January 2024
The UK and Switzerland have negotiated a mutual recognition agreement (MRA) (UK publication/ Swiss publication) to enhance regulatory cooperation and facilitate cross border financial services to institutional and certain high net worth clients. The agreement could bring new opportunities for the insurance and private banking/wealth management sectors and help stabilise and bring regulatory certainty to other financial sectors. This article explores the possible implications of the agreement and opportunities for each sector.
Whilst the MRA is noteworthy in its own right, the way it has been achieved is also interesting. Rather than taking a traditional, technical equivalence-based approach, as championed by the EU, the agreement is based on broad recognition of outcomes and deference, underpinned by close regulatory cooperation and information sharing.
High-level implications
The MRA builds on existing close ties between the UK and Switzerland and is broad in scope. It is intended to be a living document and its scope could be expanded in future to also cover wider areas of sustainable finance and other emerging areas of regulatory development.
The MRA has three functions: granting new market access, establishing recognition-based commitments and formalising aspects of the status quo. Firms should review the details and consider strategically how they can take advantage of new opportunities and adjust their strategy, structure, products and propositions and operating model, accordingly.
Collaboration between UK and Swiss financial markets supervisory authorities has traditionally been well established. This agreement may serve as a model case for negotiating financial services agreements with other countries, although negotiations of this ilk with the EU are unlikely to be on the table in the short term.
Insurance
With the exception of the EEA Single Market and the direct insurance treaty between Switzerland and the Principality of Liechtenstein, the MRA is unprecedented in the extent of mutual market access and regulatory deference agreed. Key beneficiaries are wholesale general (re)insurers — in particular the London Market — and insurance intermediaries.
To date, trade agreements in insurance have been largely limited to maritime, aviation and transport (MAT) risks. This MRA goes significantly further by allowing the UK direct market access into Switzerland for a range of wholesale non-life risks for larger clients, including renewable energy, directors' & officers' liability, sellers' and buyers' warranty, indemnity and cyber insurance. These lines of business are particularly important to the London Market.
The MRA also improves access for Swiss insurers to the UK, as professional or large companies are likely to have a greater choice of products as insurance customers in selected insurance lines. The UK recognises the possibility for Swiss companies to provide cross-border insurance services to large corporate clients under current UK law.
The commitments are based on deference, meaning that insurers will be able to provide a range of services into the other territory with significantly reduced host regulatory requirements. Instead, firms would be largely subject to the familiar local regulatory oversight — the `home' principle of supervision, not dissimilar to the EU concept of freedom of services.
The enhanced bilateral market access comes with various safeguards, including notification, reporting, solvency requirements and supervisory cooperation. Nevertheless, this is a step change from having to establish a Swiss entity fully subject to Swiss regulatory authorisation and supervision. An important point is the removal of the `tied assets' requirement, which currently forces UK insurers to localise assets in Switzerland. The removal of this requirement will improve insurers' capital efficiency and lower barriers to entry.
Insurance intermediaries are also key beneficiaries from the agreement. Notably, the UK will be exempt from new Swiss requirements that took effect on 1 January 2024, which would have required overseas brokers to establish a physical presence in Switzerland.
In addition, a side letter (UK publication / Swiss publication) clarifies that bilateral market access also extends to the supply of services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claims services.
A few limitations to note:
- This is largely of benefit for wholesale, general (re)insurers and their brokers. (Re)insurers with over 10% life business are out of scope.
- Insurers and intermediaries considering availing of the benefits of the MRA will need to carefully define their lines of business, services and corporate structure and determine next steps.
Wealth management/private banking and asset management
The MRA provides greater legal certainty for in-scope investment services (such as portfolio management and investment advice), but notably will also allow firms to access certain sophisticated retail clients on a cross-border basis without barriers. For this, market access procedures are defined, and client categories and disclosure requirements are outlined. Greater certainty and procedures are also provided for asset managers around fund marketing and portfolio management delegation.
- High net worth clients: The change that is likely to have the most significant impact for the sector, particularly given the existing substantial cross-border books of clients, is that both Swiss and UK firms will be able to access sophisticated retail customers in the other jurisdiction who have more than GBP/CHF 2 million in net assets under certain conditions.
- Disclosures and notification requirements: When using this new access mechanism, firms will need to provide clients with pre-contractual disclosure documents. Where relevant, firms will also need to consider additional requirements where they choose to use the new regime, for instance, notification and reporting requirements to the FCA. Certain details still need to be negotiated between the FCA and FINMA.
- Swiss adviser register: Based on the agreement, UK advisers will no longer need to be registered by Swiss bodies, but they will still need to fulfil certain Swiss requirements (i.e. have a professional indemnity insurance coverage).
- Marketing funds: No significant changes — funds for professional investors/qualified investors will continue to be marketed in a similar way as before. In future, the UK may grant Switzerland equivalence under the forthcoming Overseas Funds Regime for retail funds.
- Delegation of portfolio and risk management: No significant changes — this important practice is already permitted by both countries.
Corporate lending, payments, and investment banking services
The agreement does not unlock any new market access opportunities but instead focuses on stability for existing arrangements for cross border corporate banking services. However, an MoU on banking resolution arrangements is envisaged in the future between the Bank of England and Swiss National Bank.
Capital markets and financial market infrastructures
The agreement mutually recognises certain risk mitigation rules for OTC derivatives, to introduce greater flexibility and efficiency to cross-border trades. For CCPs, new recognition decisions are embedded to provide greater regulatory certainty to facilitate CCPs providing clearing services to both countries without having to comply with both sets of rules. There are also commitments to stabilise existing access arrangements to trading venues.
As explained in a UK side letter / Swiss side letter to the agreement, both sides plan to engage further to potentially expand the agreement to cover benchmarks, credit rating agencies, trade repositories and additional points in relation to OTC derivatives.
Next steps
The agreement still needs to be ratified by the UK and Swiss parliaments before it can take effect. In addition, certain changes to domestic legislation will be required which may not be completed until 2025.
However, firms can already begin to consider how they can make best use of the arrangement and to start planning accordingly. If you would like to discuss and/or require any assistance with understanding the implications of the MRA, and critically the opportunities arising for your business, please get in touch.
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