Two-tier system of supervision
Swiss banking supervision is based on a division of tasks between the SFBC, as the state supervisory authority, and a number of authorised audit firms. Under this two-tier supervisory system, the authorised audit firms conduct on-site audits while the SFBC retains responsibility for overall supervision and enforcement measures.
The relationship between the auditors and audit firms authorised by the SFBC and the institutions being audited are governed by civil law. Most of the content of their auditing activities, on the other hand, is governed by public law. The auditors, in this sense, act as an extension of the SFBC, exercising direct supervision through regular audit checks of their client institutions. They fulfil a public function but possess no sovereign authority. They must, however, report or notify to the SFBC the results of their audit procedures. All costs of the audits are beared by the institutions being audited.
The SFBC, as a Federal administrative authority, has all necessary sovereign powers, but in monitoring the institutions under its purview it depends heavily on information provided by the authorised auditors. Only in rare cases will the SFBC carry out direct verifications on-site. That said, because of the major role played by the large banking groups in the Swiss financial system, the SFBC does carry out its own verifications on the two big Swiss banks. Also, to ensure the robustness of the supervisory system, it carries out quality control checks on the authorised audit firms and, on occasion, directly monitors their audit procedures at banks or securities dealers.
Given their important position in the system of supervision, the auditors have to satisfy strict conditions for authorisation. The auditing duties of the Banking- and Stock-Exchange-Act auditors go further than those imposed on auditors appointed for statutory reporting purposes under the Swiss Federal Code of Obligations. In addition to examining the annual financial statements according to form and content with independent valuation of assets and liabilities, the auditors have also to examine whether the banks or securities dealers comply with its by-laws and business rules as well as the provisions of banking legislation, the instructions of the SFBC and any professional codes of practice falling within the scope of supervision.
Detailed audit reports are drawn up containing the findings of all ordinary, exceptional or in-depth audits. These audit reports are the main informational tools by which the SFBC exercises its supervision. But in addition to the audit reports, audit firms are obliged to inform the SFBC immediately if they suspect any breach of the law or uncover other serious irregularities. The SFBC then instigates any investigations and other measures necessary to restore legality and eliminate irregularities.
The Swiss system of supervision allows for the delegation of certain duties to self-regulating organisations in various fields. In particular, licensed stock exchanges assume far-reaching admission and monitoring functions. The Swiss Bankers' Association and the Swiss Funds Association SFA issue self-regulatory guidelines to its members in certain areas of banking collective investment schemes respectively, which the SFBC recognises as binding minimum standards. They thus have the force of compulsory rules of conduct and compliance with them must be verified by the authorised auditor. This is true in particular as regards the duty of due diligence in identifying the contracting party and beneficial owner, the rules of conduct for securities trading and the guidelines governing portfolio management and the examination, valuation and treatment of mortgage-backed loans.