Interesting Judgment of the Swiss Federal Administrative Court in relation to Swiss Financial Markets Law
On 18 May 2017, the Swiss Federal Administrative Court (FAC) rendered a very interesting judgment (case number B-5756/2014) which sets noteworthy limits to the Swiss Financial Market Supervisory Authority (FINMA) in relation to FINMA’s task to sanction financial market participants operating under its supervision.
The background to the above-mentioned judgment, which is discussed by Mirco Ceregato and Julian M. Powell in the current edition of the Swiss legal journal ius.focus (4/2018, at page 16), may be summarized, in a condensed and simplified version for the purposes of this article, very briefly as follows:
A Swiss bank had entered into a business relationship with a Swiss external asset manager (EAM). In the context of this business relationship, the Swiss bank acted as custodian bank to the EAM’s clients. From the bank’s perspective, the EAM clients were pure so-called execution-only clients (see, in relation to the triangular relationship “custodian bank / EAM / bank and EAM customers”, my post dated 6 June 2017). After several years, it turned out that the founder and key executive of the EAM had engaged in criminal activity, to the detriment of the relevant clients. In this context, FINMA opened enforcement proceedings against the Swiss bank, in which it concluded that the bank had violated Swiss financial markets regulatory provisions. The bank, which appealed FINMA’s relevant order to the FAC, disputed that it had violated any financial markets regulatory norms.
For a better understanding of the following remarks, it should be emphasized that under Swiss civil law, namely contract law, a custodian bank is, in principle, not obligated to monitor the activities of an EAM. In this regard, see, for example, my Jusletter article “Zur Haftung der Depotbank für Handlungen des externen Vermögensverwalters” dated 26 June 2017.
Now, pursuant to Art. 3(2)(a) and (c) of the Swiss Federal Banking Act (SBA), any bank conducting its business under FINMA’s supervision has to (i) maintain at all times an appropriate organization of its business as well as to (ii) see to it that the persons entrusted with the administration and management of the bank enjoy a good reputation and offer a guarantee of sound business operations. For ease of reference and the purpose of this article, these duties shall be referred to herein as, collectively, the “Duty of Sound Management“.
In its order at issue, FINMA, in essence, retained that the bank in question had violated the above-mentioned regulatory requirements by not making further inquiries with regard to the relevant EAM, particularly its investment policy, on account of the EAM’s conspicuous business activity (see consideration 4.3 of the judgment at issue). The FAC disagreed with FINMA in its judgment discussed herein, and the FAC’s reasoning in this regard is very interesting.
Essentially, FINMA accused the bank of an unlawful omission, i.e., not having made a more detailed assessment of the EAM’s investment policy. In this respect, the FAC, in essence, pointed out in its judgment that a breach of a regulatory duty committed in the form of an unlawful omission is only to be retained if and when the Swiss financial markets regulatory law contains a concrete duty to act, which the supervised person infringed (see considerations 4.3.1 and 4.3.2 of the judgment at issue).
In relation to the matter before it, the FAC concluded that the bank had not violated any such concrete regulatory provision to act. In other words, the FAC basically stated that there is no provision in the Swiss legal order, particularly in its banking and stock exchange law, but also in the Swiss civil and criminal law, which would have obligated the bank to make the further inquiries required by FINMA (see consideration 22.214.171.124 of the judgment at issue). Pursuant to the FAC, there is, particularly, no specific Swiss financial markets regulatory provision which would explicitly have obligated the bank to make any further clarifications in relation to the EAM’s investment policy, such as, for example, Swiss money laundering regulations require a bank to make, depending on the circumstances, in-depth inquiries in relation to the origin of funds (Id.).
The FAC’s reasoning related to the construction of the very broad Duty of Sound Management is particularly interesting (see consideration 126.96.36.199, at page 25). In its judgment at issue, the FAC essentially puts a stop to an overly extensive construction of the Duty of Sound Management. Referring to certain Swiss constitutional principles, the FAC essentially stated that in view of the Duty of Sound Management, a supervised person that meets its obligations pursuant to Swiss civil law, i.e., essentially Swiss contract law, in principle also meets its duties under Swiss financial markets regulatory law. Only if and when important public interests are at stake may the Duty of Sound Management be construed in a fashion to constitute duties that go beyond the duties under Swiss contract law and are exclusively based on Art. 3(2)(a) and (c) of the SBA.
With regard to the matter before it, the FAC retained that no important public interests were at stake in such matter, given that the relevant interests were basically private interests of the EAM’s / bank’s customers. Consequently, the FAC ruled that FINMA was not allowed to interpret the Duty of Sound Management in a fashion to create duties which go beyond the bank’s relevant contractual duties.
In my view, the FAC judgment under discussion here is to be welcomed. From the point of view of the fundamental rule of law principle, it is highly problematic and questionable if sanctions can be imposed on the basis of such extremely unspecific rules as the Duty of Sound Management. In my view, there is a need to oppose an excessive interpretation of these rules, as the FAC has done in its judgment discussed above.
PHH, Zurich, 26 April 2018 (www.haberbeck.ch)
The information contained in this article is for general informational purposes only and is not intended to constitute legal advice. Readers of this article should not take any actions or decisions without seeking specific legal advice.
Rechtsgebiete: Bank- und Finanzmarktrecht