By Xi Yu, Compliance Consultant
On 21 December 2023, the UK Government and the Swiss Confederation signed the Berne Financial Services Agreement on specific areas of wholesale financial services.
Undoubtedly, the key pillar of the agreement is the mutual recognition that both the UK and Switzerland’s regulatory standards and supervision regimes hope to achieve similar market integrity and investor protection outcomes.
In this article, we introduce the key features of the agreement and its impact on in-scope financial services providers.
Sector-specific mutual recognition
Under the principle of deference, UK and Swiss firms will be able to provide specific financial services in the host country, provided they adhere to the regulatory requirements applicable in their home country.
We provide an overview for each of the in-scope industries below.
Asset management
Investment services
Mutual access to financial markets
Wholesale insurance
Notification requirements
The agreement asks for specific disclosure and reporting requirements depending on the type of cross-border business firms intend to carry out. Generally, these consist of one or more of the following:
- Pre-contractual client disclosure in relation to the firm’s regulatory status, the choice of governing law and jurisdiction, whether the client has access to any financial compensation schemes and dispute settlement services, and, where relevant, the local taxes, levies, or fees to which the client may be subject
- Provision of annual reports to the firm’s home regulator and the regulator of the host country, including the volume of business and revenue generated through cross-border activities, and
- Notification to the home regulator and the host regulator of the firm’s intention to provide cross-border financial services under the agreement
The agreement instrument defers to each contracting country to develop its technical standards.
Note that these disclosures vary between sectors and that firms from each side are subject to different reporting requirements. Therefore, financial services providers who intend to take advantage of the mutual recognition mechanism should seek professional advice.
Supervisory cooperation
Cooperation between the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), and FINMA is embedded in the agreement.
For example, the PRA will emit an opinion to FINMA on whether a firm meets the criteria in Annex 4 and is in good standing before the firm is permitted to carry out insurance activities in Switzerland. Reciprocally, FINMA will alert the PRA if a UK insurance firm ceases to meet those conditions or is otherwise likely to cause harm to Swiss clients or the wider Swiss market.
Interestingly, the enforcement powers conferred to each host regulator are also asymmetrical in their remit. FINMA may restrict UK insurance firms from accessing the Swiss market and supervise an orderly wind-down whereas the FCA and PRA are granted similar prerogatives but with respect to Swiss investment firms only.
Outlook
On the surface, the agreement will eliminate the need to implement two sets of distinct compliance frameworks and possibly avoid potential conflicts of laws.
However, there is a caveat. Where deference to the home regulator’s rules is not established, cross-border services will be subject to the laws of the host country. This will be the case for out-of-scope sectors and firms that are already authorised or licensed with the host regulator.
Nevertheless, the agreement should be of particular interest to financial intermediaries, especially in the investment management industry. For context, the value of the Swiss wealth management market is estimated at CHF 5 trillion, with 60% of foreign private assets. On the UK side, wealth management is projected to reach GBP 7.45 trillion by the end of 2024.
It is also worth noting that the agreement is a living document and consequently, additional sectors may be brought within its purview by supplementary annexes. The UK and Swiss governments have notably agreed to further cooperation on novel regulatory areas such as sustainable finance.
For now, the agreement is awaiting its ratification in the respective legislature of each contracting country before its provisions are transposed into domestic law. In the UK, the Financial Services and Markets Act 2023 empowers HM Treasury to amend the relevant national legislation to give effect to the agreement. The implementation phase of the Berne Financial Services Agreement is expected to be completed sometime in 2025.
