Numerous regulators worldwide are currently responding to what is generally known as ”FinTech”. Interestingly, the question as regards the distinguishing elements of FinTech from conventional financial services seems to have been left to each stakeholder’s individual interpretation. Not seldomly, in particular in Switzerland FinTech is just characterized as “digital financial technology”. Similar in the United States, where the Department of Commerce defines the FinTech industry as “companies whose line of business combines software and technology to deliver financial services”. So, is sending an email to a bank to provide the bank with wire transfer instructions already FinTech? Most experts probably would disagree. However, reasoning their disagreement, those experts might merely point out the respective differences to commonly accepted examples of FinTech, e.g. crowd funding platforms, market place lending, digital currencies (such as Bitcoin), money management by way of deploying algorithms, or electronic payment systems (other than payments by wire transfer, debit or credit cards) without invoking a commonly accepted and precise definition of FinTech. In this respect, the definition of FinTech resembles–to some extent–an approach often characterized as “I know it when I see it”.
I. Preferential treatment for FinTech firms in Switzerland
Both the Swiss regulator (the Swiss Financial Market Supervisory Authority FINMA) and the Swiss government (the Swiss Federal Council) have taken a decision to promote FinTech-business in Switzerland, each and its distinctive way. Whereas the Swiss Federal Council has, in particular, initiated the proceedings for the amendment of Swiss banking regulation (to be finally enacted by the Swiss Parliament) by way of establishing a “Sandbox” and a “banking license light” (see under II.), FINMA put forward guidelines on how it intends to interpret Swiss financial markets law with view to FinTech solutions, thereby using its discretion to take a less restrictive stance in general when determining whether FinTech solutions require a regulatory license. FinTech solutions are thus profiting from a preferential treatment already, a situation probably to be continued in the future. The basic assumption is that FinTech will likely benefit the Swiss economy in terms of growth of GDP as well as Swiss (retail) customers in terms of an enhancement or facilitation of their financial transactions. Yet, these assumptions still await their verification.
II. “Sandbox” and “banking license light”
Swiss financial regulation applies, in principle, a functional approach to determine whether a specific business is subject to prudential supervision by FINMA and, if applicable, requires a license or registration of the persons and/or entities involved. Therefore, for the time being, FinTech solutions have to adhere to the same rules and regulations as conventional financial services. Following such functional approach, a lot of FinTech solutions in Switzerland are potentially subjected to banking regulation (as set forth by the Swiss Federal Act on Banks and Savings Banks of 1934 [BankA] and its implementing Ordinances) and to anti-money laundering regulation (as set forth by the Swiss Federal Act on Combating Money Laundering and Terrorist Financing [AMLA] and its implementing Ordinances). While the consequences of being considered a financial intermediary (in terms of AMLA) are in principle manageable, even for a FinTech startup company, the consequences of being considered to be engaged in the business of banking are not. Such business requires a banking license, the obtainment of which necessitates substantial efforts of the applying entity, not least in terms of meeting the capital requirements and corporate governance standards. The same holds true for the ongoing compliance with Swiss banking regulation. Such compliance requirements are likely to manifest themselves as market entry barriers for the establishment of FinTech solutions by (so far) unregulated startup companies.
The approach envisaged by the Swiss Federal Council as regards FinTech aims to provide for certain facilitations to comply with Swiss banking regulation, in particular in three ways. First, FinTech firms shall be permitted, in effect, to keep clients fund’s on its own bank accounts for up to seven days without being considered to be “accepting funds from the public on a commercial basis” (an undertaking which generally necessitates a banking license). This facilitation shall be achieved without a change of law but by utilizing the discretion FINMA is vested with when applying the financial market regulation. Second, following a change of law, FinTech firms would be able to accept funds from the public (on a commercial basis) up to the amount of 1 million Swiss francs (approx. $1 million) without having a banking license. The current law basically limits such an undertaking, absent a banking license, to an investor group size of 20. This proposed change of law would establish an innovation area for FinTech firms, sometimes termed as “sandbox”. And third, a proposed amendment to the BankA would provide for the creation of a new license category, which would allow for the accepting of funds (from third persons and on a commercial basis) up to the amount of 100 million Swiss francs (approx. $100 million), provided that such assets are held by the FinTech firm on one or more accounts and are not invested or interest-bearing. The such licensed FinTech firm would need to have a minimum capital of 5% of the accepted assets, but no less than 300 000 Swiss francs (approx. $300 000). This new licensing category, coupled with limited prudential oversight by FINMA compared to conventional banking supervision, is intended for FinTech firms which do not engage in the typical banking business but whose activities include certain elements of banking. Against this background, this would constitute a “banking license light”.
III. Re-impacting existing patterns of financial regulation
Treating FinTech firms on preferential terms without exactly knowing where to draw the line as to the recipients of such benefits might pose certain risks. In particular, it might not be excluded that – as a way of regulatory arbitrage – some (prospective) financial service providers will advertise their business as FinTech in order to capitalize on the respective facilitations as to regulatory compliance (or the complete exemption from such compliance requirement). However, such risks may only manifest themselves under the condition that the regulatory FinTech approach is being prevented from re-impacting the existing patterns of financial regulation from which the FinTech regulation derives. Most importantly, the regulatory facilitations and exemptions of which FinTech firms may benefit also hold the potential to kick-start a thorough assessment of the triggers of the license requirements laid down in the current financial market regulation as to their legitimation. It may well be that the FinTech business, now being fostered by various interest groups, will demonstrate that not all of the previously almost undisputed triggers of such license requirements–often broadly construed from rather generic provisions in financial markets law–provide for sensible results in an individual case.
Such assessment might hardly be done in parallel with the implementation and refinement of FinTech regulation. Indeed, it is advisable to place emphasis on the FinTech regulation itself in a first step. However, not losing sight of the potential implications of the FinTech facilitations/exemptions on existing financial market regulation seems to be an equally important goal in the long run, especially to safeguard coherence within the financial market regulation in general. This insight, which hopefully will strengthen among both the broader financial market community and legal scholars in Switzerland, could contribute – also internationally – to a better understanding as to which business actually requires a prudential supervision by the financial market regulator and which business is better left to market forces only for regulation. It may be hypothesized that it is the potential of FinTech regulation to re-impact the existing patterns of financial market regulation which constitutes the key takeaway for lawmakers internationally.
Florian Steiner is a lawyer at an international law firm in Zürich and is a Visiting Researcher at Harvard Law School. He holds a PhD from University of St. Gallen.