greater independence by parliament than its predecessor authorities. To ensure that it can perform its sovereign function of supervising the financial sector, FINMA is responsible for its own organisation and funding.

FINMA can grant and revoke authorisations such as banking licences, conduct proceedings and impose sanctions, for example prohibiting individuals from practising a given profession. In order to perform those tasks effectively and be capable of making sound, objective decisions, the authority supervising the financial market should – like the courts – be as free as possible from political influences. With this in mind, the legislature made FINMA functionally, institutionally and financially independent. Independence from political authorities is paramount, since it prevents parliament and the government from instructing FINMA on how to go about its supervisory activities. Were politicians to have too much influence on financial market supervision, there would be a danger of lobbying for particular interests. This is undesirable from a public policy point of view. FINMA’s financial independence is also important. The fact that FINMA is not funded by taxpayers means that it is less affected by federal budget considerations and spending cuts. For instance, if the complexity of supervision increases or the legislature gives FINMA new tasks, this will have an impact on headcount. That said, FINMA is constantly striving to be more efficient and, wherever appropriate and necessary, to reduce its expenditure. FINMA’s Board of Directors takes the responsibility that comes with budgetary sovereignty very seriously. In recent years, for example, FINMA has grown at a slower rate than other financial market supervisory authorities. Just over 80% of its

annual budget of CHF 130 million (2012) comes from super vision charges, with fees accounting for the remaining share of just under 20%. FINMA collects these charges and fees from the institutions it supervises. To secure FINMA’s institutional independence, the legislature structured it as a public-law institution with its own legal personality. Its governing bodies are the Board of Directors and the Executive Board. FINMA’s accounts are audited by the Swiss Federal Audit Office. The tasks of the Board of Directors include defining the supervisory authority’s strategic orientation, deciding on matters of substantial importance and overseeing the Executive Board. Giving FINMA and its staff the freedom to organise their own work obliges everyone to practice good corporate governance, which is crucial to the credibility of an independent supervisory authority. To this end, FINMA has a number of regulations, a Code of Conduct for all staff and an institutionalised system of internal controls. Despite operating as an independent authority, FINMA is integrated into the structures of the Swiss state, with all the checks and balances that entails. It is subject to parliamentary oversight and accountable to parliament’s Supervisory Committees. However, parliament restricts itself to external political control without exerting any direct influence on executive management. The Federal Council also performs a supervisory function with regard to FINMA in that it elects the Board of Directors,

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FINMA gives us plenty of room to take the initiative, so we can continually refine our accounting practices, optimise our work processes and improve how we m anage our finances. To guarantee that I’m always up to the job, I’m taking a Master of Advanced Studies course in Accounting and Finance – with FINMA’s support. Business economist, Professional Education and Training Diploma in Business Administration, 46, Operations division

appoints the Chair and approves FINMA’s choice of its CEO, its strategic goals and its Annual Report. The Federal Council checks whether financial market supervision is functioning correctly and whether the funds at FINMA’s disposal are being used appropriately. As regards other federal authorities, FINMA naturally has the closest contact with the Federal Department of Finance, through which it deals with the Federal Council.

Regulation

Entirely focused on the supervisory goals FINMA is often referred to as the financial sector regulator, but it regulates only at the lowest level and only when necessary to meet its supervisory goals. It issues circulars to make its supervisory practices – and thus its expectations – transparent for supervised institutions.

FINMA sees itself not as a regulator but first and foremost as a ‘watchdog’: an independent supervisory authority tasked with implementing and enforcing regulation. It is thus rather like a referee for the financial market. As such, its job is to ensure that rules, both global and national, are applied correctly in Switzerland. The rules themselves are made by other bodies. At the international level, they come from the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO). At the national level, they

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come from the Federal Assembly. Setting the framework within which the financial sector operates is a matter for politicians. Parliament and the government adapt international rules to suit the circumstances in Switzerland and pass laws and ordinances. A referee, of course, can also play a part when it comes to drafting new rules. FINMA brings its expertise to bear when the future legal framework for Switzerland’s financial sector is being drawn up, advising parliament, the Federal Council and the administration on financial market issues that are often complex in nature. However, its independent opinion is just one voice among many.

Working as a lawyer in a law firm, I was mainly left to deal with legal problems on my own within a clearly defined area. At FINMA, on the other hand, political considerations and policy issues also play an important role. While I no longer drill down to the same level of legal detail as before, the flip side is that I now have an overview of current developments and challenges at the economic, political and legislative levels. Lawyer, 35,

Strategic Services division

FINMA only issues regulations itself in a small number of areas: –– Where expressly provided for by the legislature, FINMA issues ordinances setting out specific details that are either too technical or too liable to change for inclusion in Federal Council ordinances or in laws. –– FINMA publishes circulars setting out its supervisory prac tices and describing how it interprets the applicable laws and ordinances. FINMA’s own regulatory efforts are guided by tried-and-tested principles: no FINMA ordinance is enacted without holding a public consultation, and no circular is issued without consulting those affected. FINMA is receptive to sound, objective arguments, but they do not always flow into its regulations in their entirety. The rules governing the Swiss financial market must be transparent for everyone, so FINMA also makes use of other

forms of communication. Its newsletters keep supervised institutions up to date with the latest supervisory issues as they arise. They are often used to call for action, formulate expectations or remind institutions of their duties. Guidelines, FAQs and forms help financial institutions in matters of practical application. A referee’s style can influence the character of a game. If he is too quick to blow his whistle, he will disrupt the flow of play and face accusations of spoiling the match. If he lets players get away with too much, he must be prepared for the game to spiral out of control, and someone will inevitably get hurt. If he obviously favours one team over the other, he will harm his own reputation and earn himself a reprimand or even expulsion from the association. The referee must always be impartial and incorruptible. The same is true of FINMA.

Audit firms

Working for FINMA FINMA’s supervision of the Swiss financial sector is supported by private audit firms. A member of FINMA’s supervisory staff explains why this is the case.

Why doesn’t FINMA use its own staff to review all supervised institutions directly on site? FINMA was deliberately set up as a lean and agile supervisory authority. It is working ever more intensively to review banks and insurers directly with its own teams, but its resources are limited. This means that it cannot carry out all review work itself, so it depends on audit firms for assistance.

What tasks are assigned to the auditors working on FINMA’s behalf? They have to carry out regular analyses of supervised institutions’ figures, organisational structures and risk management. The more complex the financial institution and the greater its risks, the more frequently and intensively it is monitored by FINMA and reviewed by the audit firm.

Do these private firms enjoy total freedom in their audit activities? No, FINMA sets out the content of the regulatory audit and provides the audit firms with clear instructions regarding what to review and how to review it.

What does FINMA expect from the audit firms? We expect not only consistency and impartiality, but also clear judgement in the final report. A professional, forward- looking opinion and meaningful statements are what we need. Forward-looking means that auditors commissioned by FINMA must think ahead, take different scenarios into account and estimate the consequences of strategic decisions made by a company’s management.

How does FINMA ensure that auditors are genuinely independent and work professionally? The regulatory audit must be carried out with a clear conceptual distinction from the audit prescribed by the Code of Obligations (CO audit). It has to be future-oriented and requires a different approach to the retrospective auditing of the balance sheet and income statement. If the institution is very large and complex, or if it operates in a particularly risky field of business, FINMA can demand that the regulatory and CO audits are carried out not just with different approaches but also by different people. In this case, a second lead auditor with his or her own team takes charge of the regulatory audit. FINMA can thus be sure that its ‘extended arm’ is working effectively and independently to further the cause of financial market supervision.

How does FINMA make use of auditors’ findings in its own supervisory work? The audit firm sends FINMA the results of its audit in a standardised written report. Based on the reports and risk analyses provided, FINMA decides whether there is any need for action by the supervised institution.

What happens when action is needed? Then FINMA may intervene itself, instruct the audit firm to carry out a further audit to shed more light on the problem areas or call in an independently mandated investigator.

What about when a financial institution is affected by an extraordinary event such as fraud? Can FINMA call on audit firms in cases like this as well? Yes, we can order case-related audits. These are conducted by mandated investigators who are not FINMA employees. As well as being used in response to extraordinary events, they can also be carried out when additional specialist knowledge is needed in a specific audit area, for example when assessing complex IT systems.

What happens if an audit firm’s work is below par? FINMA can also order a case-related audit if the regular auditor’s analysis falls short of the degree of clarity and detail we expect. This is when we need a second opinion from an independent third party.

The three mainstays of the Swiss audit system are basic and additional audits conducted by regulatory auditors and case-related audits conducted by mandated investigators. This is how FINMA guarantees that audit firms perform their supervisory function economically, effectively and independently.

Responsible action

FINMAâ&#x20AC;&#x2122;s staff combine responsibility, integrity and the ability to deliver results. They are independent, highly flexible and adaptable. They are skilled and able to cope with resistance and challenging situations. They take account of changes in their operating environment and respond with concrete measures that are both timely and appropriate.

A desire to dig deeper Markus G. is not afraid of a challenge: the 30-year-old lawyer is among the first to undergo the three-year Legal & Compliance Officer training programme. This will familiarise him with all of the areas FINMA’s Markets division deals with, turning him into a financial all-rounder with an extensive network, a broad horizon and sound specialist knowledge. Participants in the programme spend each year working in a different area, learning more about financial market law and improving their understanding of how everything fits together ‘on the job’. Markus spent his first year with the team supervising exchanges and financial market infrastructure. He is now in his second year, which is being split 50/50 between FINMA’s specialists in funds and asset management. To complete the course, he will have the opportunity to work on combating money laundering and financial crime as well as monitoring directly subordinated financial intermediaries. He can also take advantage of synergies between different areas. In the second year, for example, when dealing with an exchange-traded fund, he can call on the experience he gained working with exchanges in the first year. After a year at a law firm, Markus wanted to move on and further his career with FINMA’s Legal & Compliance Officer programme. His verdict after a year at FINMA is positive: ‘I get a lot of enjoyment from continually acquiring specialist know-how both on my own and as part of a team, and amassing valuable experience.’ One thing he particularly appreciated about the first year was the intensive dialogue with supervised institutions and other authorities:

‘In the space of a year,’ he recalls, ‘I came into contact with lots of key financial market players.’ Another highlight was working on an interdisciplinary FINMA project concerning international regulatory initiatives: ‘The international context and the importance of this project were appealing and motivating,’ he says. Markus was even chosen to manage a sub-project, which was a major challenge for the young lawyer. He also had to present his findings convincingly to Executive Board members and other experienced FINMA colleagues on a regular basis. This was often a daunting task, since FINMA’s work tends to focus on complex specialist topics. Now, after a year in the programme, he comments: ‘Anyone who wants to work at FINMA definitely has to have the desire to dig deeper. It’s the only way to get an accurate view of potential risks. Working in supervision is especially rewarding if you have a keen interest in financial matters and continuing education as well as a high level of dedication. If you’re open to new ideas and a good team player, FINMA offers you an exciting, challenging and diverse working environment with great career prospects.’

Markus G., lawyer (fictitious name)

Social skills are a must Verena H. completed her doctorate in economics in Germany and then continued her academic career as a post- doctoral researcher. After taking time out from her career to have two children, she wanted to take on a new professional challenge away from academia. As an undergraduate and later doctoral student, she had already specialised in cap ital markets, so there was little hesitation when she saw a job advertised at one of FINMA’s predecessor authorities, the Federal Office of Private Insurance (FOPI). The FOPI was looking for an investment expert. The breadth of its activities was such that few other employers could match it, so Verena took the plunge and moved to Switzerland with her family in 2008. It was like a dream come true: ‘Everything I used to discuss in theory, I can directly apply in practice at FINMA,’ she says, adding ‘I’m delighted that I can now solve problems in the real world.’ As an investment expert, Verena supervises the investment side of all insurance companies in all fields. This means working closely with FINMA’s supervisory officers. In life, non-life and health insurance, she deals specifically with ‘tied assets’. Every direct insurer must create sufficient technical provisions to secure policyholders’ claims. These must be covered at all times by tied assets. Strict rules thus apply to the investment of tied assets with regard to risk management and diversification, asset management and permitted asset classes. This is where Verena comes in: ‘We’re in regular contact with the insurance companies, and we also make on-site visits to check their investments. This gives us a broader view of the wide

range of insurers and their investment decisions.’ The opportunity to experience a range of different firms in action makes working at FINMA more interesting for Verena than working at a single insurance company. Verena was placed in charge of a team of FINMA specialists in 2009. Her staff have had a great deal of work to do over the past few years, with new issues arising all the time due to the situation on the financial markets. Real estate and mortgages are one example: once seen as a relatively unexciting asset class, they have been thrust into the headlines recently. Verena’s team also plays a part in many cross-divisional FINMA projects. ‘Social skills are a must in our work because we have to deal with a broad spectrum of experts. Whether it’s lawyers, economists or actuaries, they all speak their own language and have different ways of thinking and acting. That’s why our team often serves as an interface between them.’

Verena H., economist (fictitious name)

Finding the right solutions Anita M. joined the Swiss Federal Banking Commission as a young lawyer in the summer of 2005. She was responsible for licensing banks and securities dealers. Today, at FINMA, she still manages the licensing process. Her work at FINMA, which straddles the divide between the legal and business communities, offers her a lot of variety: ‘Besides acting as a contact for supervised institutions and third parties, I also have to deal with new licences and changes to the licensing requirements. Financial market participants occasionally leave FINMA’s sphere of supervision of their own accord, but new licence applications are by far the most complex and thus the most interesting cases. One good example is the whole project surrounding PostFinance’s banking licence, which was unique in its scope.’ When someone applies for a banking licence, Anita checks the application and business plan in terms of personnel, organisation and finances. The personnel aspect, for example, calls on her years of experience. The focus here is on determining whether the executives and directors of a would-be bank are able to provide assurance of proper business conduct. To this end, she checks documents, asks for references and interviews the individuals who will be subject to the business conduct requirement. This allows her to build up her own picture of their reputation and capabilities: ‘The aim is to understand what the managers’ intentions are. Only then can I really judge an application on its merits.’ Anita strives above all to find solutions that are not only correct from a legal point of view but also make good economic sense. ‘Although FINMA has

to be strict and even say no sometimes, we aren’t working against financial market players: we’re working to find viable, sustainable approaches,’ she says. It goes without saying that Anita needs a broad working knowledge of financial matters in addition to her legal expertise: ‘There’s been an increase in mergers and acquisitions of late, so we have to know all the legal ins and outs in this area, too. On top of this, the import ance of cross-border financial services has grown dramatically.’ To ensure that she has a comprehensive understanding of both banking and auditing, Anita has spent several months on an external placement at an audit firm and completed an 18-month course at the Swiss Finance Institute. Training opportunities like this enhance the appeal of FINMA’s dynamic working environment for Anita. She shares the theoretical and practical knowhow she has built up over the years with her younger colleagues, holding regular induction and coaching sessions. This knowledge transfer ensures that future problems can be addressed with a uniform, practically oriented supervisory approach.

Anita M., lawyer (fictitious name)

Looking back

The birth of FINMA FINMA was created on 1 January 2009 when the legislature merged the Swiss Federal Banking Commission (SFBC), the Federal Office of Private Insurance (FOPI) and the Anti-Money Laundering Control Authority (AMLCA) into an integrated financial market supervisory authority.

The traditional Swiss system of financial market supervision, comprising FINMA’s three predecessor authorities, had already revealed its limitations before the financial crisis hit in 2008. The fast pace of change on the financial markets and the international environment demanded a new, powerful authority in which knowledge and skills were pooled and supervisory tools standardised. Based on the recommendations of a commission of experts headed by Prof. Jean-Baptiste Zufferey, the Federal Council tasked a second group of experts under Prof. Ulrich Zimmerli with drafting a law on an integrated Swiss financial market supervisory authority. Switzerland was among the first industrialised nations to subject its financial sector to a voluntary review by the International Monetary Fund (IMF) back in 2001. The IMF’s recommendations to Switzerland included improving its prudential supervisory tools, optimising its insurance supervision and granting the SFBC greater sanctioning powers. The Zimmerli Commission advised the Federal Council to merge the SFBC with the FOPI to form FINMA and to submit a draft federal act on financial market supervision (FINMASA) to parliament. The aim was to harmonise financial market law in a single document, thus transferring some of the burden from the specific laws (Banking Act, Stock Exchange Act, Collective Investment Schemes Act, Anti-Money Laundering Act, Insurance Supervision Act, Insurance Contract Act, Mortgage Bond Act

and Auditor Oversight Act). At the same time, the substance of these specific laws was to remain as untouched as possible to ensure that supervisory approaches would continue to be adapted to suit each individual financial market. The commission also proposed a new sanctioning regime, given that the old one had not proven sufficiently effective. The Federal Council’s dispatch accepted the commission’s proposals for passing the FINMASA as an umbrella law. Its goal was to ensure that similar or identical situations would receive the same supervisory treatment in line with the maxim ‘same business, same risks, same rules’. It wanted to avoid duplications and unlock synergies. It was also keen to create a new, integrated supervisory authority that would be acknowledged by foreign authorities on equal terms. In addition to merging the SFBC with the FOPI, the Federal Council also envisaged integrating the AMLCA into FINMA. The Federal Assembly passed the FINMASA into law on 22 June 2007. The Act came into force on 1 January 2009, together with the related changes to the specific financial market laws and attendant ordinances. This is the date FINMA was born.

The beginnings of supervision At the end of the 19th century, a wave of new banks and insurers in the industrialised nations led to fierce competition that culÂ minated in a series of corporate failures. Many clients lost large sums of money, prompting various governments to look into the issue of oversight for banks and insurers. This resulted in the first supervisory authorities being formed at the start of the 20th century. The Swiss banking sector grew during the second half of the 19th century as demand for loans increased in line with the rise of the textile and machinery industries and the construction of railways. Regulation of the banks was haphazard and limited to just a few cantons. At the federal level, the Constitution did not provide a basis for regulation until 1874. The Great Depression of the 1930s plunged many Swiss banks into financial difficulties, and a number of them had to be bailed out with state aid. The legislature responded in 1934 with the first Banking Act, which took effect the following year, and set up the SFBC to enforce the new law.

The boom in Switzerlandâ&#x20AC;&#x2122;s private insurance industry also began in the second half of the 19th century. Industrialisation brought with it the need to cover risks. However, many insurers at that time did not possess the technical tools or the financial means needed for their business, and the cantonal authorities were not in a position to check these aspects. With this in mind, parliament handed the power to legislate and supervise private insurance to the federal government when it revised the Constitution in 1874. In 1885, parliament passed the Insurance Supervision Act, which entered into force the same year. The Federal Insurance Office (FIO) was set up at the same time. Its transformation into the FOPI was brought about by the total revision of the old Insurance Supervision Act in June 1978.

Contact Swiss Financial Market Supervisory Authority FINMA Postal address: Tel. +41 (0)31 327 91 00 Einsteinstrasse 2 Fax +41 (0)31 327 91 01 CH-3003 Bern info@finma.ch www.finma.ch

As of spring 2014: Laupenstrasse 27 CH-3003 Bern

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At the FINMA reception desk, I come up against everyone from bike couriers to bank CEOs and Federal Councillors. So I need to be a good listener and organiser and a flexible multitasker. I even perform tasks that arenâ&#x20AC;&#x2122;t in my job description, like sewing on a button or recommending restaurants. Welcome Desk receptionist, 43, Operations division

Other offices: Badenerstrasse 47 CH-8004 Zurich

What information does FINMA provide? FINMA provides information on whether it has licensed a specific company and the type of licence granted. It gives notice of bankruptcies and liquidations and when investigating agents are deployed. It informs the general public about individual unlicensed institutions. It can also publish its legally valid rulings in electronic or printed form, including details of the people involved, but only in cases where a serious violation of supervisory law has occurred. In principle, FINMA does not provide information on current proceedings against supervised institutions or companies operating without a licence. It is not bound by the Swiss Federal Free-

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dom of Information Act. This means, for example, that it does not disclose details of the financial situation of supervised institutions. People making complaints to FINMA about irregularities are not entitled to view documents or to be informed about FINMA’s actions. In addition, FINMA does not offer legal advice.

After several years in the banking industry, I wanted to see the financial sector from a different side. There’s a lot of variety in my work at FINMA, and it gives me a complete view of the financial market and brings me into contact with a wide range of people. Every supervised institution is different, so patient listening, pragmatism and persuasiveness are especially important aspects of my work.

Diploma in Business Administration, 43, Banks division