Financial market regulation in Switzerland may appear at first glance to be a rather technical subject, but it is a prevailing issue of grea...

Financial market regulation in Switzerland may appear at first glance to be a rather technical subject, but it is a prevailing issue of great significance for the future of the Swiss financial services industry.

Last November, the head of the federal department of finance launched a consultation on a report by an expert committee headed by Jean-Baptiste Zufferey which addressed gaps in the Swiss financial markets regulation. Interested parties had until time the end of last month to submit their comments on the report to the department. The Swiss Private Bankers' Association contributed its views to the reply document submitted by the Schweizerischen Bankiervereinigung. In this article I would like to examine a few of the questions raised in the report.

The committee has made a total of 42 recommendations. In general, we can only agree with the committee, when it calls on the legislative authorities to consider the effect of any regulatory measure on the competitive edge of individual firms and on the balance of the financial market as a whole. The committee recommends that financial regulation needs to take into account the peculiarities of individual banks and other financial service providers. In this context, the regulations concerning own capital requirements in particular need to be addressed by the legislative. Our organisation has been working towards this aim for several years. The majority of our members are small firms who nonetheless have to comply with rules which were designed to regulate significantly bigger players in the market.

Even though de-regulation has been a central theme of Swiss economic policy over the past few years, the financial market has clearly moved into the opposite direction. The importance of small and medium sized players for the Swiss financial market is often highlighted by experts and politicians. In practice, it is the small and medium sized firms which have to bear the brunt of cost implications in the wake of regulatory changes.

Private bankers, for instance, had to measure interest rate risk at considerable expense. However, because of the nature of their business, private bankers are exposed to little or no interest rate risk. The respective regulations where therefore excessive and unnecessary. We agree with the committee, that the one size fits all principle of financial regulation hampers smaller banks with prohibitive costs.

We also endorse the committee’s recommendation to monitor the cost of regulating the financial markets at all levels, from the regulators down to the regulated firms, and to conduct a cost-benefit analysis to assess regulatory measures.

Banking supervision

Risk management plays an ever increasing role in the banking industry. The Zufferey report recommends the establishment of certain incentives for banks to improve their risk assessment procedures on a continuous basis. Such incentives could come in form of a relaxation of own capital requirements.

We champion this way of thinking. This has nothing to do with private bankers seeking to reduce own capital requirements. We are not under pressure to create shareholder value at all costs and our firms in general are well endowed with own capital. We believe that the concept of balancing risk assessment on the one side and own capital on the other appears fundamentally sound.

Independent asset management

The regulation of independent asset management is an issue which we follow with great interest. Some of the services offered in this sector, for instance by independent financial advisers, compete directly with our own business. The committee’s opinion on this sector of the financial market was split. The majority supported the regulation and supervision of independent asset managers and advisers on the grounds that the current system does not comply with international standards, that stricter regulation is desirable to protect consumers and, finally, that it will guarantee fair competition in the financial market.

The private banking industry has a liberal view on the subject and has no interest to regulate each and every financial activity. Therefore we do not believe, that the fact that Swiss law does not comply with international standards is in itself an argument to introduce new regulations. We are, however, in favour of the regulation of independent asset managers. It would be against better judgement to exempt this type of financial services provider from supervision-not at least in respect to money laundering regulations-on the ground that he/she is himself/herself a client of a regulated bank. This would push banks de facto into the role of the watchdog of independent asset managers, which is a completely impracticable solution. We say: same business, same risk, same rules.

Organisation of financial market supervision

The Zufferey report recommends the establishment of a central financial regulator in place of the Eidgenössischen Bankenkommission (federal banking commission) and the Bundesamt für Privatversicherungswesen (federal office for the insurance industry). At the same time, the committee acknowledges that both systems have their specific advantages and disadvantages. We feel, that the disadvantages of a centralised super regulator, which would be expensive and inflexible, have been assessed somewhat superficially by the committee. We would prefer a model, which unifies the principles of supervision but avoids the merger of regulatory bodies. As a business, banking and insurance are fundamentally different and ask for radically different regulatory skills.

Dr Christian Rahn is managing partner of Zurich-based private bank Rahn & Bodmer. He is also a committee member of the Swiss Private Bankers' Association. This article is based on a speech given at a SPBA press conference in Basel on 18 January and appeared originally in German on the association’s web site www.swissprivatebankers.com. The author can be contacted at info@swissprivatebankers.com.