Simplifying the bank establishment approval process in Switzerland

Following an agreement between the People’s Bank of China and the Swiss National Bank to establish clearing arrangements in Switzerland for trading renminbi, China Construction Bank announced earlier this year its intent to open a branch office in Switzerland within the year.

Other Chinese banks such as Bank of China, Agricultural Bank of China and Industrial and Commercial Bank of China may follow suit and open their own branch offices in Switzerland. This column addresses the most important Swiss regulatory questions to be considered when establishing a bank in Switzerland.

First and foremost, the Swiss entity requires a banking licence from the Swiss Financial Market Supervisory Authority (FINMA) before it can start any banking activities in Switzerland. Should the Swiss entity also trade in securities, it needs a securities dealer licence in addition to the banking licence.

Foreign banks that wish to establish a major presence in the Swiss financial markets often incorporate a subsidiary for reasons of market standing. The usual legal form for such a subsidiary is a Swiss stock corporation (Aktiengesellschaft, Société Anonyme).

Branch offices can be an attractive alternative from a regulatory point of view. This is because several exemptions and reliefs from the licensing requirements are available. Some of these include exemption from minimum capital requirements and reliefs from certain organizational requirements.

In addition, branch offices are not subject to withholding tax on dividends, which may be preferable for the repatriation of profits.

Obtaining a licence

In order to obtain a Swiss banking licence, the Swiss entity needs to fulfil multiple requirements, as set out below.

Capital: The Swiss entity must have a fully paid-in share capital of at least 10 million Swiss francs (US$10.4 million). (It should be noted that, in practice, FINMA requires at least 15 million francs.) Additional capital may be required to cover market, credit and operational risks depending on the scope and complexity of the specific business.

Internal organization: The Swiss entity must be adequately organized in view of the scope and complexity of the specific business. In particular, the front office and back office functions of the subsidiary must be fully segregated.

The subsidiary’s risk management, compliance and internal control systems must be clearly set out in the organizational by-laws and specific directives. In practice, it needs to have at least five to 10 employees to meet these requirements.

Board of directors and executive management: The board of directors must consist of at least three non-executive members. The executive management must consist of at least two members who reside in Switzerland. (Exemption from the residence requirement is possible.)

The members of the board and management must enjoy a good personal and professional reputation and be adequately qualified for their tasks to ensure proper conduct of the bank’s business operations.

Auditors: The Swiss entity needs to appoint internal and external auditors, the latter being recognized by FINMA. In addition, a special auditor must be appointed to review the FINMA licence application.

Qualified shareholders: Shareholders with at least 10% of the voting rights or capital must enjoy a good personal and professional reputation and show that their influence will not have any negative impact on the bank’s business. Shareholdings over 5% must be disclosed.

Home country supervision: The Swiss entity must demonstrate to FINMA that the controlling foreign bank is adequately supervized in its home jurisdiction and that the Swiss entity is included in this supervision on a consolidated basis. Further, the Swiss entity must show that the foreign supervisory authority has granted approval for the establishment of a banking presence in Switzerland.

Reciprocity: In principle, the home jurisdiction of the foreign shareholder must grant reciprocal rights to Swiss investors wanting to enter the foreign banking market. In the case of China, the reciprocity requirement is deemed to be fulfilled since China is a member state of the WTO.

If the Swiss entity no longer meets approval requirements at any time after approval is granted, FINMA may take administrative measures, up to revoking the banking licence at the last resort.

Application submission

The application for a banking licence must be submitted to FINMA in writing in one of Switzerland’s official languages (German, French, Italian).

A number of documents must be filed together with the application for the banking licence. These include:

• A business plan and budgets covering the first three financial years;
• Articles of association, organizational by-laws and detailed directives on the bank’s internal organization;
• Detailed information on infrastructure, IT systems and outsourcing arrangements;
• Signed CVs, reference letters, excerpts from criminal records and debt enforcement registers for each member of the board of directors and the executive management, as well as FINMA forms for each person regarding his or her participation in other companies;
• Specific FINMA forms for the controlling shareholders; and
• A report of the special auditor for the FINMA licence application.

The effort required to finalize the application and its pertaining documents should not be underestimated. In our experience, the approval process may take up to six months; in complex cases, it may be between nine and 12 months.

We are often asked whether the acquisition of an existing Swiss bank is a cheaper alternative to setting up a new banking entity. In our experience, this is often not the case.

Acquiring an existing bank requires changes in the bank’s shareholders, scope of business, internal organization, corporate bodies and personnel, all of which also require FINMA’s approval. The respective efforts and costs are often comparable to those of an application for a new bank. At the same time, the acquirer not only buys into the banking licence but the full history of the bank as well – with possible hidden risks.

Adrian Dörig and Stefan Grieder are both partners on VISCHER’s banking & financing team; Fiona Gao Yue is an associate on VISCHER’s China desk