Switzerland
Financial Sector Assessment Program: Detailed Assessment of Observance of Financial Sector Standards and Codes
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This paper discusses key findings of the detailed assessment of observance of financial sector standards and codes in Switzerland. Switzerland has a relatively unique banking sector, with a high market concentration by the two largest domestic banks. The overall assessment of the peer-review team is that Switzerland is generally in compliance with the Basel Core Principles with two exceptions where the Swiss Federal Banking Commission (SFBC) is deemed largely compliant. The two exception areas are budgetary independence and banking activities not subject to SFBC supervision.

Abstract

This paper discusses key findings of the detailed assessment of observance of financial sector standards and codes in Switzerland. Switzerland has a relatively unique banking sector, with a high market concentration by the two largest domestic banks. The overall assessment of the peer-review team is that Switzerland is generally in compliance with the Basel Core Principles with two exceptions where the Swiss Federal Banking Commission (SFBC) is deemed largely compliant. The two exception areas are budgetary independence and banking activities not subject to SFBC supervision.

I. Basel Core Principles for Effective Banking Supervision

This chapter provides the findings from the assessment of Basel Core Principles for Effective Banking Supervision (Basel Core Principles or BCP).1

Information and methodology used for assessment

The Swiss authorities were requested to complete a self-assessment questionnaire in advance of the mission pertaining to the above-mentioned regulatory standards and principles. The questionnaire and self-assessments, where performed, were made available to the peer group of experts in advance of the mission. During the mission, the responses to the questionnaire and self-assessments of compliance with the standards and principles were clarified and checked through subsequent discussion with the authorities and market participants in critical areas. In the case of the Basel Core Principles, the banking specialists reviewed documents made available in advance of the mission, met with host country supervisors in the United States and the United Kingdom of the largest two Swiss banks (the Credit Suisse Group and UBS), and spent several days interviewing representatives of the Swiss Federal Banking Commission (SFBC), bankers, bankers association representatives, and accountants in order to clarify and/or verify the facts contained in the questionnaire responses.

The responses to the IMF questionnaire by the Swiss authorities, detailed information available on the SFBC's Internet website (http://www.ebk.admin.ch/) plus the websites of KPMG Switzerland, the Swiss Bankers' Association (SBA), the Federal Department of Finance (FDF), and the two large Swiss banks, facilitated the initial drafting of this report. The Basel Core Principles assessors were able to focus their discussions and verify information provided with the Federal Law on Banks and Savings Banks of November 8, 1934 (Banking Act), as amended through April 22, 1999, the Ordinance of the Swiss Federal Council on Banks and Savings Banks of May 17, 1972 (Banking Ordinance), as amended through October 4, 1999, other ordinances and SFBC Circulars and Guidelines, Codes, Conventions and Agreements issued by the SBA. Implementing Swiss regulations, SFBC administrative notices and statutory instruments, audit and accounting guidelines and the SFBC's Guidelines on Financial Statement Reporting Requirements, which provide instructions/guidance for periodic financial and prudential reports, were incorporated into the assessment process. Follow-up questions were discussed with SFBC staff and supplemental information was provided to the banking specialists as necessary.

Institutional and macroprudential setting, market structure overview

Banking is one of the prime industries in the Swiss economy accounting for significant employment opportunities and contributing 11 percent to GDP. Bank activities have undergone changes in the last decade with reduction in bank savings accounts, increased investment funds, initiation of mortgage backed securities, increased global custody, fiduciary business, derivatives and investment counseling, and asset management business. Swiss banks offer global consultancy services, primarily in private banking that include tax, pension plan and inheritance counseling.

There are 375 banks licensed in Switzerland.2 The number of banks has been shrinking in the last decade due to increased competition, mergers and acquisitions. The banking sector is dominated by three large Swiss-licensed banks (part of two banking groups) with significant global presence. There are 24 cantonal banks, 103 regional banks, one cooperative bank (with 537 independent members), 17 private banks, 23 subsidiaries of major international financial conglomerates and 204 institutions categorized as “other banks.”

The two largest banking groups represent about 60 percent of total Swiss banks' assets and deposits and dominate the Swiss banking system. The spread of their operations into many different financial markets—including both banking and insurance—in many different countries, which resulted from an extended process of national and international mergers and acquisitions, has significantly complicated the establishment and management of their risk profile, both for their managements and supervisory boards, and for the supervisors. Recently, these large and complex financial institutions have been affected by turmoil on international financial markets. These two aspects–their increasing complexity and their sensitivity to international asset market developments–as well as their key role within the Swiss financial system underscore the importance of an intense, hands-on, and risk-based form of monitoring and supervision by the banking supervisor, including with regard to aspects of corporate governance in these large and often culturally diverse organizations.

The authority and responsibility of the SFBC in bank licensing and supervision are explicitly set out in the Banking Act and various ordinances, circulars, and guidelines. All credit institutions are subject to supervision and regulation by the SFBC. The SFBC is not responsible for the supervision of insurance companies, insurance intermediaries, investment advisors or industrial deposit-taking entities. Thus these entities are not included in this BCP assessment. However, recent recommendations issued by an expert working group include legislation to transfer the supervision of insurance intermediaries to the SFBC.

General preconditions for effective banking supervision

The SFBC and Swiss Government have achieved a high degree of implementation of the recommendations of the Basel Committee's reports. Although not a member of the European Union (EU), Switzerland has incorporated many of the EU Directives into its ordinances, guidelines and supervisory practices. To a large extent, the Basel Core Principles parallel the EU Directives and this contributed to Switzerland's compliance with the Basel Core Principles. The SFBC has recently taken steps to enhance its supervisory process by establishing a separate Large Bank Supervision unit to oversee the two large banking groups. The SFBC has also created a unit responsible for the assessment and validation of bank models. These two new units, focused primarily on the two main banks, have somewhat altered the traditional Swiss “indirect” supervision of these two banks. The changes allow the SFBC to better coordinate its supervisory activities for the two large banks with external auditors, bank management, foreign host supervisors, and the insurance supervisors. This approach shifts limited supervisory resources to the financial sector's greatest risk, that is, the largest banks. The risk-based supervision approach more fully integrates the SFBC's off-site analysis of these banks' prudential returns with the bank examinations performed by SFBC-licensed and approved external auditors. The new approach includes quarterly management meetings with the two institutions, semi-annual trilateral meetings with the U.K. and U.S. supervisors and the SFBC and annual trilateral meetings with the bank, its external auditor and the SFBC. Cooperation between the SFBC and the Swiss insurance supervisor has also been strengthened.

The overall assessment of the peer review team is that Switzerland is generally in compliance with the Basel Core Principles with two exceptions where the SFBC is deemed largely compliant. The two exceptions are in the area of budgetary independence and banking activities not subject to SFBC supervision. Both exceptions are discussed in more detail in the detailed assessment that follows. It is important to note that the assessment tailored the principles to the Swiss market. Switzerland has a relatively unique banking sector, with a high market concentration by the two largest domestic banks, and a relatively low level of complex bank activities conducted in most other banks, which are primarily involved with mortgage banking activities or private banking and asset management

Currently the SFBC—which is a small organization in comparison to the size of the system it oversees—relies heavily on the dualistic system of supervision whereby the on-site examinations are outsourced by the SFBC to approved and licensed external auditors. The supervisory process is enhanced by the self-regulatory activities of the industry via the Swiss Bankers Association (SBA) who, together with the SFBC issues guidance to the industry. The SFBC is aware of the risks of outsourcing on-site work and takes a number of steps to check that the work done meets the standards required. This dualistic approach, however, would benefit from a more formalized quality assurance program for supervising external auditors and an increase in joint on-site inspections. This, as well as preparations for the new Basel Capital Accord, will require the SFBC, among other things, to recruit and retain a sufficient number of additional competent staff. The SFBC is taking steps in this direction.

Frequent communication between the SFBC and the banks and the external auditors is key to the Swiss current supervisory process. The SFBC's licensing and supervisory policies and practices are clearly communicated to the banks and external auditors. As a member of the Basel Committee, the Joint Forum, and several other international standards and principle-setting bodies, the SFBC participates in setting the standards for financial sector supervision and actively strives to implement them.

The SFBC will continue to be challenged by innovative licensing proposals (such as Internet banks) and requests for approval of new business activities and increasingly complex investment products, many of the same issues being faced by supervisors in other financially developed countries. As banks expand or enter new businesses, supervisors need to remain vigilant in their supervision in order to minimize associated risks in the industry. This should include a more formalized system of supervision with more explicit supervisory directives being incorporated into the Banking Act. The SFBC is responding to recent regulatory initiatives put forth by various expert commissions and working groups to enhance the supervisory process. Several recommendations have come out of these projects and are being considered by the government as a good start in closing supervisory gaps among all financial companies.

Swiss legislation, SFBC ordinances and circulars, or SBA guidelines and circulars cover all the Basel Core Principles. Although the Banking Act is broad in some instances, the SFBC's implementation of the Banking Act through regulations and guidance to external auditors in their examination mandate reflects effective supervision and works well with the Swiss-licensed institutions.

Various expert commissions and working groups have been created in the last several years to analyze the Swiss financial system and supervision. In December 1998, Switzerland's Minister of Finance mandated an expert commission “Financial Market Supervision,” chaired by Prof. Zufferey, with an analysis of the strengths and weakness of the system for the supervision of the financial services industry in Switzerland. In November 2000, the expert commission issued a report and 42 general recommendations for a reform of the supervisory framework in the financial sector (“Bericht über die Finanzmarktregulierung und–aufsicht in der Schweiz,” Zufferey Report).

In May 1999, Switzerland's Finance Minister mandated an expert commission to review the existing bank reorganization and liquidation law and the deposit insurance system. In October 2000, the Expert Commission submitted its findings in a report along with a proposal for an amendment to the Banking Act. The trigger that started that reform process was the failure of the Spar and Leihkasse Thun in 1991, a large regional bank. This incident had brought several shortcomings of the existing legal framework for dealing with insolvent banks to the surface.

In February 2000, the SFBC mandated a working group, chaired by Prof. Nobel, with an analysis of the dualistic concept of the supervisory system. The working group published its report and 17 recommendations in December 2000. In March 2001, the working group “Auditing and Supervision of Banks” was established to follow up on those recommendations and put forward proposals to revise the Banking Act, the Banking Ordinance and the SFBC Circulars to implement the expert commission's recommendations.

In November 2001, the Federal Council instituted an Expert Commission with nine members that will be chaired by Prof. Zimmerli. The Expert Commission was mandated to put forward a legislative proposal for the creation of a unified financial supervisory authority. While the mission team was aware of the work of the various commissions and working groups, it was agreed prior to the start of the mission that the assessment of the Basel Core Principles would be done based on the laws, policies, and procedures in effect as of the start of the mission. This Basel Core Principles assessment arrived at many of the same conclusions as those of the commissions and working groups, and generally supports the various groups' recommendations.

At this time (and pending the revision of the Banking Act) a potential vulnerability exists because nonbank industrial deposit-taking entities and certain nonbank asset management/investment advisors are not under the SFBC's supervision or covered by the Basel Core Principles. There is vulnerability anytime non-regulated institutions compete with regulated institutions in banking-type activities.

Principle-by-principle assessment

The following assessment of the Basel Core Principles (BCP) is based on the Core Principles Methodology of the Basel Committee on Banking Supervision, October 1999. The methodology makes a distinction between “essential” and “additional” criteria. Essential criteria should be present in order for supervision to be considered effective. Additional criteria further strengthen supervision and countries should strive to implement as many of the additional criteria as possible. This assessment takes both the essential and additional criteria into consideration. Principle 15 on anti-money laundering supervisory activities was supplemented with the August 15, 2001 draft methodology paper issued by the IMF to further facilitate assessments of this particular area and a separate report on anti-money laundering efforts was prepared.

The Basel Core Principles are grouped into seven categories: (1) Preconditions for Effective Banking Supervision; (2) Licensing and Structure; (3) Prudential Regulations and Requirements; (4) Methods of Ongoing Banking Supervision; (5) Information Requirements; (6) Formal Powers of Supervisors; and, (7) Cross-Border Banking.

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

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Table 2.

Summary Compliance with the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially non-compliant.

NC: Non-compliant.

NA: Not applicable.

Recommended action plan and authorities' response to the assessment

Table 3.

Recommended Action Plan—Basel Core Principles

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Authorities' response

In general, the Swiss authorities agreed with the main findings and the recommendations, in particular CP 1.2 (budgetary independence) and CP 2 (deposit taking entities). Most comments of the SFBC were included in the assessment. The main area in which the mission team identified a need for improvement and where agreement with the Swiss authorities was not fully reached is detailed below.

  • CP 1.6/24: The SFBC shares the conviction that it is important to establish a relationship with other primary supervisors. As mentioned earlier, the existence of a formal co-operation arrangement with a foreign regulator is not a prerequisite for the exchange of information under Swiss law. While the existence of such arrangements may be useful in some cases, the SFBC finds that in the absence of such arrangements co-operation can be as efficient and oftentimes more flexible. There are no legal or other obstacles for the SFBC to enter into formal co-operation arrangements with a foreign counterpart. Should a foreign regulator, with whom the SFBC maintains close working relations, wish to formalize this process the SFBC does not raise any objections.

II. IOSCO Objectives and Principles of Securities Regulation

This report was prepared as part of the Financial Sector Assessment Program (FSAP) of Switzerland. Its purpose is to assess implementation of the IOSCO Objectives and Principles of Securities Regulation.

An IMF mission visited Switzerland in October 2001 to conduct the assessment. The mission met with staff of the Swiss National Bank (SNB), the Swiss Federal Banking Commission (SFBC), the Swiss Exchange (SWX), the Swiss Funds Association, and several private sector firms. The assessment contained in this report is based on these discussions, on the responses to questionnaires sent to the SFBC, and on the analysis of relevant laws, regulations, administrative polices and other written information provided during the meetings.4

Institutional Setting and Market Structure

Supervision and regulation of the securities market are entrusted to the SFBC. The SFBC is responsible for licensing and supervising securities dealers and stock exchanges; it regulates disclosure of shareholdings in listed companies and takeover bids. Supervisory functions are also delegated to the exchanges, which function as SROs and supervise trading, exchange members and listing procedures.

As with the supervision of banks, the SFBC relies on recognized private external auditors to conduct front-line supervision and has not performed on-site inspections of securities dealers in the recent past. Front-line supervision of the SWX is also performed by an external auditor. The auditor is required to examine compliance with the obligations arising from the Stock Exchange Act, the implementing ordinance, and the relevant rules and regulations.

The SWX, as an SRO, is responsible for regulating its members and admitting participants to trading (who have to be licensed securities dealers); supervising price formation, execution and settlement of transactions; and ensuring that the information necessary “to maintain a transparent market” is made public. The Exchange is also responsible for enforcing listing rules and checking listing prospectuses.

In 2000, the SWX ranked 10th in the world by turnover in equities, with turnover of SwF1.0 trillion, more than double the turnover in 1996. Market capitalization of the Swiss Performance Index (SPI) was SwF 1.3 trillion at the end of 2000 (equivalent to three times annual GDP). Since June 2001, the stocks represented in the Swiss blue chip index (SMI) are being traded exclusively on Virt-x—the new pan-European blue chip exchange in London, which is a joint venture between the SWX and Tradepoint. The SWX is also one of the largest markets for warrants in the world with almost 3500 warrants listed. Since 1998, all Swiss standardized derivatives are traded on EUREX, which was created by the merger of the Swiss Options and Financial Futures Exchange (SOFFEX) with the Deutsche Terminbörse (DTB).

Securities intermediaries comprise primarily securities dealers and investment funds.5 Since the Swiss system is based on the universal bank model, both the securities and the fund businesses are dominated by banks. Total assets of investment funds have almost doubled since 1996 to SwF 468 billion (115 percent of GDP) at end-2000. More than two-thirds of the assets are invested in foreign funds, which are in most cases established by Swiss financial institutions in Luxembourg and their products are then offered in Switzerland to residents and nonresidents.

Principle-by-Principle Assessment

This section presents a detailed discussion and assessment of practices in Switzerland regarding securities regulation, vis-à-vis the practices in the IOSCO Objectives and Principles of Securities Regulation. The assessment of observance of each practice is made on a qualitative basis using a four-part assessment system: implemented; partially implemented; non-implemented; not applicable.

A Principle will be considered implemented whenever all assessment criteria are met without any material deficiencies. It will be considered partially implemented when the authorities have not fully implemented one or more assessment criteria. A Principle will be considered non-implemented whenever material shortcomings are found in adhering to the assessment criteria. When a principle is assessed to be partially or non-implemented, recommendations are provided to improve observance. A Principle will be considered not applicable whenever it does not apply given the existing structural and institutional conditions.

Table 4.

Detailed Assessment of Observance of the IOSCO Objectives and Principles

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Based on the detailed assessment, a summary table of assessment of observance is presented in Table 5.

Table 5.

Summary Observance of the IOSCO Objectives and Principles

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Recommended action plan and authorities' response to the assessment

Table 6.

Recommended Action Plan—IOSCO Objectives and Principles

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Authorities' response

In general, the authorities agreed with the key findings and with most of the recommendations. They agreed that budgetary independence of the SFBC could be strengthened, but viewed full prudential regulation of asset managers and investment advisors who do not manage funds in their name on behalf of clients, and small firms that trade on their own account, as unnecessary. They supported the recommendation for additional sanction powers as useful but not strictly necessary. The SFBC noted that in its view, prudential supervision of firms who trade on their own account below the threshold of SwF 5 billion is not required from the perspective of investor protection nor from that of financial system stability. On the need for a more proactive role in supervising SROs and primary and secondary markets, the authorities noted that the SFBC in most cases has the authority, if needed, to directly supervise SROs, securities dealers, and markets. They did not consider direct responsibility of the SFBC with respect to accounting and auditing standards as necessary, since the SFBC's approval of SWX listing rules, which prescribe acceptable accounting and auditing standards, provides the regulator with indirect competence in this area.

III. IAIS Insurance Core Principles

The assessment of the Swiss Insurance Sector was performed as part of the Financial Sector Assessment Program (FSAP) for Switzerland.6 The main objectives of the assessment were to determine the levels of observance with the International Association of Insurance Supervisors (IAIS) principles, and to suggest areas where further development is appropriate.

The assessment was based on a review of the legal framework, and extensive discussions with the supervisory authorities and market participants. It focused mainly on the supervisory work of the Federal Office of Private Insurance (FOPI) under the Ministry of Justice and Police.

The supervisory staff of the FOPI cooperated extensively in the assessment by providing answers to a questionnaire, preparing a self-assessment against IAIS Core Principles, and making themselves available to meet with mission members.

Information and methodology used for assessment

The assessment is based on legislation applying to the insurance sector. The following laws apply:

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In addition to these laws, there are the following ordinances and decrees:

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The assessment was performed using the Core Principles Methodology report adopted by the IAIS at its meeting in October 2000. The IAIS has developed 17 principles for effective insurance regulation and supervision. A principle will be considered observed whenever all essential criteria are generally met without any significant deficiencies. A principle will be considered broadly observed whenever only minor shortcomings are observed, which do not raise any concerns about the authority's ability and intent to achieve full observance with the principle within a prescribed period of time. A principle will be considered partly observed whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority's ability to achieve observance. A principle will be considered non-observed whenever no substantive progress toward observance has been achieved. A Principle will be considered not applicable whenever the CP does not apply given the structural, legal and institutional features of a jurisdiction.

Institutional and macroprudential setting—overview

The insurance sector in Switzerland is very concentrated. The largest ten insurance companies cover about 90 percent of the insurance market. The Swiss insurance industry has significant interests abroad. Most cross-border operations are in the form of subsidiaries to Swiss insurance companies. Several foreign insurance companies carry out business in Switzerland. The Swiss insurance industry is highly developed. Insurance purchases by residents of Switzerland ranks among the highest rates of such consumption in the world. Swiss companies have not confined themselves to operations in Switzerland and some of them rank among the big suppliers of insurance throughout Europe—either directly or through subsidiary members of a number of conglomerate groups. For some of these organizations, fully one-half of their premiums come from outside Switzerland.

The following tables provide statistics that are widely quoted as indicative of the development of an insurance market. The first table provides information on insurance premiums per capita for the year 2000 (in U.S. dollars), often referred to as “premium density”:

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Source: SIGMA/Swiss Re, World Insurance in 2000. Social security contributions are excluded.

Another widely quoted statistic is the ratio of premiums to Gross Domestic Product, referred to as the rate of insurance penetration. The following table shows the 2000 statistics for the five countries with the highest percentage ratios:

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Source: SIGMA/Swiss Re, World Insurance in 2000.

As the tables indicate, Swiss residents are among the world leaders in the purchase of insurance.

The insurance market in Switzerland is highly concentrated even though there are a large number of companies. The following table provides information on the number of players in the market.

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Of the 30 life companies operating in the Swiss market, only five companies received over 75 percent of total premiums paid for life insurance business in the year 2000. In the non-life business, 10 companies collected over 75 percent of premiums paid for non-life insurance in Switzerland during the year 2000. This leaves a relatively small amount of premiums to be divided up among the many other licensed companies.

Management of Swiss insurance companies share the belief that there remains little opportunity for growth in the domestic insurance market. In the area of non-life insurance, they speak of a “saturated” market. Growth potential in the life insurance area is also regarded as limited although there may still be some opportunities for growth from the pension business. With this picture in mind, companies have been exploring the opportunities for selling policies in other countries and have been expanding their operations through acquisition in other countries. The United States was regarded by some as an area with potential for growth.

General preconditions for effective insurance supervision

In order to carry on insurance activities in Switzerland, a company must be licensed by the Ministry of Justice and Police. The FOPI is responsible for supervision of the private insurance market.

Swiss legislation is not very specific on obligations and powers of the supervisory authority. In some ways, this gives quite extended supervisory powers to the Minister of Justice and Police, who is formally responsible for decisions in this area. In practice, however, decision-making in general is delegated to the FOPI's Managing Board. This implies that the range and quality of supervision to a large extent depends on the composition of the Board.

The FOPI has its own annual budget, approved by the Ministry of Justice and Police. The costs for supervision are charged to the insurance companies afterwards. For that purpose, the FOPI prepares an annual record of the cost of its operations. The contributions are paid directly to the Treasury, and the FOPI may not keep any eventual “surplus.”

Of a total staff of 55, the professional members of the FOPI dedicated to supervision number about 35—which is low by almost any standard, but in particular in light of the large size of the insurance industry in Switzerland. The FOPI is anxious to increase this number in order to augment its supervisory capacity. If it had more professional staff it could engage, for example, in more on-site inspections; strengthen offsite monitoring (including, e.g., in-depth analyses of the impact of recent asset market volatility on the insurance industry); intensify contacts with supervised companies; and strengthen cooperation with other supervisory agencies, both domestically and abroad. Steps in all these directions are recommended. Lack of flexibility with regard to salary scales has so far hampered recruitment efforts.

There are some shortcomings in the present supervisory model. One is in the area of changes in control of management or ownership. The FOPI does not give its approval of changes in ownership or carry out fit and proper assessments of major owners or management, since the present legislation does not give the authority those powers.

A critical feature to be submitted with an application for license is the “Business Plan.” This document contains a description of the manner in which the company intends to conduct its business and fixes the parameters of the pricing for insurance contracts, the computation for the technical provisions in support of those contracts, and the reinsurance treaty arrangements that the company will, or has, negotiated. The important feature is that this plan remains in force for as long as the company is licensed and the company will be expected to seek approval of the authorities for any amendment to the plan, even in such matters as changes to the parameters used to set premium rates for life and health insurance.

Another area of concern is insurance intermediaries. There is presently no legislation in Switzerland that applies to insurance brokers, nor is there a code of conduct regarding sale of insurance products by tied agents or others. This is an area of concern, since market conduct and consumer protection issues in many ways relate to the conduct of insurance intermediaries.

A third issue of concern is the lack of requirements on internal control systems in insurance companies. Insurance legislation does not cover the duties of the Board of Directors or the General Manager in this area. The FOPI has no legal basis to establish appropriate rules and has not issued any guidance. The legislation that to some extent covers internal controls and management is the general corporation legislation. In addition, the insurance legislation does not give directions regarding corporate governance, which has proven in other countries to be a key aspect of sound management practices, in particular in large and internationally active financial institutions. Since the FOPI has not provided formal guidance, no standards have been set in this area (except from the general provisions in the corporate legislation).

A new draft Bill will shortly be submitted to the Parliament. It is expected to become effective in 2003 and its rapid adoption is highly recommended. The new law will encompass the areas that are now covered by the Acts mentioned above. It will also cover the areas of changes in control and ownership and insurance intermediaries. Under the new law, Swiss insurance legislation will, in essential areas, be in line with EU regulations. The Draft Bill also sets the foundations for the supervision of insurance activities of financial conglomerates.

Principle-by-principle assessment

Table 7.

Detailed Assessment of Observance of the IAIS Insurance Core Principles

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Table 8.

Summary Observance of IAIS Insurance Core Principles

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Recommended action plan and authorities' response to the assessment

Recommended action plan

  • The authorities should move as quickly as possible to complete the preparation of the new insurance legislation.

  • The compensation system for the FOPI staff should be reviewed and, if possible, separated from the general public service scales. Additional staff should be hired to increase the frequency of on-site inspections and to expand off-site monitoring of developments in the industry.

  • The FOPI should be provided with broader authority to exchange confidential information with other financial sector supervisors.

Table 9.

Recommended Action Plan—IAIS Core Principles

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Authorities' response

The FOPI broadly agreed with this assessment, which it considered to be comprehensive, balanced, and constructive. At the same time, it wished to emphasize that most of the recommendations contained therein are being addressed in the proposed new legislation on insurance supervision.

IV. CPSS Core Principles for Systemically Important Payment Systems

Information and methodology used for assessment

This assessment pertains specifically to the interbank payment mechanism known as the Swiss Interbank Clearing (SIC). This real-time, gross settlement (RTGS) system is by far the most important payment mechanism in the country, and is a significant element of the global network of payment arrangements. The SIC handles both large- and small-value transactions. Participation in the SIC is open to a wide range of domestic and foreign financial institutions and clearing mechanisms. It is systemically important, and thus the subject of assessment according to the CPSS Core Principles for such systems.

The assessment was conducted based on information provided by the SNB in the form of the answers to the IMF questionnaire with regard to payment and securities clearing and settlement infrastructure, relevant sections of the current Federal Law on the Swiss National Bank (the LNB), the 2001 “experts” draft of the LNB, the SIC Users Manual, the SIC Rules and Regulations, and the October 8, 2001 draft of the Self-Assessment of the Core Principles for Systemically Important Payment Systems prepared by the SNB.7 These sources were supplemented by discussions held with officials of the SNB, the chief executive officer of Swiss Interbank Clearing AG which is the principal computer-service corporation operating the SIC on behalf of the central bank, a senior official of SIS SegaInterSettle AG (SIS), Switzerland's central securities depository and securities settlement system, as well as individuals regularly using SIC at the two largest banks. The individuals involved in these discussions were both knowledgeable and cooperative. A fuller assessment of the payment system broadly defined was limited by the fact that time did not permit an examination of many of the other relevant laws such as the Swiss Civil Code, the Code of Obligations, or the bankruptcy law.

Institutional and market structure—Overview

As in many other countries, there are close links in the Switzerland between the payments system, the securities markets, and the foreign exchange market. The Swiss central securities depository (SIS) and its securities settlement system known as SECOM have been linked in real time to the SIC since 1995 in order to transfer funds and securities on a delivery-versus-payment basis. Together, the SIC and SIS form the platform for the daily implementation of monetary policy. The derivatives exchange, called Eurex, also settles over the SIC. The Swiss franc leg of foreign exchange transactions typically involves large-value payments moving between pairs of banks, via the SIC, two business days after spot purchase and sale contracts are negotiated.

The SIC is used for the regular settlement procedures of all the retail payment mechanisms, whether they are related to electronic payments at the point of sale, to checks, to bulk transfers of periodic payments such as salaries, interest and dividends, and, e.g., to regular debits of mortgage interest. The value of all these retail payment components represents only about 1 percent of the typical value of the daily flow of payments in the SIC.

Payment systems infrastructure

The Swiss Interbank Clearing (SIC) is unquestionably a systemically important payment system—both for Switzerland and for the global financial system. On an average day, electronic funds transfers amounting to some SwF180 billion are processed on a real-time, gross-settlement basis. (The annual value of Swiss GDP is, in comparison, SwF 407 billion). Of this daily average value, over half involves either foreign exchange transactions being settled, or the correspondent banking flows which reflect cross-border commercial and financial business payments. Each SIC transfer that passes the risk-control test of adequate balances in the sending participant's (continually updated) settlement account is immediately final (daylight overdrafts are automatically and legally prohibited). The SIC not only effects interbank transfers of funds, many of which are initiated by the clients of participating institutions, but it is also used for the cash settlement procedures of the securities clearing mechanism (SIS), the derivatives exchange (Eurex), and the bulk settlement arrangements of the various services reflecting retail-level payments (the interbank data media exchange called DTA, for example).

The broad usage of the SIC is reflected in its list of participants. At the end of 2000, there were 302 participating members, of which 55 functioned on a remote basis, many of these in turn being banks in other countries. Any Swiss bank or broker/dealer with a license from the Federal Banking Commission can gain access—essentially upon request—to the Swiss National Bank (SNB). Domestic or foreign clearing institutions will usually gain access if their presence will reduce systemic risk or enhance the significance of the Swiss financial center in the global context. Correspondingly the foreign banks that are users of these clearing institutions typically become SIC participants.

Principle-by-principle assessment

The following assessment of the Swiss Interbank Clearing is based on the guidance provided in the BIS document of 2001 titled Core Principles for Systemically Important Payment Systems, as well as the Guidance Note and Templates provided to the assessors by the International Monetary Fund.

Table 10.

Detailed Assessment of Observance of CPSS Core Principles

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Table 11.

Summary Observance of CPSS Core Principles

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Recommended action plan and authorities' response to the assessment

Table 12.

Recommended Action Plan—CPSS Core Principles

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Authorities' response

The staff of the SNB has begun the recommended examination of the structural developments anticipated in 2002, and has investigated the steps necessary to establish an inter-central bank swap arrangement that could provide U.S. dollar liquidity if needed. The suggestions made with respect to operational reliability and additional security audits have been viewed positively.

V. IMF Code of Good Practices on Transparency in Monetary and Financial Policies

This assessment was prepared as part of the Financial Sector Assessment Program (FSAP) of Switzerland. Its purpose was to assess observance of the IMF developed Code of Good Practices on Transparency in Monetary and Financial Policies (“Code”). For purposes of the code, transparency refers to an environment in which policy objectives, their legal, institutional and policy framework, monetary and financial policy decisions and their rationale, data and information related to these policies, and the terms of central bank accountability are provided to the public in a comprehensible, accessible and timely manner.

The assessment of observance of each practice is made on a qualitative basis using a five-part assessment system: observed, broadly observed, partly observed, non-observed and not applicable. A practice is considered observed whenever all essential criteria are met without significant deficiencies—though there may be instances where a country can demonstrate a practice is observed through different means. A practice is considered broadly observed whenever only minor shortcomings are observed, which do not raise any concerns about the ability to achieve full observance with the principle within a prescribed period of time. A practice is considered partly observed whenever, despite progress, the shortcomings remain substantial. A practice is considered non-observed whenever no substantive progress toward observance has been achieved. A practice is considered not applicable whenever, in the view of the assessor, the practice does not apply given the structural, legal and institutional features of a jurisdiction.

A. Transparency of Monetary Policy

Information and methodology used for assessment

The assessment contained in this chapter is based on discussions with the staff of the SNB, responses to questionnaires sent to the authorities, and an analysis of the National Bank Law (NBL), other relevant laws, regulations, administrative policies, and information provided during these meetings. This assessment was prepared by Anastassios Gagales and Maike Luedersen (both IMF). It is based on information available during the FSAP mission in October 2001.

The mission also discussed the proposed revisions to the National Bank Law (revNBL), which is currently in the consultation process. A draft bill, incorporating comments made in the consultation process, is expected to be submitted to Parliament in mid-2002. The revisions are anticipated to take effect in 2004 at the earliest.

Institutional and market structure-overview

In Switzerland, the responsibility for monetary policy is vested with the SNB. In 2000, after a quarter century of monetary targeting, the SNB made several changes, among them: (i) it switched to a new framework in which monetary policy is set on the basis of the inflation forecast over a three-year horizon with an explicit objective of keeping medium-term inflation below 2 percent; (ii) it also introduced as an operational target a publicly announced range for the three-month Swiss franc rate; and (iii) adopted repos as the main instrument of controlling liquidity.

Practice-by-practice assessment

Table 13.

Detailed Assessment of Observance of Transparency Code—Monetary Policy

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Table 14.

Summary Observance of IMF's MFP Transparency Code—Monetary Policy

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Recommended action plan and authorities' response to the assessment

Table 15.

Recommended Action Plan—Monetary Policy Transparency

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Authorities' response

General remarks

The IMF's report on the compliance of the Swiss National Bank (SNB) and of Swiss monetary policy with the IMF Code of Good Practices on Transparency in Monetary and Financial Policies as part of the Financial Sector Assessment Program (FSAP) is of high quality. The analysis was conducted in a careful manner and contains some constructive criticism.

The SNB recognizes that the vast majority of practices are considered “observed,” that is, they satisfy all essential criteria without significant deficiencies. From the report, it is also apparent that the new National Bank Law will strengthen the legal support of the transparency and the accountability efforts already undertaken by the SNB. Regarding monetary policy and the relation between the fiscal and monetary authorities, all practices are observed. In this very crucial area, the SNB complies comfortably with the high standards set by the IMF's code.

The report mentions two practices, which do not satisfy the essential criteria according to the IMF. The first practice refers to the prerequisites for board members and the criteria for the removal of board members. The IMF suggests setting clearer rules in this respect. Regarding this issue, the SNB intends to propose a corresponding clarification to be integrated in the new National Bank Law. The second point refers to the rules of internal governance and the conduct of personal financial affairs. With respect to this point, the SNB will review its standards to comply with the code.

The report addresses many important issues also in those practices, which were considered “observed.” These points will be examined by the SNB and they may be helpful to improve further the transparency and accountability of monetary policy. In the remainder of the document, the SNB comments in detail on the actions recommended by the IMF.

Remarks on individual recommended actions

Practice 1.1.5

  • Recommended action by the IMF: It is recommended that the proposed revised NBL should contain a provision explicitly requiring the publication of the annual report.

  • Response by the SNB: The recommendation has been taken up. The draft of the revised NBL, which the Federal Council intends to submit to the Federal Assembly as a bill before the summer of 2002, will include an explicit provision requiring the publication of the annual report by the SNB (article 7, paragraph 4, rev. draft NBL).

Practice 1.1.7

  • Recommended action by the IMF: It is recommended that the proposed revised NBL requires that SNB Board members be “fit and proper” individuals. Also, it would be advisable to be more specific regarding the criteria to be applied to determine that a person no longer fulfills the conditions for exercising the duties as SNB's Governing Board member.

  • Response by the SNB: The suggestion to introduce a “fit and proper” requirement as a prerequisite for the election of members of the Governing Board or of the Bank Council was taken up; it will presumably be included in the bill to be submitted to the Federal Assembly. While the provision on the removal of members of the Governing Board will not be amended, the explicit reference to the prerequisites for election makes it clear that these are also relevant for a removal decision.

Practice 2.1.2

  • Recommended action by the IMF: It is recommended to disclose principles for selecting counterparties in foreign exchange transactions with the SNB.

  • Response by the SNB: As mentioned in the report, counterparties are chosen according to the quality of their services. This is the information the Swiss National Bank gives any potential counterparty requesting to do business with the SNB. The Swiss National Bank does not deem it necessary to publish additional details of the selection procedure.

Practice 3.2.1

  • Recommended action by the IMF: It is desirable that the SNB discloses in its 10-day statements information on claims on general government.

  • Response by the SNB: The SNB will examine the appropriateness of publishing information on holdings of government securities in the 10-day-statement.

Practice 3.2.3

  • Recommended action by the IMF: It would be advisable to establish internal rules on disclosure.

  • Response by the SNB: The SNB currently undertakes a review of its lender-of-last-resort function and will also address the question of establishing internal rules on disclosure regarding emergency financial support.

Practice 4.2.2 and practice 4.4

  • Recommended action by the IMF: In the context of corporate governance, it would be advisable to publish information on the integrity of operations, such as measures to address conflicts of interest, and internal audit procedures.

  • Response by the SNB: The rules on internal governance procedures and on the conduct of personal financial affairs will be subject to a comprehensive review in the course of the revision of the NBL. In this process, the SNB plans to carefully review its policy for the publication of internal rules and standards.

B. Transparency of Financial Policies—Banking and Securities

This section assesses the transparency of the arrangements for banking and securities regulation by the SFBC. The objective of the assessment was to measure Swiss banking supervision practice against the IMF Transparency Code.8

On the banking side, the assessment was based on the laws and regulations relating to banking supervision, particularly the Banking Act (BA), and the Banking Ordinance (BO). Reference was also made to circulars issued by the SFBC and by the SBA, which once approved by the SFBC are legally enforceable on all banks. The assessors read the SFBC's annual report, the annual report of the Swiss Banking Ombudsman, various press releases and other documentation released on the SFBC's website. The assessors had a series of conversations with the Director of the SFBC and his staff who had produced answers to a questionnaire provide by the mission. The assessors also met the Chairman of the SFBC. In addition, the assessors met with officials of the FFA, commercial banks supervised by the SFBC and external auditors who perform functions on behalf of the SFBC. The assessors also met staff of the Federal Reserve Bank of New York and the Financial Services Authority, who act as “host” supervisors for the large financial groups in New York and London.

On the securities side, the assessment was based on the laws and regulations relating to securities supervision. Reference was also made to circulars issued by the SFBC, by the Swiss Bankers Association (SBA) and by the Swiss Funds Association (SFA). The assessors read the SFBC's annual report, various press releases and other documentation released on the SFBC's website. The assessor had a series of conversations with the SFBC's staff that produced answers to a questionnaire provided by the mission. In addition, the assessors met representatives of supervised entities.

Practice-by-practice assessment

Table 16.

Detailed Assessment of Observance of Transparency Code—Banking and Securities

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Table 17.

Summary Observance of Transparency Code—Banking and Securities

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Recommended action plan and authorities' response to the assessment

Table 18.

Recommended Action Plan—Banking and Securities Policies Transparency

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Authorities' response

The authorities were in agreement with the assessments.

C. Transparency of Financial Policies—Insurance

This assessment was performed using the IMF MFP Code of Good Practices on Transparency in Monetary and Financial Policies Methodology document that was adopted by the Executive Board on July 24, 2000.9

The assessment was based on a review of the following documents: (1) The self assessment prepared by the FOPI; (2) The relevant legislation, decrees and ordinances; and (3) Publications issued by the FOPI.

Practice-by-practice assessment

Table 19.

Detailed Assessment of Observance of Transparency Code—Insurance

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Table 20.

Summary Observance of Transparency Code—Insurance

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Recommended action plan and authorities' response to the assessment

Table 21.

Recommended Action Plan—Insurance Policies Transparency

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Authorities' response

The authorities were in agreement with the assessments.

D. Transparency of Financial Policies—Pensions

This section presents a discussion and assessment of practices in Switzerland regarding transparency in financial policies, with a focus on pension fund regulators, vis-à-vis the practices in the Code. The assessment of observance of each practice is made on a qualitative basis using a five-part assessment system: observed; broadly observed, partly observed; non-observed and not applicable.10

Supervisory roles and responsibilities in the pension system cut across agencies at the federal as well as cantonal level. The cantonal authorities designate supervisory authorities—the Cantonal Offices for Occupational Benefits Plans—to control the funds within the borders of the individual cantons.11 Pension funds and social security institutions operating at the national or international level are supervised by the Federal Office of Social Insurance (FOSI). The law has also created an advisory Federal Commission on Occupational Benefits Plans with representatives from federal and cantonal governments, employers, employees, and the pension funds.

Practice-by-practice assessment

Table 22.

Detailed Assessment of Observance of Transparency Code—Pensions

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Table 23.

Summary Observance of Transparency Code—Pensions

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Recommended action plan and authorities' response to the assessment

Table 24.

Recommended Action Plan—Pension Policies Transparency

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Authorities' response

The authorities were in agreement with the assessments.

E. Transparency of Financial Policies—Payment Systems

This assessment was based on information provided by the SNB in the form of the answers to the IMF Questionnaire on Compliance with the Code of Good Practices on Transparency in Financial Policies, particularly in regard to the oversight of payment systems. This source was supplemented by discussions held with the staff of the Payment Systems Section of the SNB. The main author of this assessment is James Dingle (Bank of Canada).

Practice-by-practice assessment

Table 25.

Detailed Assessment of Observance of Transparency Code—Payment Systems

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Table 26.

Summary Observance of Transparency Code—Payment Systems

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Recommended action plan and authorities' response to the assessment

No further action needs to be undertaken in the area of payment system policy transparency. For responses on general transparency issues, see monetary policy transparency assessment. The authorities were in agreement with this assessment.

1

The main authors of this assessment were Peter Hayward (IMF), Kathleen O'Brien (OCC, United States), and Stefan Spamer (Bundesbank, Germany). The assessment is based on information available during the Financial Sector Assessment Program (FSAP) mission in October 2001.

2

As of end-2000 (Swiss National Bank).

3

Reciprocity is, in most instances, an essential requirement for the licensing of any foreign bank entity including subsidiaries, branches, and representative offices. As a result, the issuance of a license generally will require that the home country of the applicant permit Swiss financial intermediaries to establish entities in that country with similar powers. However, the Banking Act provides that the requirement of reciprocity must give way to international treaty provisions such as the General Agreement on Tariffs and Trade (GATT). Thus, to the extent that GATT or other treaties call for different reciprocity standards, these will be applied to applicants whose home countries are covered by the treaty.

4

The main author of the assessment was Nicoletta Giusto (CONSOB, Italy). The assessment is based on information available at the time of the FSAP mission in October 2001.

5

The category of securities dealers includes not only market makers and client dealers (who trade securities in their own name for the account of clients), but also issuing houses and own account dealers.

6

The assessment was prepared by Donald McIsaac, lead insurance specialist, Financial Sector Department of the World Bank and Johan Altersten, supervision process manager, Finansinspektionen of Sweden. The assessment is based on information available during the FSAP mission in October 2001.

7

The main author of this assessment is James Dingle (Bank of Canada). The assessment is based on information available during the FSAP mission in October 2001.

8

The assessment was carried out by Peter Hayward (IMF), Nicoletta Giusto (CONSOB, Italy), Kathleen O'Brien (Office of the Comptroller of the Currency, US), and Stefan Spamer (Deutsche Bundesbank, Germany). It is based on information available during the FSAP mision in October 2001.

9

The main author of this assessment is Donald McIsaac (World Bank).

10

The main author of this assessment is Marina Moretti (IMF).

11

With 15 professional staff, the Zürich Cantonal Office for Municipalities and Occupational Benefits Plans is the largest of such supervisory agencies.

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Switzerland: Financial Sector Assessment Program: Detailed Assessment of Observance of Financial Sector Standards and Codes
Author:
International Monetary Fund