Licensing as a challenge and as a seal of quality

A licence from the supervisory authority for portfolio managers and trustees is a seal of quality. Those financial institutions that view the licensing requirement as an opportunity to improve their organisational structures and to meet the requirements of the FinSA and the FinIA are able to provide proof that they are acting in accordance with the high standards of quality expected by the legislator and FINMA.

In 2020 FINMA has successfully laid the foundations for the licensing process for portfolio managers and trustees:

the survey and application platform (EHP) is ready to process the applications digitally and FINMA has successively increased its resources;
it has licensed five supervisory organisations; and
it has adopted the necessary regulations implementing the FinSA and the FinIA.

FINMA is therefore ready to process the applications of the estimated 2,500 portfolio managers and trustees. Based on the notifications received, it expects that around 30% of the market participants concerned will seek a FINMA licence in the course of 2021.

Appropriate risk management

The new requirements could pose major challenges for a number of financial institutions. Besides rules on a financial institution's organisation and own funds, the new regulations also include rules of conduct, such as on dealing with risks from cross-border business, suitability or market conduct. All risks emanating from business must be assessed, limited and monitored by means of appropriate processes and controls.

Particularly the risks from cross-border business can be significant. Many portfolio managers and trustees serve clients from other jurisdictions – partly for historical reasons, partly for reasons of business policy. Depending on the country, different rules apply in connection with the financial services provided. These can lead to legal and liability risks, particularly in the area of tax offences. The portfolio manager or the trustee is responsible for appropriately managing these risks.

Required expertise and necessary adjustments to the organisation

FINMA’s focus in 2021 will therefore increasingly be on fundamental issues of substance and risk considerations in the licensing process. Depending on the business model and scope as well as the type of risks, FINMA expects to see evidence of the required expertise and any necessary adjustments to the organisation. The operational separation of risk management and internal control from revenue-based activities may also be required from financial institutions below the threshold values as set out in Article 26 FinIO, for example, if the portfolio manager or trustee adheres to a high-risk business model. FINMA will focus here on adequate processes and their documentation.

Finally, FINMA can only license those financial institutions that are able to prove that their risks are adequately limited and monitored. This may involve costs if, for example, more resources need to be built up or external service providers are used. It is therefore to be expected that not all applicants will automatically be granted a licence with the existing structures.

FINMA licence as a seal of quality

A FINMA licence ought to enhance the competitiveness of portfolio managers and trustees, as well as improving comparability and equivalence with foreign competitors. The industry and Switzerland as a centre for wealth management will become more attractive as a result.

Constructive collaboration

The licensing process can only be implemented successfully through the open and constructive collaboration of all involved parties. The portfolio managers and trustees must get to grips with the new requirements in an open and timely manner and make the necessary arrangements at an early stage. This concerns their organisation, processes and documentation, for instance, as well as their affiliation to a supervisory organisation. It is also imperative that they put together a high-quality licence application, which allows the supervisory organisation and FINMA to check it without any queries.

New role for the supervisory organisations

The supervisory organisations, which are still in their infancy, must establish their systems and processes and gear these towards supervising new members in a risk-oriented manner and in accordance with FINMA’s criteria on an ongoing basis. For this reason, it is important that they quickly find their place as control bodies that are independent from associations and interest groups and perform their role effectively. This new supervisory architecture has yet to prove itself in practice.

For its part, FINMA will ensure that besides efficient processes for handling the applications it receives, it communicates the expectations clearly and openly and creates a level playing field. The applications will be processed with the necessary rigour, but also dealt with pragmatically and fairly in a cross-comparison.

Advantages for “first movers”

The volume of applications is expected to reach its highest level in the second half of 2022. This means that FINMA will be busy checking them until well into 2023. Some delay is therefore to be expected for applications submitted later. It may therefore be advantageous to tackle the challenge in 2021 and to become a “first mover”. In any case, FINMA is ready and is looking forward with great interest to the applications and the dialogue with portfolio managers and trustees.