Exemptions for Trustee and Portfolio Managers under FinIA

Trustees and portfolio managers are subject to a licensing requirement and prudential supervision following the entry into force of the Financial Institutions Act (FinIA) on 1 January 2020. The scope of activity of specific trustees and portfolio managers may, however, be very limited in scope and the requirements of the FinIA may be disproportionate in the light of its purpose in specific cases. The FinIA and the Financial Institutions Ordinance (FinIO) address these cases to some extent by specific exemptions.

By Alexander Greter (Reference: CapLaw-2020-40)

1) New Regulation of Trustees and Portfolio Managers

Following the entry into force of the FinIA, trustees and portfolio managers are subject to a licensing requirement and to prudential supervision by FINMA and an approved supervisory organization. Existing trustees and portfolio managers benefit from transitional provision expiring on 31 December 2022 at the latest.

Trustees are persons, whether an individual or entity, who, on a professional basis, manage or have a power of disposal over a segregated fund for the benefit of one or more beneficiaries or for a specified purpose (i.e., purpose trusts) based on an instrument creating a trust within the meaning of the Hague Trust Convention. Portfolio managers are persons who have the power based on a mandate agreement to dispose, in the name and on account of their customers, over assets of customers for purposes of providing financial services as further defined in the Financial Services Act. This includes the traditional discretionary asset management, but also the execution of transactions in financial instruments based on a power of attorney pursuant to instructions received from the customer or the receipt and forwarding of instructions regarding financial instruments. Pure investment advisory services without any power of disposal of the advisor over the assets of the customer are not subject to the FinIA.

2) Trustees and Portfolio Managers acting on a Professional Basis

The scope of the FinIA is limited to trustees and portfolio managers conducting their activity on a professional basis. The concept has been adopted from the Anti-Money Laundering Act (AMLA). A Trustee or portfolio manager only falls within the scope of the FinIA if:

a) the activity as trustee or portfolio manager generates gross revenue in excess of CHF 50,000 per calendar year;

b) business relationships with more than 20 counterparties are entered into or maintained during a calendar year; or

c) the portfolio manager has a power of disposal over assets of a third party exceeding the total value of CHF 5 million.

Certain relationships of trustees or portfolio managers for which an exemption pursuant to article 2 (2) is available are not included in the calculation of the abovementioned thresholds. This includes the exemptions further described in paragraphs (3)(a) and (3)(b) below. Moreover, a trustee is the legal owner of the assets held in a trust fund of a trust. Therefore, the explanatory notes to the FinIO explicitly state that the threshold of CHF 5 million for assets subject to the trustee’s power of disposal is not relevant to determine whether a trustee is acting on a professional basis. 

3) Exemptions from the Licensing Requirement

The FinIA and the FinIO provide for exemptions from the licensing requirement. The FinIA provides for a carve-out for persons managing assets exclusively for persons economically connected to them or with whom they have family ties. Despite the reference to “management of assets”, the exemption is not limited to portfolio managers and other financial institutions providing asset management services in the sense of the Financial Services Act, but also applies to trustees. In addition to the general exemptions in the FinIA, the FinIO provides for a possibility to obtain an exemption from the licensing requirement of the FinIA for dedicated trust companies.

a) Exemption for Economically Connected Persons

Persons providing services exclusively to other persons with whom they are economically connected are not subject to the FinIA at all (article 2 (2) (a) FinIA). A qualified economic connection exists between entities connected, directly or indirectly, by participation of more than 50% in the capital or voting rights or in case of control by other means (e.g., parent companies, subsidiaries, affiliates). Pursuant to the explanatory notes to the FinIO, a qualified economic connection also exists between pension funds, patronage welfare funds and charitable organizations linked to a group of companies and the members of that group. This is in line with the current definition of an economic unit pursuant to article 3c (1) (c) Banking Act. This exemption is primarily of relevance for entities providing group treasury functions, which may involve investment of funds of affiliates, but is of limited relevance for the traditional asset management and trustee business.

b) Family Ties-Exemption

Persons providing services exclusively to persons with whom they have family ties are also outside of the scope of the FinIA and its requirements. A corresponding exemption for closely related persons has already been available for financial intermediaries, including trustees and portfolio managers, pursuant to the AMLA. However, while under the AMLA family ties are relevant in the context of the question as to whether services are provided on a professional basis, the exemption in the FinIA directly limits the scope of application. It is, therefore, possible that a person providing services to family members is not subject to the FinIA, but meets the criteria of a financial intermediary under the AMLA.

In relation to individuals, the definition of family ties in the FinIO is almost identical to the corresponding definition in article 7 (5) of the Anti-Money Laundering Ordinance (AMLO). The following individuals are deemed to be connected by family ties (article 4 (1) FinIO):

i. relatives by blood or by marriage in the direct line;

ii. relatives by blood or by marriage up to the fourth degree in the col-lateral line (as opposed to article 7 (5) (b) AMLO which only extends to the third degree in the collateral line);

iii. spouses and registered partners;

iv. co-heirs and legatees from succession until completion of the division of estate or allocation of the legacy;

v. remaindermen and residuary legatees in accordance with article 488 of the Civil Code (CC);

vi. Persons living in a long-term life partnership with the portfolio manager or trustee.

Pursuant article 20 (1) CC, the degree of a relationship in the collateral line is determined by the number of births connecting two individuals. Based on the application of the principle of uniformity of the legal system and in the absence of any indications to the contrary, the scope of the exemption of relatives by blood in the collateral line is determined by the number of births connecting the portfolio manager or trustee with the customer being a relative. Grandnephews and grandnieces, cousins and grandaunts and granduncles as well as the spouse of each of them are individuals with are still deemed to have family ties to the asset manager or trustee. More remote family relationships would be beyond the family tie exemption. There is, however, no restriction on the number of births between relatives in the direct line.

The family affairs of wealthy individuals and families are, however, often more complex and not limited to the provision of services between two individuals within the same family. The assets of the family may be managed by a single family office or may be consolidated in a trust structure for the benefit of the family with a private trust company (PTC) as trustee, i.e., a trust company only acting as trustee for trusts of one specific family. Based on submissions received during the consultation process, the exemption of family ties has been extended to certain structures commonly used by wealthy individuals and families to organize their wealth. Pursuant to article 4 (2) FinIO, entities which provide services as portfolio managers or trustees are outside the scope of the FinIA if:

i. the family office manages assets, or the PTC manages or administers the trust fund, for the benefit of individuals who amongst themselves are connected by family ties; and

ii. the family office or PTC is directly or indirectly controlled by:

(1) individuals who are connected by family ties as defined in the FinIA to the individuals for the benefit of whom the assets are managed or administered; or

(2) a trust, foundation or similar legal arrangement established by a person connected by family ties to the individuals for the benefit of whom the assets are managed or administered.

A strict reading of the term “amongst themselves” would require that the conditions of family ties must be met by any possible member of the group of individuals in relation to all the other members of the group as well as in relation to the person controlling, or having established the trust or foundation controlling, the family office or PTC. Due to the limitation to the fourth degree in the collateral line, family offices and trust structures established for the benefit of families comprising several generations may not meet the conditions. In the light of the fact that also relationships between individuals are limited to the fourth degree in the collateral line, which implies that the exemption should only be available for relatively close family relationships, this may be the intended result. However, the FinIA and the FinIO as well as the explanatory notes remain silent on this point.

Pursuant to article 4 (3) FinIO, the exemption is also available if the class of persons for the benefit of whom the assets are managed or administered also includes charitable institutions or institutions with a public purpose despite the fact that they are not connected to a family by blood or otherwise. 

c) Dedicated Trust Companies

Based on the submissions made in the consultation process, a further exemption was introduced by article 9 (3) FinIO for a specific type of trust companies. The exemption is available to trust companies exclusively acting as trustee for one or more trusts established by the same settlor or for the benefit of the same family, provided that such trust company is held and overseen by a licensed Swiss financial institution pursuant to the FinIA or a licensed branch of a foreign financial institution. This kind of trust company is typically established by a professional trustee at the request of the settlor who wishes not to share the same trustee with other trusts, but would still like to appoint an independent trustee without family involvement. In practice, such special purpose trust companies are often referred to as dedicated trust companies. There is no equivalent exemption for portfolio managers.

As opposed to the exemption for PTCs, dedicated trust companies are not controlled by the family for the benefit of which the trust has been established, but by a professional trustee or other type of financial institution pursuant to the FinIA. Moreover, different to PTCs, the FinIO does not require the settlor and beneficiaries to be connected by family ties as defined in the FinIO but more generally states that the trusts must be for the benefit of the same family or established by the same settlor. The exemption is therefore broader and goes beyond relationships involving family ties. In the light of the purpose of the FinIA to protect customers and the functioning of the financial market and taking into account that only dedicated trust companies owned and overseen by a FINMA licensed service provider are eligible for this exemption, this differentiation compared to PTCs is appropriate.

The exemption is not automatically applicable to dedicated trust companies. Dedicated trust companies may be exempt by FINMA from the requirement to obtain a license upon request only. Accordingly, an application for relief from the licensing requirement must be submitted for each dedicated trust company.

It is not entirely clear from the FinIO whether dedicated trust companies are obliged to meet the licensing conditions of the FinIA themselves despite the fact that a license may not be required. This is particularly relevant in practice because dedicated trust companies are regularly companies incorporated in foreign jurisdictions due to lower maintenance costs and reduced complexity of the corporate administration and taxation. Despite the incorporation abroad, dedicated trust companies are typically fully integrated in the organization and oversight of the licensed trust company, including in respect of anti-money laundering compliance, regulatory compliance, risk management and internal controls. Dedicated trust companies generally use the infrastructure of the parent trust company and do not have premises or employees of their own. As ownership and oversight by a trust company licensed in Switzerland is a requirement to be eligible for the dedicated trust company exemption, the purpose of the FinIA does, in my view, not require dedicated trust companies to independently meet the licensing conditions of the FinIA. Otherwise, the intended relief provided by article 9 (3) FinIO would evaporate. In the light of the existing international practice of professional trustees, the exemption for dedicated trust companies should, therefore, permit the establishment and maintenance of dedicated trust companies in foreign jurisdictions. Provided that the requirements in respect of ownership and oversight are met, such foreign dedicated trust companies should be eligible for the exemption from the requirement to obtain a separate license as trustee.

Alexander Greter (alexander.greter@lenzstaehelin.com)