Global Financial Strategy - FSB: Swiss regulator needs more teeth

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FSB: Swiss regulator needs more teeth

Thursday 26 January 2012 – by Karina Whalley

The Financial Stability Board says Switzerland’s financial watchdog needs more teeth to impose penalties and beef up its prudential powers.

The FSB has reviewed the Swiss Financial Market Supervisory Authority’s progress on recommendations the board made in 2007 on financial regulation and supervision, as well as institutional and market infrastructure.

Although Finma was commended for increasing its independence from the federal government and for boosting its resources and headcount, the FSB is concerned that fines cannot be handed out by the Swiss regulator.

“The Finma Act has not been revised – as recommended by the Financial Sector Assessment Program – to grant Finma the powers to impose civil money penalties to enhance its prudential powers,” said the report, released on Wednesday.

However, the Berne-based regulator is now able to confiscate illegal profits, remove banking officials from their position, prohibit them from future banking employment and file criminal complaints.

The FSB also noted that Finma has not addressed situations where there is tension or direct conflict between prudential objectives and enhancing the competitiveness of the Swiss financial centre.

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In the 2007 report, the FSAP recommended that Switzerland’s two largest banks, Credit Suisse and UBS should strengthen their resilience in terms of capital and liquidity requirements.

In response, the Swiss regulator recently approved a too-big-to-fail package which is due to come into force on 1 March. The package was praised by the FSB for going beyond international minimum standards in regulatory capital requirements and for its influence on the international policy debate on systemically important banks.

But it warned that for the TBTF to be successful, Finma must focus on implementation issues like using contingent capital instruments and applying regulatory capital “rebates” for certain firms.

In terms of Finma’s supervisory framework, the FSB praised it for bringing in a new risk-based approach but said it should reduce its reliance on outsourcing supervisory functions to third parties.

Finma should enhance its supervisory capacity and its ability to do more on-site examinations itself, including on bank risk management practices and internal controls, the report said.

In the insurance sector, Finma has made significant progress, said the FSB and commended the body’s new Swiss Solvency Test which came into effect last year.

But the FSB is concerned that not enough resources have been allocated to the central pension supervisory commission which oversees pension funds. It also said the commission must boost its risk management guidelines.

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