Brexit (9): 5 things the UK can learn from the Swiss experience a perspective from CMS Switzerland

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1 Brexit (9): 5 things the UK can learn from the Swiss experience a perspective from CMS Switzerland RegZone has published a series of reports on Brexit and financial services. You can access the RegZone Brexit page for analysis, news and online training and seminar recordings (which you can download to your mobile device). You can also subscribe to a RegZone Brexit newsfeed delivered in a daily or weekly digest. You can read more about Brexit planning in our brochure The Challenge of Brexit: How CMS is helping its financial institution clients across Europe and beyond. You can find further information and analysis on Brexit Next including Brexit checklists covering 19 different legal practice areas. For assistance or further information please regzonesupport@cmslegal.com. heading Key points: Switzerland rejected EEA/EU membership and a recent referendum has challenged the free movement of persons. On 20 September it was reported that Switzerland were close to reaching a compromise deal that would prioritise Swiss workers. The current Swiss-EU relationship took a considerable length of time to achieve and is made normal text bold up of more than 120 agreements 20 regarded to be of central importance, with two main packages under Bilaterals I and II. Switzerland contributes to the cost of EU development. Switzerland replicates a great deal of EU FS legislation but is not afforded passporting rights or any other benefits regarding internal market participation under the bilateral agreements. The institutional structure for maintenance of the bilateral agreements is not satisfactory. The EU stated that the horizontal issues must be addressed before any new agreements giving Switzerland further access to the single market will be concluded. There is no suggestion that the UK will try to follow the Swiss model as the basis for the post-brexit UK-EU relationship. However, the UK will have a bilateral agreement with the EU: to that end, there are lessons to be learned from the Swiss experience. This report will also clarify the common misconceptions regarding the scope and scale of the Swiss experience: the press has incorrectly described the situation surrounding market access / passporting for financial services firms. An overview of the Swiss-EU relationship can be accessed here (September 2016). Switzerland rejected EEA/EU membership and has a similar political stance regarding free movement / immigration

2 Switzerland is in a different position to the UK; however, similarities exist in that they share borders with other EU Member States and their economies are integrated with the EEA/EU bloc. The EEA was designed to accommodate Switzerland but the Swiss rejected membership in The Swiss-EU bilateral relationship embodies free movement principles and Schengen 1. Free movement/immigration was challenged by the 9 February 2014 referendum: the majority voted against mass immigration. The matter is now the subject of negotiations with the EU. On 20 September 2016, it was widely reported 2 that the EU and Switzerland were close to concluding a deal that would balance immigration with access to the single market. Juncker reportedly said that there may be a Swiss compromise agreement whereby hiring preference would be in Swiss nationals favour. On 21 September, a vote in the Swiss Parliament approved legislation giving locals hiring preference 3 - the second chamber is to consider the compromise plan in December Current Swiss-EU relations took a considerable length of time to achieve with more than 120 agreements Switzerland has more than 120 separate agreements - 20 of which are considered of central importance - with the EU starting with the 1972 FTA. After the Swiss electorate rejected the EEA Agreement in 1992 it took seven years before Bilaterals I was signed and a further five years before Bilaterals II was signed. The EU principle of parallelism was central to the negotiations: [In 1993] the EU declared itself ready for negotiations in seven sectors on condition that the negotiations be conducted in parallel and that they be signed and take effect together (parallelism). The EU set this condition because it considered that the different dossiers would only be in the interest of both partners if they were adopted as a single package. The agreements were therefore linked in legal terms by a so-called guillotine clause, stipulating that they can only take effect together: if one of the agreements were not to be prolonged or terminated, the other could also cease to have effect 4. This highlights the structural issues that arise when negotiating across a diverse range of sectors and in this case it was not structured as a single, all-encompassing Treaty. Switzerland contributes to the cost of EU development Switzerland does not contribute to central EU funding. The Swiss, however, independently contribute to Member States in Eastern Europe (not as part of the EU s cohesion policy fund) the enlargement contribution. The commitment was agreed in an MoU between the EU and Switzerland in In the same year the Swiss electorate voted in favour of the Federal Act on Cooperation with the States of Eastern Europe providing the legal basis for this commitment. Switzerland replicates a large proportion of EU FS regulations but does not have full access / participation in the single market for FS Despite two Bilateral packages (which cover free movement of persons, technical obstacles to trade, public procurement, agriculture, research, civil aviation, overland transport; processed agricultural products, pensions, taxation of savings, MEDIA, environment, statistics, Schengen/Dublin, fraud, education, Europol, 1 The Schengen Agreement (1985) is the Treaty that led to the creation of the Schengen Area this covers 26 countries, in which border checks/control are largely abolished. 2 See, for example, Reuters Swiss and EU say they are closer on immigration deal after talks (20 September 2016). 3 See, for example, Reuters Swiss compromise on EU immigration clears first parliamentary hurdle (21 September 2016). 4 Switzerland s European Policy (June 2016), p.3 2

3 Eurojust, EDA, competition, Galileo/EGNOS, EASO) the EU did not grant internal market participation to Swiss financial services firms and vice versa. Although not obliged to do so (unlike the other EFTA states bound by the EEA agreement), Switzerland adopts/follows a substantial amount of EU financial services legislation most of MiFID II and the Prospectus Directive (by 2017/8), 90% of EMIR (1/1/16) and substantial parts of the Market Abuse Directive (1/5/13). There are a number of reasons why Switzerland follows a large proportion of EU FS legislation partly as they flow from international agreements (e.g. Basel)/international organisations (e.g. FATF), and partly to secure equivalence under EU legislation. As expected, Switzerland was granted full equivalence under Solvency II for an indefinite period. The limited scope of the EU s equivalence regime is explained in Brexit (10): The UK as a third country under EU rules. Swiss firms are not afforded passporting rights or any other internal market benefits under the bilaterals. Prior to the negotiation of the Bilaterals, Switzerland and the EU had reached a very narrow sectoral agreement on non-life insurance (1989) 5. This effectively extended the Non-Life Establishment Directive to Switzerland. It gives limited rights of establishment for Swiss non-life companies in the EU and vice versa. It removed the need to maintain separate solvency margins; the EU supervisor of a branch of a Swiss non-life insurer in the EU to allow the Swiss supervisor to calculate its capital requirement according to Swiss rules, and vice versa. Switzerland also secured a narrow bilateral agreement with Germany regarding the marketing/distribution of Swiss securities funds and German UCITS funds. This Implementation Agreement entered into effect 1 January Switzerland s FINMA and Germany s BaFin agreed that Swiss securities funds and German UCITS funds are equivalent; a notification procedure 6 is used instead of an authorisation procedure. Notwithstanding this agreement, Swiss funds are still regarded as non-eu AIFs for the purposes of AIFMD and there are restrictions regarding marketing fund units. What is clear is that Switzerland gains very little from an FS perspective: the current arrangements with the EU and a single Member State are limited. The institutional structure for maintenance of the bilateral relationship is not satisfactory The Swiss bilateral agreements are based on the equivalence of legislation or on the adoption of the EU aquis, i.e. the accumulated body of EU law and obligations in existence since Currently, the Swiss- EU bilateral agreements are managed through a structure of more than 15 joint committees 7. The mixed committees determine based on the Swiss-EU agreements which EU legislation/aquis may need to be adopted. The mixed committees review each agreement in light of developments in EU legislation/acquis and ascertain whether the agreement ought to be amended. Amendments to the agreements or the introduction of new obligations (i.e adoption of new EU law by Switzerland) must follow the relevant internal 5 EU-Switzerland agreement on non-life insurance: Agreement of 10 October 1989 between Swiss Confederation and the EEC on direct insurance other than life assurance (entered into effect 1 Jan 1993); Decision 91/370/EEC - Conclusion of the Agreement between the EEC and the Swiss Confederation; Agreement between the European Economic Community and the Swiss Confederation on direct insurance other than life assurance; Directive 91/371/EEC Implementation of the Agreement between the EEC and the Swiss Confederation; Council Regulation (EEC) No 2155/91 of 20 June 1991 laying down particular provisions for the application of Articles 37, 39 and 40 of the Agreement between the EEC and the Swiss Confederation on direct insurance other than life assurance; 2001/776/EC EC-Switzerland Joint Committee Decision No 1/2001 amending annexes and protocols 6 The notification procedure is based on the UCITS Directive (with FINMA and BaFin having discretion to add further national marketing requirements to the procedure). In short, a Swiss fund management company may commence marketing activities in Germany for a Swiss securities fund after FINMA has received the complete notification, forwarded it to BaFin and informed the applicant accordingly (which must be effected within 10 days after receipt of the complete notification). This is a significant time reduction compared to the potentially six-month authorization procedure that previously had to be undertaken with BaFin. 7 Switzerland Trade European Commission access here. 3

4 procedures. The relevant internal procedure may be approval by the Federal Council, by Parliament or by the people in a national referendum. 8 In 2014, the Council of the EU reiterated the 2012 findings namely, that the current system of bilateral agreements with Switzerland had reached its limits and a new institutional framework was needed. The Council outlined the horizontal issues that must be addressed before any new agreements giving Switzerland further access to the single market will be concluded: Switzerland considers that it has signed international agreements only as covered by the law existing at the time of signature. This leads to a reoccurring question of how to deal with post-agreement developments of the acquis, including interpretations by the Court of Justice of the European Union (ECJ). At the same time, insufficient surveillance and dispute settlement procedures exacerbated this issue. The ensuing incoherence of internal market rules creates discrimination issues for investors, businesses and citizens, a structural challenge that the EU seeks to remedy. [ ] The horizontal issues related to the dynamic adaptation of all agreements to the evolving acquis, the homogenous interpretation of the agreements, but equally the need for independent surveillance, judicial enforcement and dispute settlement need to be reflected in EU-Switzerland agreements. 8 For an overview of institutional and legal issues and the autonomous adoption of EU law, see 4

5 Swiss Contact Kaspar Landolt Partner (Switzerland) UK Contacts Paul Edmondson +44 (0) Ash Saluja +44 (0) Simon Morris +44 (0) Aidan Campbell +44 (0) Caroline Hobson +44 (0) Jacqueline Vallat Associate (UK) +44 (0) October This report is for general purposes and guidance only and does not constitute legal or professional advice and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. For legal advice, please contact your main contact partner at the relevant CMS member firm. If you are not a client of a CMS member firm, or if you have general queries about Law-Now or RegZone, please send an to: law-now.support@cmslegal.com so that your enquiry can be passed on to the right person(s). All Law-Now and RegZone information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments. CMS Legal Services EEIG (CMS EEIG), has its head office at: Barckhausstraße 12-16, Frankfurt, Germany. The contact address for CMS EEIG is info@cmslegal.com, its Ust-ID is: DE and it is registered on Handelsregister A in Frankfurt am Main with the registration number: HRA CMS Legal Services EEIG (CMS EEIG) is a European Economic Interest Grouping that coordinates an organisation of independent law firms. CMS EEIG provides no client services. Such services are solely provided by CMS EEIG s member firms in their respective jurisdictions. CMS EEIG and each of its member firms are separate and legally distinct entities, and no such entity has any authority to bind any other. CMS EEIG and each member firm are liable only for their own acts or omissions and not those of each other. The brand name CMS and the term firm are used to refer to some or all of the member firms or their offices. CMS EEIG member firms are: 5

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