Cracks show at ‘stressed’ Swiss financial watchdog

Criticism of FINMA has switched from the Swiss regulator being too draconian to being too soft. © Keystone / Peter Klaunzer

The Swiss financial regulator is under extreme pressure following the emergency takeover of Credit Suisse by UBS. The pressure is starting to tell, forcing the unexpected resignation of the watchdog’s CEO.

Urban Angehrn lasted less than two years in the job before “the high and permanent stress level had health consequences”, he said in a press release on Wednesday.

The Swiss media, which has been one source of stress for the Financial Market Supervisory Authority (FINMA), has been quick to recognise the pressures that will face Angehrn’s eventual permanent successor.

“The resignation confirms an old suspicion: the top position at FINMA is a hell of a job that is not particularly well paid,” stated the Neue Zürcher Zeitung newspaper.

In July, Angehrn was provoked into writing a letter of defence in response to the same newspaper’s criticism of his organisation in the wake of Credit Suisse’s demise. “FINMA is not responsible for the Credit Suisse crisis,” he wrote. 

FINMA was created from the merger of three previous regulatory bodies in the midst of a global banking crisis in 2009. It has therefore been under constant pressure for the entirety of its existence.

It has played a leading role in dealing with enhanced capital requirements for banks (ironically, given the Credit Suisse collapse, designed to protect banks against failure), a global crackdown on tax evasion that threatened the survival of many Swiss banks, sanctions against Russia and various high profile money laundering cases, such as the Malaysian 1MDB sovereign fund fraud and the Brazilian Petrobras scandal.

FINMA has sanctioned several Swiss banks in recent years for helping to enable large scale and complex frauds in other parts of the world.

The forced takeover of Credit Suisse by UBS in March significantly tightened the screw on FINMA, unleashing heavy criticism of the regulator’s role in allowing events to spiral out of control.

A rare parliamentary committee of inquiry has been set up to examine the performance of FINMA and other agencies. On top of that, FINMA is at the centre of snowballing litigation, having made the decision to write-off CHF16 billion ($18 billion) of Credit Suisse AT1 bonds held by investors around the world.

+ How much the CS AT1 bond ‘rip-off’ could cost Switzerland

Unsurprisingly, FINMA regards the Credit Suisse episode as “the biggest challenge in [our] history”.

What happens next?

Angehrn’s unplanned departure presents FINMA with the immediate problem of keeping its operations running during an intensely challenging period.

The search for a permanent successor has been launched with Deputy CEO, Birgit Rutishauser, acting as CEO ad interim from October 1.

FINMA’s priority is to make sure the UBS takeover of Credit Suisse, due to be completed in 2025, goes forward without hitches. The Swiss Competitions Commission is expected to file its findings on the takeover in the coming weeks.

+ Where did it all go wrong for Credit Suisse?

The regulator will also be concerned with setting capital requirement measures for the new mega-bank and will keep one eye on how the enlarged UBS will affect the balance of the financial sector.

In the coming months, FINMA may well be forced to defend itself in court against lawsuits from aggrieved AT1 bond investors. An adverse court ruling would severely dent its reputation as defender of fair play in the markets.

“Regulators are meant to set rules and police them. Evidence is growing that FINMA – under heavy pressure from politicians – did just the reverse,” the Financial Times wrote in a scathing assessment in May.

FINMA will then have to contend with the findings of the Swiss parliamentary committee of inquiry that will conduct its examination within the next 12 to 15 months.

According to media reports, the Swiss Attorney General has also opened an investigation into the takeover to determine whether any official, regulator or executive breached laws.

A new FINMA?

Even before Angehrn stepped down, there were growing calls for reform at the regulator to prevent a repeat of the Credit Suisse fiasco.

In times gone by, the regulator has been accused of over-reaching its authority. “From time to time, articles appear in the press claiming that FINMA is regulating excessively or on its own initiative, and thereby going beyond its statutory mandate: in short, that it has become too powerful,” wrote then FINMA chair Thomas Bauer in its 2018 annual report – before going on to dismiss the claims as nonsense.

+ Why a monster UBS scares Switzerland

Now the boot is on the other foot. The regulator is criticised for being toothless, too cumbersome and for not having its eye on the ball, despite staff numbers rising from 442 full-time equivalents in 2012 to 547.2 last year.

“FINMA, in its role as regulator, should have acted more firmly and swiftly, but it didn’t do that. It was guilty of the sin of omission,” Henry Peter, a professor of corporate law at the University of Geneva and once a member of FINMA’s Swiss [company] Takeover Board, told Swiss public broadcaster RTS when Angehrn announced his resignation.

In the immediate aftermath of the Credit Suisse debacle, FINMA took the rare step of demanding extra powers to bring it in line with regulatory bodies in other countries.

This includes the ability to issue fines (at present FINMA can only order banks to hand back illicitly made profits), hold financial executives to greater account and name-and-shame miscreants, which at present it can only do under exceptional cases of public interest.

“Our instruments hit their limits in extreme cases as seen in the case of Credit Suisse,” said FINMA President Marlene Amstad in April.

An expert panel set up to advise parliament on how to enhance financial stability in Switzerland recently concurred with FINMA’s demands, among other findings.

Politicians, banks and regulators agree that Switzerland, as one of the world’s leading financial centres, needs to restore global faith in its ability to keep order in the banking sector.

But achieving consensus on the details of achieving that goal might be harder to find. The Swiss Bankers Association applauded many of the findings of the expert panel – but not all.

“There is a substantial need for further analysis and clarification in various areas,” the banking lobby group wrote. In particular, it recommends that moves to widen “FINMA’s powers and supervisory instruments must be investigated in detail.”