FINMA has issued a new position paper addressing the increased risks in cross-border financial business. It calls on supervised institutions to comply with foreign supervisory law and define an appropriate service model for each target market. As part of its ongoing supervision, FINMA will in future increasingly assess whether supervised institutions are aware of the risks inherent in their cross-border operations and take appropriate measures to mitigate them. FINMA's expectations set out in the paper will also be reflected in its future enforcement practice.
The legal and reputational risks involved in cross-border financial services have risen noticeably in recent years. The business models of many wealth management banks have traditionally been strongly focused on cross-border services for private clients resident outside Switzerland. Insurers have also increasingly transacted business with cross-border elements in recent years. At the same time, the legal and reputational risks associated with cross-border business have increased significantly, as several high-profile cases have shown in recent years.
In view of these developments, FINMA believes it is essential for supervised institutions to conduct a thorough assessment of their cross-border financial services operations, examining the legal framework and associated risks. Appropriate measures to mitigate or eliminate risk must also be taken. In its capacity as supervisor, FINMA expects institutions to take due account of foreign supervisory legislation in particular, and to define a service model appropriate for each individual target market.
The Swiss Financial Market Supervision Act does not contain any provision that supervised institutions must observe foreign law. However, breaches of foreign regulations may still be of relevance under the various acts of supervisory legislation. For instance, violating foreign rules may breach the requirement that business be conducted in a proper manner. In addition, supervisory rules regarding organisational structure require institutions to identify, mitigate and monitor all risks in an appropriate manner, including legal and reputational risks, and establish an effective system of internal control. Naturally, this also applies to cross-border business.
As part of its ongoing supervision, FINMA will increasingly focus in future on examining how supervised institutions mitigate the risks in their cross-border operations. The expectations of FINMA outlined will also be reflected in its future enforcement practice.
Many sources of risk on different levels
The causes of legal and reputational risks in cross-border financial services are varied. Frequently, they arise from foreign supervisory law. Failures to meet requirements in this area may result in administrative sanctions being imposed by foreign authorities. Violations of such regulatory provisions may also have consequences under criminal law, and result in financial institutions being held liable under civil law, with clients having the right to contest or terminate contracts entered into with the financial institutions. Tax legislation is a further source of risk. The danger here is that financial intermediaries or their employees may become a party to tax offences committed by foreign clients under foreign law. In some jurisdictions, criminal offences may even include acts performed exclusively or largely outside the country, e.g. on Swiss territory. Further legal and reputational risks for institutions with cross-border operations may arise under foreign anti-money laundering legislation and civil law, conflict of law rules and procedural rules. There may also be risks linked to other areas of commercial law.
Tobias Lux, Media Spokesperson, Phone +41 (0)31 327 91 71, firstname.lastname@example.org