This development is good news for Swiss-resident business owners, as it provides a much-needed vehicle for estate planning. Moreover, it broadens the toolbox of Swiss trustees, who will not have to rely solely on foreign law-governed trusts for the establishment of trusts out of Switzerland.

Legislative lift-off

One can think of the introduction of a Swiss trust law as a rocket, requiring a launch pad, plenty of preparation and the right atmospheric conditions. Here, the preparations involved various stages of legislative developments, with the ‘atmosphere’ of alignment of regulatory and political conditions. The window of opportunity for a successful launch is ready, but it is down to the legal and trust community to speak with one voice, and for the politicians to act.

Launch Pad

The fertile ground for trusts has been present for decades, given the exposure of the Swiss legal system, courts and financial professionals to family trusts. Trust companies form an integral part of the country’s financial ecosystem, and organisations like STEP and the Swiss Association of Trust Companies have contributed positively to the professionalisation of the sector.

Preparation

In 2007, Switzerland ratified the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition. That was followed the same year by the adoption of Circular No. 30 (the Circular) on trusts, creating a favourable tax regime for foreign trusts administered in Switzerland where settlors and beneficiaries are resident abroad. However, the Circular is less favourable as regards trusts’ establishment by Swiss residents.

The arrival of a Swiss trust might offer the possibility to examine this, without creating either a tax benefit or detriment for Swiss-resident settlors  and beneficiaries.

Political conditions

Finally, the change of paradigm in Switzerland as an international finance centre, from reliance on banking secrecy to compliance with international standards, creates the conditions for a sound evaluation of the adoption of the trust into Swiss law. Shortcuts made by certain Swiss politicians mischaracterising trusts as a means to hide the identity of beneficial owners and evade tax do not stand the test of the current regulatory framework. The 2018 enactment of the Swiss Financial Institutions Act (FinIA)¹ should further comfort politicians, as it obliges both Swiss and foreign trustees active in Switzerland to obtain a licence to carry out their activities.

It is essential for Switzerland’s legislators to get the legislative enactment right. The risk would be to characterise a trust as a contract or a corporation, because that would fail to recognise its unique features. Indeed, it would make it a tax subject where the principle for taxation of foreign trusts under the Circular is tax transparency.

Options

With that in mind, various options are open to the Swiss legislators. One of them is to borrow wholesale from a well-regarded foreign trust statute (e.g. Jersey or England and Wales). This would require significant legislative changes, such as the adoption of the notion of equity, an unfamiliar legal concept under Swiss law.

An alternative is to look in the direction of the Swiss foundation. However, the foundation, as an estate-planning vehicle at least, today presents serious legal restrictions and tax challenges, being a legal entity, and so would fail to broaden the type of vehicles at the disposal of Swiss trustees to structure family wealth.

A third interesting option is offered  by honorary STEP member Professor  Luc Thévenoz, who suggests that Switzerland’s legislators: ‘build upon and expand the existing but under-developed law of fiducie (Treuhand). …As is already the case for trust assets, fiduciary assets should be considered as a special patrimony (Sondervermögen), separate from the fiduciary’s personal assets and liabilities, and dedicated to the interests of the beneficiaries… It would be firmly rooted in the legal principles of Swiss civil law while enjoying international recognition by way of the Hague Trusts Convention.’²

The attractiveness of such an option lies in the analogy between the functionalities of a trust and the fiducie, and the reinforcement of an institution known for more than a century by Swiss courts and legislators.

Whatever the option chosen, any  Swiss trusts law will have to integrate  all the main functionalities of trusts,  be tax neutral and provide a flexible wealth-transfer vehicle, currently missing under Swiss law for both Swiss residents and foreigners. The countdown to launch has begun.

¹See p.47 – STEP Journal (Vol27 Iss5)

²Luc Thévenoz, ‘Proposition pour un trust suisse’, Revue suisse de droit des affaires et du marché financier, 920:2 (2018), pp. 99-112

STEP Journal, June 2019, June issue, (Vol27 Iss5), p.35

For memory, SATC was set up by dozen of trust companies following the ratification by Switzerland of the Hague Convention on Trust and the introduction of Tax Circular 30 of 2007 on the taxation of trusts. This association wanted to promote certain ethical, quality and professional standards in the trust industry and ensure adherence to them by its members who had to observe a set of Regulations and a Code of Conduct. It is worthwhile noting that, historically, trustees’ activities were not subject to any specific regulations, apart from Swiss anti-money laundering and terrorism financing legislation. This situation contrasted notably with the requirement for trustees to obtain a licence prior to conducting trust business. Such licensing system was applicable in most of the competing international financial centres.

The introduction of the FinIA is a welcomed development in that it reinforces the credibility and attractiveness of the Swiss trust industry toward high net worth families and their advisors. These are sophisticated individuals who consider the reputation and robustness of the regulatory framework of the jurisdiction of their trustees as an important criteria of any trustee’s selection process. It also contributes to the positioning of Switzerland as a modern and truly well regulated wealth management centre.

But what is the FinIA and does it meet the trust professionals’ expectations?

FinIA has always been presented as a legislative package together with the Financial Services Act (FinSA). This suggests that their provisions are applicable to both portfolio managers and trustees. Actually, we are of the view that only the FinIA should apply to trustees’ activities sensu stricto. The current stage of confusion in this regard is unfortunate. Indeed, trust companies’ competences, internal organization, risk management processes and business models are not remotely close to those of portfolio managers. We expect the final bills to clarify this issue.

FinIA governs the requirements for acting as a financial institution and it encompasses trustees. FINMA will supervise trustees, even though the day-to-day supervision will be carried out by a to be created supervisory organization (SO). This body will also be subject to the supervision of FINMA and will be issuing the authorizations enabling trustees’ to carry out their activities in Switzerland. The obtaining of such authorization, coupled with trustees’ supervision by FINMA, are positive developments. It meets international standards. Of note, is the establishment of a cascade authorization system, whereby the holder of an authorization considered as “superior” can exercise other financial market activities without applying for an additional authorization. Typically a bank could operate as portfolio manager, which does make sense given the similarity of risk exposures, competences and internal organization required for conducting the business. However, that parallel can’t be made between banking and trustees activities! We hope that this point will be addressed before the enactment of the bill so that all financial institutions acting as trustees will have to obtain a prior authorization to do so. This is the case in most competing regulated jurisdictions. It would also be in the best interest of the banks themselves. Indeed, one could find disproportionate the withdrawal of a banking licence in the event the trustee subsidiary company would have breached the provisions of the FinIA.

Single Family Offices and Private Trust Companies shouldn’t be in scope of the FinIA. The position of the Multi family offices is more ambiguous and it would be good to clarify without delay the uncertainties surrounding that point given the number of family offices operating in Switzerland. Moreover the position of lawyers and notaries acting as trustees should also be looked at since they are out of scope of FinIA provided that the activity is subject to professional secrecy. The day-to-day management and administration of trust structures by lawyers and notaries are often a residual part of their practice. For that reason, these activities shouldn’t be exonerated, except in certain specific situations. Otherwise one would deviate from the rationale of the law, which is to apply the same regulatory requirements to all financial services providers. Finally, individuals and companies acting as trusts’ protector should not be subject to the FinIA.

Several provisions in respect of internal organization have been introduced, taking into account the types of activities, size and risk profiles of the financial institutions. Minimum requirements applicable to trustees could be enacted by FINMA in respect of governance, risk management and control systems, outsourcing and the management of conflict of interests. In addition, the trustees’ SO could establish more detailed internal regulations as well as a Code of Conduct. The current Code of SATC would be a good starting point.

Other welcomed novelties are the requirement for the persons responsible for the management and administration of trust companies to provide guarantee of irreproachable business conduct, to enjoy a good reputation and have the specialist qualifications required for their functions.

Finally the FinIA introduces the obligation to subscribe to a professional indemnity insurance policy. This is relevant in a sector becoming increasingly complex and litigious, with claims for breach of trust against trustees often in millions of Swiss francs.

Once the above-mentioned ambiguities are lifted, the FinIA must be considered as an inevitable and proportioned evolution of the legislation applicable to trustees in Switzerland. It is less stringent and more pragmatic than many similar legislations coming from the Channel Islands or the Caribbean. However, its implementation will generate additional cost and may affect the business sustainability of some of the smaller players in the market. This should in turn further boost the wave of consolidation currently taking place in the Swiss market. Unfortunately this is the cost to pay for reinforcing the credibility and attractiveness of the Swiss trust industry as a whole.

Published on November 2017 Issue by BSL

You provide advice on all aspects of trust & fiduciary matters – what are common aspects and regulations that non-experts are often unaware about?

The most common aspect that people are unaware of, or tend to forget, is that trusts are relationships and not entities (except for Foreign Account Tax Compliance Act (FATCA) and Automatic Exchange of Information (AEOI)/ Common Reporting Standard (CRS) purposes). To establish a trust does not require registration anywhere; there is no such thing, for example, a certificate of good standing for trusts (which is a request we received no later than last week!). This relationship between the trustee and trust’s beneficiaries is regulated by law and the terms of the trust deed with the trustee being held to very high standard.

As a lecturer on trusts, what do you think is most important to advise on?

I lecture for STEP, both in Geneva and Zurich, on “how to be a good trustee”. The session focuses on the dos and don’ts of acting as trustee and highlights the various risks inherent to the position. I remind trustees (externally and internally) of the high level of care they need to display at all times, as anything they do may, and will one day, be scrutinised. The session also serves as a reminder that ultimately it is the trustee who will be called to account for any potential wrongdoings or mismanagement of the trust’s assets. Therefore, the trustee should take all the decisions based on sound information and avoid being directed by the settlor. The duty and level of care is high. Being a trustee can be very rewarding but is not without risks.

Moreover, do you think your advice will change due to Brexit, when regarding trusts to the intermediary market in London?

It is a bit early to feel the effect of Brexit on the London intermediary market. London is a sophisticated international financial and wealth structuring centre and as such will continue to attract wealthy families. Its property market remains an attractive asset class for many internationals subject to geopolitical instability. Going forward however, Geneva and Zurich will probably grow more in importance, owing principally to Switzerland’s political, tax and financial stability and its educated workforce.

What advice would you offer start-up businesses when regarding fiduciary trusts?

Scope your risks and understand your fiduciary responsibilities. The trustee carries the legal and fiduciary risks of any act he undertakes and this towards 3rd parties and the trust’s beneficiaries. It is therefore important to have a precise understanding of what the role entails and what standard is expected, in particular in relation to the administration of the trust’s assets. Holding a bank’s portfolio requires a different skill set, team organisation, intermediary network and monitoring tools than, for example, operating a mine in Kazakhstan.

You are based in London, Geneva, Jersey and Mauritius; which place do you think is the most advanced when regarding business law?

For trust law, Jersey and the UK are the most advanced, although UK matrimonial courts have had a tendency to look through trusts in the last couple of years.

Moreover, do you think each city could benefit from adopting certain regulations from other cities?

At Accuro, we welcome the new legislation to come into force in Switzerland in January 2018, on the regulation of trustees and trustees’ activities (LeFIN). This will put the Swiss trust industry on a par with other established trust’s jurisdictions and will increase the attractiveness of Switzerland as a centre of trust’s administration with strong reputable players.

Are there any changes in regulations to which you have an eye on?

The group is currently finalising the reporting for AEOI (early adopters jurisdictions). FATCA, dare I say it, has become almost routine. We are getting to grips with the legal entity identifier (LEI) legislation which was introduced into Swiss law under the Financial Market Infrastructure Act (the “Act”). The Act requires us to register certain of our trusts and companies where they hold derivatives. Last month, the UK enacted a new legislation in the form of regulations (“the Money Laundering, Terrorist Financing and Transfer of funds Regulations 2917 “MLR2017”) whereby trustees, whether they be UK or foreign, will have to register and report on their trusts to the UK authorities where there is an exposure to UK tax.

Published (July Issue-page 84) by Lawyer Monthly