Investment activities of insurance companies – general framework

An application is required in these cases. However, the transitional regulations in Article 16c paras. 3 and 4 ISO apply to assets that were assigned to the tied assets before the revised ordinance took effect. In accordance with Article 216c para. 3 ISO, these can remain allocated to the tied assets during the transitional period of three years from entry into force of the revised ISO (under the administrative rules relating to deadlines, the transitional period ends at midnight on Monday, 4 January 2027).

During the transitional period the following rules apply to the allocation of assets that were previously eligible, but are now outside the standard list in the revised ordinance, to the tied assets:

• If the insurance company was permitted to invest in this category of assets before the revised ordinance entered into force on 1 January 2024 and allocated these assets to the tied assets, it may allocate them to the tied assets during the transitional period on the same scale without an application. For example, reinvestments in assets outside the standard list on a similar scale and allocating these to the tied assets does not require an application to FINMA during the transitional period. However, the insurance company remains responsible for making an application for its own list in good time before expiry of the transitional period in accordance with Article 79 para. 1 ISO.

• In accordance with Article 216c para. 3 let. c ISO, an application is required before allocating assets if the allocation of assets outside the standard list, which the insurance company invested in before entry into force of the revised ISO, will no longer be on a similar scale but is to be significantly increased. The same applies to assets outside the standard list that the insurance company invested in before the revised ISO entered into force but did not allocate to the tied assets. In accordance with Article 216c para. 3 let. c ISO, the insurer must submit an application to begin allocating these assets to the tied assets.

• If the insurance company intends to invest in assets outside the standard list, which it has not previously invested in, after the revised ISO enters into force, it must apply to allocate them to the tied assets in accordance with Article 216c para. 3 let. c ISO. 

The key point to note is that the transitional provision in Article 216c para. 3 ISO only relates to assets that were previously eligible. After entry into force of the revised ISO, other assets may not be allocated to the tied assets without FINMA’s prior approval.

An application under Article 79 para. 1 ISO may only be made after the revised ISO enters into force on 1 January 2024. Under the transitional regulations in Article 216c paras. 3 and 4 ISO, approval is not required for assets that were allocated to the tied assets before its entry into force, provided the requirements of Article 216c paras. 3 and 4 are met.

The application form is available on the EHP. The application must provide detailed information on the insurer’s investment strategy, its processes to ensure compliance with the regulatory provisions on tied assets and its risk management of investments. Moreover, before making an application it should be noted that monitoring ongoing compliance with regulatory requirements can be more intensive for more complex investments that typically need permission in accordance with Article 79 para. 1 ISO.

FINMA recommends describing the proposed assets or, if asset classes rather than individual assets are being specified, the class and way in which the individual assets will be selected as precisely as possible. Applications that are too broad or general and could for example comprise unsuitable assets or be difficult to incorporate in reporting, can result in the application having to be reworked and cause considerable delays.

In general, insurance companies must always invest their assets in accordance with the prudent person principle and must comply with the requirements of Article 69a ISO. These requirements must also be met if asset management is outsourced. In this case, suitable measures must be taken to monitor the outsourcing to ensure compliance with Article 69a ISO. The insurance company remains responsible for compliance with Article 69a ISO even if asset management is outsourced.

Assets pursuant to Article 79 para. 2 ISO may be allocated to the tied assets without the company having to obtain an approved list of assets. If assets that are not mentioned in Article 79 para. 2 ISO are to be allocated to the tied assets, the company is required to first obtain approval of its own list in accordance with Article 79 para. 1 ISO. The transitional provisions according to Article 216c ISO remain reserved (see also above).

The revised ISO and thus the new regulations on tied assets have been in force since 1 January 2024. FINMA Circular 2016/5 “Investment guidelines – insurers” of 3 December 2015 (FINMA Circular 2016/5) was repealed with the entry into force of the ISO-FINMA on 1 September 2024.

Under the revised ISO, there is no formal requirement to sign the FINMA supplementary agreement for assets to be eligible for the tied assets. FINMA does not provide a supplementary agreement that ensures compliance with the requirements for third-party custody set out in the revised ordinance. When drawing up contracts for the custody of tied assets, it is the insurer’s own responsibility to ensure that the provisions of Articles 84 and 87 ISO are met. In accordance with the prudent person principle, the revised ordinance therefore strengthens insurers’ own responsibility in complying with requirements for the tied assets. The relevant contractual basis will be requested by FINMA and must be submitted accordingly by the insurance companies (Art. 87 para. 1 ISO).

The requirements for third-party custody and current or custody account relationships derive primarily from Articles 84 and 87 ISO. It is the insurance company’s responsibility to ensure these requirements are met. Under the revised ordinance, third-party custody by an appropriate custodian remains permitted. The principles of Article 69 a ISO, which sets out the requirements of the prudent person principle, must be observed (cf. Art. 87 para. 2 ISO). In addition, the insurance company must ensure that the custodian bears liability for meeting the custody obligations. This liability must be at an appropriate level and in line with the purpose of the tied assets (Art. 87 para. 2 let. a ISO). In the event of third-party custody abroad, the seniority of the claim to the tied assets in accordance with Article 54a^bis ISA must be maintained (Art. 87 para. 2 let. b ISO). As was previously the case, assets held in the tied assets may not be encumbered. The insurance company’s liabilities may not be offset against tied assets (Art. 84 para. 2 rev. ISO). FINMA will not provide any supplementary agreement or model provisions to ensure the above requirements are met. Furthermore, the assets allocated to the tied assets must be identified as such and a list must be kept by the custodian (Art. 86 ISO). FINMA expects the custodian to be informed of the inclusion of these assets in the tied assets and to acknowledge this in writing.

In FINMA’s view, previous FINMA supplementary agreements largely but not entirely meet the requirements for third-party custody and current or custody account relationships under the revised ordinance. In FINMA’s view there is a need for amended provisions in relation to liability and encumbrance of tied assets (see the questions below on expectations for appropriate liability and the prohibition on encumbrance).

FINMA expects that this will lead contracts for third-party custody and current or custody account relationships to be examined and amended if necessary to ensure appropriate liability and the prohibition on encumbrance of tied assets in all circumstances. The amended contractual basis will be requested by FINMA and must be submitted accordingly by the insurance companies  (Art. 87 para. 1 ISO).

As regards liability, FINMA believes appropriate liability within the meaning of Article 87 para. 2 let. a ISO is usually met if the relevant contract is in line with the following guidelines:

• The contract contains no (or at least no significant) agreements that reduce or qualify liability in connection with custody of the tied assets.

• The contract contains at least the same liability that applies by virtue of the relevant legislation to the asset held in the tied assets (e.g. liability provisions of the Intermediated Securities Act for book-entry securities).

• For third-party custody, i.e. authorised use of a sub-custodian, the liability must comprise responsibility for due care in selecting and instructing the sub-custodian and the monitoring of ongoing compliance with the selection criteria. This standard of liability should apply at a minimum between the primary custodian and the first sub-custodian, irrespective of whether it is a domestic or foreign sub-custodian.

As regards encumbrance of tied assets, FINMA notes that Article 84 para. 2 ISO does not permit any exceptions to the prohibition on encumbrance. Previously, the FINMA supplementary agreement permitted encumbrances resulting from claims by the custodian linked to management of the custody or current accounts (e.g. fees, commissions, expenses etc.) by way of an exception. But with the abolition of the FINMA supplementary agreement the prohibition on encumbrance under Article 84 para. 2 ISO applies without exception and therefore no rights of pledge, retention, offset and similar can be exercised on tied assets. The purpose of the prohibition on encumbrance is to preserve the intrinsic value of the tied assets and access to them in the event of liquidation, so that these assets can fulfil their legal function as part of the tied assets (cf. Arts. 17 and 19 in conjunction with Art.54a^bis ISA). The ordinary debiting of fees outside of liquidation proceedings for operational reasons is generally acceptable for FINMA. On the other hand, FINMA considers the continued possibility of debits after the opening of liquidation proceedings, as currently possible in the FINMA supplementary agreement, to be problematic in view of the prohibition on encumbrance pursuant to Article 84 para. 2 ISO. Consequently FINMA expects contractual amendments in this regard.

The requirements for tied assets based on the prudent person principle, and thus also for third-party custody and current or custody account relationships, apply following the entry into force of the ISA and ISO on 1 January 2024. Contracts entered into from 1 January 2024 for third-party custody and current or custody account relationships relating to tied assets therefore have to meet the requirements of Articles 84 and 87 ISO. Existing contracts need to be amended accordingly. FINMA will consider the circumstances of the specific case when reviewing the time period over which the requirements of the revised ISO are implemented.