The UK and Switzerland have signed an agreement on the mutual recognition of their respective regulatory and supervisory frameworks for financial services. The agreement will remove specific regulatory barriers to cross-border business between the UK and Switzerland, stabilise the existing basis on which UK and Swiss firms provide cross-border services and provide a framework for supervisory and regulatory cooperation and the future expansion of mutual recognition to additional cross-border services.

The 'Berne Financial Services Agreement' entered into by the UK and the Swiss Confederation on 21 December 2023 is a binding international agreement under which the parties recognise that their respective domestic regulatory and supervisory frameworks achieve equivalent outcomes within the scope and with the effect set out in the agreement and its sectoral annexes. The UK government describes the agreement as "ground-breaking and dynamic" and the Swiss government describes it as "unique in the area of financial services in terms of approach and scope".

Removing regulatory barriers to cross-border business

The agreement will allow Swiss firms to provide specified investment and ancillary services to UK high-net worth individuals and private investment structures (with assets exceeding £2 million), as well as 'per se' professional clients and eligible counterparties, without the need for authorisation in the UK. The new regime will be available to Swiss firms that are not already authorised to provide the services in the UK when providing the services cross-border from Switzerland or via temporary visits of employees, subject to registration with the UK Financial Conduct Authority (FCA) and compliance with pre-contractual disclosure, client verification, client consent and reporting requirements and requirements regarding the use of third-country sub-custodians. Swiss firms can choose to continue to rely on existing means of cross-border access to the UK (such as the UK 'overseas persons exclusion').

Conversely, the agreement will relieve client advisers employed by UK firms from the requirement to register individually with the Swiss Financial Market Supervisory Authority (FINMA) when providing specified investment and ancillary services on a temporary basis in Switzerland. The relief will apply where services are provided to institutional clients, other professional clients and high-net worth clients (with assets of at least CHF 2 million) that have opted to be treated as professional clients under Swiss law, subject to prior notification to the FCA and compliance with prior disclosure and other Swiss law requirements.

In the insurance sector, the agreement will allow UK insurers to provide selected lines of non-life direct insurance business to large corporate clients in Switzerland without the need for authorisation in Switzerland, including renewable energy, directors’ & officers’ liability, seller's and buyer's warranty indemnity, and cyber insurance (but not accident, health or monopoly insurance or most liability insurance). UK insurance intermediaries providing certain cross-border services to large corporate clients in Switzerland will also be relieved from the new Swiss localisation requirement that apply from 1 January 2024. The new regime will be available to UK firms subject to compliance with requirements for pre-contractual and ad hoc disclosures to clients and (for insurers) registration with and reporting to FINMA.

The agreement also provides for the mutual recognition of the equivalence of the domestic regulatory and supervisory arrangements for Swiss and UK CCPs and will allow Swiss and UK counterparties to apply the other country's risk mitigation rules in relation to OTC derivative transactions between them.

Stabilising the basis for cross-border business

The sectoral annexes to the agreement embed existing arrangements under UK and Swiss domestic law which already allow specified activities relating to fund marketing, delegation of portfolio or risk management, deposit-taking and lending, operation of trading venues and other (re)insurance and investment services to take place on a cross-border basis between the UK and Switzerland. The agreement constrains the parties' ability to modify their domestic law in a way that would prevent the supply of services under these arrangements.

Providing a forward-looking framework

The agreement requires the parties to ensure that their supervisory authorities cooperate in the supervision of financial services suppliers covered by the agreement. It also requires the parties to cooperate in relation to the regulation of the sectors covered by the agreement. The parties must notify and consult each other on proposed new measures of general application relevant to covered sectors and endeavour to deepen regulatory cooperation and coordination in international fora. The agreement establishes a joint committee, meeting at least annually, to carry out functions under the agreement.

The agreement creates a mechanism for expanding its scope over time. As a first step, it envisages that the parties will negotiate disciplines for recognising their respective rules and standards on sustainable finance based on international standards. In addition, a side letter records the parties' intention to enhance cooperation regarding benchmarks, credit rating agencies, trade repositories, the recognition of reporting and clearing obligations for OTC derivatives and the application of intragroup exemptions for OTC derivatives.

Preserving the right to regulate

However, the agreement specifically recognises that the agreement does not affect the parties' right to amend their laws and regulations in respect of covered sectors. The agreement includes a 'prudential safeguard' ensuring that no provision of the agreement prevents a party at any time amending its laws and regulations if circumstances arise which cannot be addressed under the agreement, subject to some procedural protections. But a party cannot use this provision as a means of avoiding its obligations under the agreement.

Where the sectoral annexes require a party to give deference to the other party's laws and regulations, it can withdraw that deference subject to prior notice and consultation. The agreement also provides for 'wind-down' arrangements if a party withdraws deference or the agreement is terminated.

Entry into force

The agreement will come into force on the first day of the second month following notification of ratification by the parties in accordance with their domestic procedures. HM Treasury has indicated that it will use its new powers under the Financial Services and Markets Act 2023 to give effect to the agreement in UK domestic law.

Authors: Caroline Dawson and Chris Bates