Swiss financial market authority issues circular on consolidated supervision of financial groups
The Swiss Financial Market Supervisory Authority (FINMA) has issued a draft circular clarifying the scope and content of consolidated supervision for Swiss financial groups.
The circular targets Swiss financial groups and their affiliates, states the conditions under which they are subject to supervision, and clarifies the scope, exceptions and content of this supervision.
The FINMA conducted a public hearing in November 2024. The circular is scheduled to be adopted in May 2025 and to enter into force on 1 July 2025.
General scope and exceptions (ring-fencing)
Notion of financial groups
The circular primarily applies to financial groups, including financial conglomerates dominated by banks or securities firm. It also applies, by analogy, to financial groups dominated by securities firm, as well as to groups dominated by "fintech licensed" institutions. Consolidated supervision is the rule for these groups, which the FINMA considers essential given the inherent risks of these structures.
The existence of a financial group within the legal meaning of the term determines whether it is subject to consolidated supervision. This group must include at least two companies, and one must operate as an institution within the meaning of the circular (i.e. bank, "fintech licensed" institution, or securities firm). The legal form of the companies is not a decisive factor since the emphasis is placed on economic substance.
Group structure
As per its current practice, the circular distinguishes several financial group structures:
- parent company structure;
- holding company structure;
- atypical structure (contractual groups, de facto groups);
- subgroup of a foreign financial group; and
- financial subgroup forming part of a financial group subject to the FINMA.
Details are provided for each structure, particularly concerning the inclusion of holding companies and ad hoc companies. The scope of consolidation is assessed on a case-by-case basis by the institution and then verified by the audit firm. The FINMA must be notified of any major consolidation decision, including changes affecting the consolidation permitter.
Exceptions
In specific cases, the FINMA may lighten the requirement for consolidated supervision and impose, in accordance with the principle of proportionality, ring-fencing measures or other measures such as adapting the group structure rather than consolidation. These measures are intended to segregate or isolate Swiss institutions from the potential risks associated with foreign financial groups without adequate consolidated supervision.
Ring-fencing measures may include provisions relating to governance, finance, group structure, operations and reporting requirements. The application of such measures, however, remains the exception while consolidated supervision remains the principle.
Determination of the consolidation perimeter
The circular details the criteria for determining or delimiting the regulatory consolidation perimeter, which may differ from the accounting consolidation perimeter. The following two main elements are taken into account:
- the company's activity, and
- the links between entities.
Company's activity
Activity in the financial sector is generally presumed. The activity, however, must fit in the financial field, which is a broader concept than activities subject to authorisation or registration. It covers the provision of financial services, including leasing, factoring, credit card operations and payment services as well as the issuance and custody of means of payment (including payment token). Purely craft, industrial or administrative activities are excluded.
Links between entities
Links between entities are established by control (majority of votes or capital, or domination in some other way) or by an obligation to provide assistance de facto or de jure.
Domination may result from voting arrangements, the power to appoint governing bodies or decisive influence over management (set or not in a shareholder's agreement for instance).
The obligation to provide assistance may arise from the interdependence of resources (e.g. strategic, financial, such as intercompany-loans, organisational or personnel), cooperation and dependences, the use of a common company name, a uniform presence on the market or comfort letter or similar guarantees.
In any case, there is still an obligation to report the FINMA changes to the regulatory scope of consolidation when:
- institutions adjust (enlarge or reduce) their regulatory scope of consolidation, or
- they refrain from making an adjustment despite an event of significant importance for the regulatory scope of consolidation.
Content of consolidated supervision and exemption criteria
Consolidated supervision covers both qualitative and quantitative elements. The qualitative elements relate to organisation, internal control, risk management, the activities of executives and the separation of management and supervisory bodies at group level. They also include the obligation to appoint an approved audit firm.
| Requirement | Description |
|---|---|
| Organisation | Internal regulations on the management of the group, defining tasks and responsibilities. |
| Internal control | Appropriate internal control system at group level. |
| Risk management | Appropriate risk management at group level. |
| Irreproachable activity | Guarantee of irreproachable activity (fit and proper test) by the group's executive/board (or equivalent) members. |
| Separation of corporate bodies | Separation of executive and board (or equivalent) members at group level. |
| Audit | Appointment of a recognised audit firm to audit the group. |
The quantitative elements relate to equity capital, risk distribution, liquidity and accounting. The applicable accounting standards are those set out in the Swiss banking regulations, IFRS or US GAAP. Special provisions apply to groups dominated by "fintech licensed" institutions and to private bankers.
| Requirement | Description |
|---|---|
| Capital adequacy and risk diversification | Requirements relating to the capital adequacy and risk diversification rules applicable to the various types of financial groups in Switzerland:
are subject to capital requirements decided on a case-by-case basis. |
| Liquidity requirements | The Ordinance on Liquidity applies to banking groups and account-holding securities firms. Financial subgroups of these groups are subject to consolidation for liquidity purposes. For non-account-holding securities firm, the Financial Institutions Act and its Ordinance apply to its financial group. |
| Financial reporting | Financial groups of banks or securities firms are required to establish consolidated accounts in accordance with Swiss accounting standards for banks, IFRS or US GAAP. Financial groups dominated by "fintech licensed" institutions must follow the provisions of the Swiss Code of Obligations on consolidated accounts. Financial subgroups are generally exempt, unless required by FINMA. Finally, financial groups of private bankers that do not accept public deposits are not required to disclose consolidated financial statements and are exempt from the prudential requirements of consolidated disclosure. |
The circular sets out exemption criteria for holding companies that are not material for the purposes of consolidated supervision. A group company is considered non-material if it meets specific conditions, particularly in terms of size, activity and interdependence with the rest of the group. The assessment of materiality is made by the institution and verified by the audit firm.
| Exemption criteria | Description |
|---|---|
| Domination | The holding company does not dominate any other company active in the financial sector, with the exception of the relevant institution. |
| Commercial activity | Apart from its shareholding in the relevant institution, the holding company does not carry out any commercial activities of its own in the financial sector. |
| Influence | The holding company does not influence the commercial activities of the institution. |
| Financing | The holding company is not financed to any significant extent by third parties. |
Outlook
The circular is not a revolution, but it has the merit of bringing together a number of previous FINMA publications relating to consolidated supervision that were scattered and no longer up to date.
It strengthens supervision of the risks associated with these complex structures while at the same time offering a degree of flexibility thanks to the possibilities for relief and exemption. It remains to be seen in practice how the FINMA will concretely determine the perimeter of consolidation, particularly how the authority will decide that certain links must be considered as interdependences and whether it will be willing to apply these exceptions.
For more information on consolidated supervision of financial groups regulations in Switzerland, contact your CMS client partner or local CMS expert.
