1. PREAMBLE

The protection of depositors enshrined in the SBA is intended, on one hand, to protect the financial system and to prevent any crisis of public confidence, and, on the other hand, to enable bank customers to dispose of their assets quickly in order to cover their daily needs, and thus, mitigate, as much as possible, the effects of a banking crisis during which one or many banks would default.

The economic and banking crisis of 2008 demonstrated that the existing system only partially achieved this objective. In response to that crisis, on December 19, 2008, the Swiss Federal Assembly adopted temporary amendments to the banking law which were declared to be urgent and of limited duration. The amendments included a package of measures to stabilize the Swiss financial system and to increase confidence in the Swiss financial market. The March 18, 2011 amendment made these changes a permanent part of Swiss banking law and also introduced other provisions concerning, in particular, restructuring proceedings, preservation of banking services, time limits for the payment by the Deposit Protection, recognition of measures taken by foreign authorities, and dormant accounts.

2. INCORPORATION OF EMERGENCY MEASURES ADOPTED IN 2008 INTO PERMANENT LAW

In 2008, the first emergency measure was to increase the limit of the amount of preferential deposits per depositor from CHF 30,000 (under the old law) to CHF 100,000. The amount of CHF 30,000 guaranteed before the crisis was already considered too modest and, after many countries had raised their own limits, this amount was deemed manifestly insufficient.

On March 18, 2011, the Swiss Parliament amended the Swiss Banking Act ("SBA"). The amendments, effective September 1, 2011, incorporate into the permanent law the emergency measures taken on December 19, 2008, in response to the economic crisis and introduced new provisions aimed at improving the protection of depositors. For several years, Swiss law provides for the intervention of the Deposit Protection for Banks and Securities Dealers (the "Deposit Protection") in case of bankruptcy of a bank, a savings bank, a stock exchange, or a Swiss securities dealer ("Covered Institutions"). That protection arises in case of bankruptcy or similar measures imposed by the FINMA when preferential deposits cannot be repaid immediately from the assets of the bankrupt institution. The deposits are called preferential because in the bankruptcy of a Covered Institution, they have priority over certain other claims. Those deposits are repaid after employees (first class creditors), but before suppliers and other service providers (third class unsecured creditors).

Deposit Protection is a Swiss association which includes all the Covered Institutions and which does not have equity permanently available to disburse the depositors. In case of bankruptcy or financial difficulty of a Covered Institution, the Deposit Protection requires from all its members that they contribute to the reimbursement of depositors according to a predefined distribution key. The Deposit Protection then pays off the preferential depositors and is subrogated to the depositors' rights.

The second measure has obliged banks to cover preferential deposits up to 125% with assets located in Switzerland. This measure shows to the public that the Covered Institutions have sufficient assets available to meet their obligations.

The third measure consisted of a more important immediate repayment of the preferential deposits from the assets of the Covered Institution in financial difficulty, before the intervention of the Deposit Protection, outside the schedule of claims, and without the possibility of compensation.

Initially, the system of deposit protection was limited to refund a total maximum amount of 4 billion Swiss francs (in order to limit the systemic negative effects). The fourth measure decided in 2008 increased the upper limit of the contribution of the Deposit Protection from 4 to 6 billion Swiss francs. It should, however, be noted that despite the increase of this limit, it is still not possible to overcome fully the failure of one of the largest banks of the country or the simultaneous failure of several medium-sized banks, the probability of which, however, was deemed unlikely.

Finally, the last measure provided that pension assets are also covered by the Deposit Protection.

3. NEW PROVISIONS DECIDED IN 2011

3.1 Preferential Deposits

In the new law, the definition of preferential deposits has been revised. Preferential deposits are deposits made in the name of the depositor. The preferential treatment is still limited to CHF 100,000. Under the new law, numbered accounts are no longer classed as preferential and are therefore no longer covered by the Deposit Protection. Since it was extremely difficult, if not impossible, to verify if a customer with an account in his name had also opened a numbered account, the new law addressed the risk that a depositor may be unduly compensated twice: once because of his numbered account, by definition relatively anonymous, and a second time due to another account opened in his name.

3.2 New Restructuring Proceedings

The restructuring proceedings introduced in 2004 were criticized because of the fact that in the event of the insolvency of a Covered Institution which could be treated outside of bankruptcy, the Swiss Financial Market Supervisory Authority (FINMA) was charged to initiate formal restructuring proceedings (an administrative procedure), to appoint a restructuring agent, and to give the latter the responsibility of developing a restructuring plan.

In practice, this meant that restructuring proceedings were initiated – and potentially published – and that a restructuring agent was appointed, although no restructuring measures were taken at this stage. The negative effects of the public's knowledge of restructuring proceedings without knowledge of the details or the timeframe for the restructuring are clearly perceptible.

The financial crisis has shown that, in order to obtain their desired effects, reorganization measures should not only be credible by their scale, but also become effective as soon as they are announced.

The amendment of restructuring proceedings is intended to provide greater flexibility and to simplify the procedural requirements. In particular, it is now possible for the FINMA to approve the restructuring plan before the commencement of restructuring proceedings; the restructuring agent is thus in charge of the implementation and the enforcement of the plan but not necessarily its development. The new timeline is intended to be reassuring to the public, which will now know that restructuring proceedings have been initiated and that a restructuring plan has been approved.

The criteria for the approval of a restructuring plan remain unchanged. The rights of the creditors of the Covered Institution are preserved, since unsecured creditors may refuse the plan and thus force the bankruptcy of the bank.

3.3 Preservation of Banking Services (Bridge Bank) The amendment of the SBA also allows the continuation of the services offered by an insolvent Covered Institution, particularly a bank, by transferring any of the deposited assets and any of its activities, to other institutions. For instance, the continuity of the payment traffic will be guaranteed.

In practical terms, it is now possible to transfer a portion of the existing bank to another institution, while restructur- ing the bank and allowing it to continue on a reduced basis It is also possible to transfer all the banking activities subject to authorization while allowing the bank to continue to exist under a new authorization granted by the FINMA.

3.4 Time Limits for the Payment by the Deposit Protection

The amendment provides for a reduction of the time for repayment by the Deposit Protection of the preferential deposits from three months to twenty working days from the date of the bankruptcy or from the date on which the restructuring measures are ordered. This new timeframe is subject to the depositors' providing repayment instructions.

3.5 Recognition of Measures taken by Foreign Authorities

In the amendment of the SBA, the Federal Council created an exception, at this stage only for bank insolvency, to the Swiss law principle of territoriality of insolvency proceedings. This principle, having a prominent place in Swiss law, geographically limits the effects of a bankruptcy. According to this principle, the effects of a bankruptcy declared in a foreign State do not extend to the bankrupt's property located in Switzerland. A debtor declared bankrupt in a foreign country will retain power over his property located in Switzerland until proceedings are initiated in Switzerland under Swiss law.

The new wording of art. 37g par. 2 SBA allows the FINMA, nevertheless, to recognize ex officio foreign insolvency proceedings (including protection and restructuring proceedings), as well as foreign decisions regarding appointment of an insolvency administrator or other insolvency proceedings, without requesting recognition of the foreign proceedings in Switzerland, usually subject to the condition of reciprocity. Such recognition is, however, subject to the condition of non-discrimination against Swiss creditors in the foreign proceedings, as well as compliance creditors' rights under Swiss law.

3.6 Treatment of Dormant Accounts in the Insolvency Proceedings

Because there was no law regulating dormant accounts, banks could not get rid of funds for which they could not find the owners despite extensive research. Initially, the Federal Council intended to fill this gap by adopting a Federal Law on dormant accounts.

But the Parliament adopted a simpler solution, proposing only one provision regulating these accounts under the existing law. It is now possible for a bank to transfer dormant accounts to another bank without the consent of the creditor. Such a transfer is not limited to forced liquidation proceedings. A Covered Institution can also transfer all dormant accounts to another bank active in the same market.

4. NEW COMPETENCE OF THE FINMA

The amendment of the SBA gives to the FINMA an expanded role in insolvency proceedings, allowing it to regulate all participants in the financial markets and not just banks, savings banks, stock exchanges and securities dealers already subject to its competence. If restructuring is not feasible, or if restructuring fails, the FINMA has the power to withdraw the authorization of the holder, to declare its bankruptcy and publish it.

Henceforth, the FINMA may order the bankruptcy of a fund management company, an investment company with fixed capital ("SICAV"), a limited partnership for collective investments ("SCPC") or an investment company with fixed capital ("SICAF"). Under the new law, if a request to open bankruptcy proceedings – filed under the Debt Enforcement and Bankruptcy Law – concerns a fund management company, a SICAV, a SCPC or a SICAF, the ordinary bankruptcy courts must refer the matter to the FINMA, which proceeds in accordance with the special regulations.

Similarly, the FINMA now has the power to initiate insolvency proceedings against insurance companies, including medical insurance companies.

"Henceforth, the FINMA may order the bankruptcy of a fund management company, The transfer of competence from the civil courts to the FINMA for bankruptcy proceedings involving collective investment schemes and insurance companies was in particular justified by the fact that the FINMA, with its specialized competence, was better able to handle insolvency cases involving these types of companies. Moreover, as the activities of Covered Institutions are under FINMA's supervision, it was deemed important that FINMA be competent both to declare bankruptcy and simultaneously to withdraw the authorization. The old law permitted coordination problems in cases of concurrent competence of civil courts and FINMA.

It should also be noted that banking regulations – broadly defined to include nearly all financial institutions – address the need for increased protection of customers of banks, securities dealers, investors in collective investment schemes and other insured parties better than the ordinary law.

5. CONCLUSION

The amendments of the Swiss Banking Act, effective since September 1, 2011, significantly improve the protection of depositors, local and foreign, through a wide range of effective measures.

This protection is now at least as effective as that granted by the laws of competing financial centers, thus ensuring and enhancing the competitiveness of the Swiss financial market.

The extension of FINMA's supervisory authority to include collective investment schemes and to insurance companies, is a welcome development in Switzerland. It enhances protection of investors by providing investors in collective investment schemes and insured parties under insurance arrangements with protection nearly equal to that of depositors, and by ensuring the handling of the proceedings by a specialized judicial authority (FINMA) which controls both the material and formal aspects of such proceedings.

Finally, while this article was being written, FINMA released for consultation a draft Ordinance on the Insolvency of Banks and Securities Dealers (BIO-FINMA). This ordinance is potentially intended to replace the current Bank Bankruptcy Ordinance (BBO-FINMA).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.