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Bilateral Treaty on the Mutual Recognition of Financial Services between Switzerland and the UK – Legal and Regulatory Impact
by: Olivier Favre (olivier.favre@swlegal.ch), Philippe Borens (philippe.borens@swlegal.ch), Caroline Clemetson (caroline.clemetson@swlegal.ch) and Grégoire Wüest (gregoire.wuest@swlegal.ch) of Schellenberg Wittmer Ltd.
Switzerland and the UK signed on 21 December 2023 a bilateral treaty on the mutual recognition of financial and insurance services (the Treaty). It is the end result of a negotiation that lasted more than two years. The entry into force of the Treaty is subject to ratification by the parliaments of both contracting parties and, as a result, the date of entry into force is not defined yet.
The Treaty enshrines the principle that the regulatory and supervisory frameworks are mutually recognised as being equivalent, as far as the scope of the Treaty and its sector-specific annexes (the Annexes) are concerned. It sets out principles of cooperation between the relevant supervisory bodies in Switzerland and the UK (i.e. FINMA, the SNB, the FCA and the Bank of England), which includes fostering the compatibility of the regulatory and supervisory frameworks. To the extent any rules are changed in a way that would have an impact on how the Treaty is meant to operate, the other contracting party would have to be informed on a timely basis. The Treaty also includes a dispute resolution mechanism between the contracting parties, e.g. regarding the interpretation of the Treaty.
The biggest impact of the Treaty in practice is expected to be the market access by Swiss financial services providers to the UK when providing investment services, which will include high net worth clients with net assets in excess of GBP 2 Mio. and the market access of UK insurers to the Swiss market for non-life insurance policies offered to Swiss corporate clients.
The key points for the different sectors covered by the treaty include the following:
- Financial Services provided by regulated Financial Services Providers
Swiss banks licensed by FINMA under the Swiss Banking Act and Swiss securities firms, fund management companies as well as asset managers of collective assets and portfolio managers licensed by FINMA under the Swiss Financial Institutions Act (FinIA) will be permitted to provide certain investment services and activities in the sense of UK MiFID and certain ancillary services to UK clients on a cross-border basis without further local authorisation or registration requirements, provided that the clients are per se professional clients, eligible counterparties in the sense of UK MiFID or high net worth clients with net assets in excess of GBP 2 Mio. (including private investment structures for such clients). This will be subject to certain notification obligations to the relevant UK authorities and obtaining the relevant declarations from the clients. The Swiss financial services providers may also provide the services in the UK with a temporary local presence, provided this does not amount to a permanent establishment in the UK.
Regulated UK financial services providers already benefit today from an access to the Swiss market without further licensing requirements for financial services provided on a cross-border basis without a Swiss presence. The Treaty grants reciprocity as regards the absence of any registration requirements under the Financial Services Act (FinSA) for UK financial services providers servicing Swiss clients with net assets in excess of CHF 2 Mio. However, the UK financial services providers will not be relieved from ensuring that the client advisors have sufficient knowledge of the FinSA obligations, from setting up a professional indemnity insurance coverage and from the affiliation with the FinSA ombudsman services, where applicable.
- Insurance Services
For insurance services, the Treaty is expected to materially impact the access of Swiss corporate clients to non-life products offered by UK insurers.
The Treaty will exempt regulated UK non-life direct insurers from obtaining a FINMA license when providing certain types of policies to Swiss corporate clients that exceed two of the following thresholds: (a) a net turnover in excess of CHF 40 Mio, (b) a balance sheet total in excess of CHF 20 Mio. and (c) having more than 250 employees. Non-life insurance policies subject to a public law regime, e.g. in the scope of monopolies, as well as accident and health policies are excluded from such market access. Such increased market access is expected to broaden the choice of available insurance policies available for Swiss corporate clients.
As regards insurance intermediation services, the Treaty will exempt untied UK insurance intermediaries from the requirement to establish a local presence in Switzerland that would apply otherwise under the revised Swiss Insurance Supervision Act.
The Treaty will establish reciprocity for the access of Swiss insurers and insurance intermediaries to the UK market. As regards the definition of the UK corporate clients falling into the scope of the Treaty, they must exceed two of the following thresholds: (a) a net turnover in excess of GBP 36 Mio, (b) a balance sheet total in excess of CHF 18 Mio. and (c) having more than 250 employees.
- Central Counterparties
Where a UK central counterparty intends to onboard Swiss participants, the Treaty will relieve central counterparties duly established in the UK from demonstrating to FINMA in the Swiss registration process under the Swiss Financial Market Infrastructure Act (FinMIA) that the central counterparty is subject to supervision and regulation under rules that are equivalent to the Swiss rules. However, FINMA retains the power to evaluate whether the Bank of England has the adequate procedures in place to notify FINMA in the event it has knowledge of any misconduct regarding Swiss participants and to provide administrative assistance. Also, the Treaty will not interfere with the powers of Swiss authorities to assess whether the central counterparty is of systemic importance and if it is, or likely to become, systemically important, the central counterparty may be required to comply with some or all of the measures under the domestic law of Switzerland.
The Treaty will also grant reciprocity to a Swiss central counterparty.
- Derivatives Regulation
The Treaty will provide that the risk mitigation obligations of article 107 to 110 FinMIA applicable to Swiss counterparties trading over the counter (OTC) derivatives transactions with UK counterparties may be satisfied by complying with the respective UK rules, which are recognized as equivalent for purposes of the FinMIA. However, this recognition is already in place at present.
Conversely, the Treaty will provide that the risk mitigation obligations applicable to UK counterparties trading over the counter (OTC) derivatives transactions with Swiss counterparties may be satisfied by complying the relevant Swiss rules, which will be recognized as equivalent for purposes of the UK rules, except for the standards and supervision of initial margin models and the variation margin obligations applicable to physically settled FX forwards and swaps.
- Trading Venues
The Treaty will provide that the rules for the supervision of trading venues (i.e. a regulated market or a multilateral trading facility) are deemed to be equivalent in Switzerland and the UK, however, without relieving the trading venues from obtaining relevant authorisations before onboarding participants in the other jurisdiction.
- Banking Services
For banking services (deposit taking activities and lending), the Treaty establishes that the Swiss and UK rules are deemed to be equivalent. However, as the market access is already possible at present, the Treaty is not expected to materially change the current cross-border practices between Switzerland and the UK.
- Asset Management
The Treaty further includes an Annex applicable to certain asset management activities (marketing of alternative investment funds (AIFs) and collective investment schemes and acting as asset manager for AIFs, collective investment schemes, pension funds or insurance companies). While the Treaty establishes that the Swiss and UK rules are deemed to be equivalent also in these areas, we do not expect the Treaty will materially change the current cross-border practices between Switzerland and the UK.
- Sustainable Finance
The Treaty further includes a declaration of the intent that the UK and Switzerland aim to cooperate in respect of the rules on sustainable finance and to consider the mutual recognition of the respective rules in the future.
