Dealing with Economic and Political Change in Germany and Switzerland

June 6th, 2017

Introduction
Heading into the second half of 2017, Germans prepare for uncertainty while the Swiss, characteristically, persist with stability. Chancellor Angela Merkel, an advocate of diplomatic relations and globalization, is up for reelection to serve her fourth term. The election of President Trump has had a polarizing effect on German politics, ushering in a rise in popularity for both the Social Democrats and the far-right Alternative for Germany party. In recent years, the country has received an increasingly steady stream of migrants, and it has become an economic leader in the EU – a position that has become more important as the UK prepares to exit the bloc.

Meanwhile, Switzerland’s labor market has rebounded from its unrest in 2015 and is expected to make up any losses by 2018. Gross domestic product (GDP) growth is expected to improve from 2016 to 2017 to 1.8%. Swiss banks appear well capitalized with few problematic loan ratios.

Given their somewhat different economic climates, the key regulatory agencies, Germany’s Federal Financial Supervisory Authority (BaFin) and Switzerland’s Financial Market Supervisory Authority (FINMA), have adopted differentiated regulatory agendas.

Federal Financial Supervisory Authority
Germany’s Federal Financial Supervisory Authority (BaFin) serves as the country’s leading financial regulator, housed within the Federal Ministry of Finance. BaFin is responsible for supervising the most influential financial entities, including banks, insurance providers, securities firms and asset managers. The independent regulator also works closely with the Bundesbank. The agency has put forth an aggressive agenda for 2017, working to preserve a regulatory balance with financial innovation and economic growth in the midst of political change in the EU.

• Soliciting Whistleblowers – BaFin recently launched an anonymous online portal where employees can report misconduct, but Germany has yet to implement comprehensive whistleblower protections. Without such reforms, it is unclear how successful the platform will be in attracting new whistleblowers.

• Basel III Acceptance – BaFin appears to be softening its approach to Basel III and proposed amendments. After initial opposition, BaFin President, Felix Hufeld, said Germany is primarily focused on the design and calibration of an output floor. Hufeld has held on to the need for risk-sensitivity and hopes to strike a compromise in Basel III requirements.

• Brexit Response – In the wake of the UK’s Brexit referendum, Germany has been eager to draw more banking operations from London to Frankfurt. BaFin hosted 20 foreign banks in January and is likely to maintain its campaign for industry relocation throughout 2017.

• Defense of Regulatory Environment – The recent rhetoric of BaFin President Hufeld reflects concern about the impact of financial deregulation in the US. He has cautioned against unwinding the post-crisis regulatory reforms in Germany and abroad.

• Supervising Fintech – BaFin has taken a more defensive approach towards fintech. In announcements of the agency’s 2017 initiatives, BaFin announced plans to supervise and regulate fintech firms as much as financial institutions, and has suggested that such innovation may pose security risks.

Financial Market Supervisory Authority
The Financial Market Supervisory Authority (FINMA) is Switzerland’s financial regulatory body, with sovereign authority over the country’s financial system. The agency’s authority extends to the country’s banks, insurance companies, stock exchanges, securities dealers and collective investment schemes. FINMA’s 2017 regulatory agenda looks strikingly similar to last year’s agenda, citing fintech and capital requirements as top priorities.

• Capitalization and Resolution Plans – FINMA has recommitted to safeguarding financial stability and will monitor regulated entities to ensure strong capitalization. The agency is likely to scrutinize emergency and resolution strategies in 2017 through its supervisory efforts.

• Conduct – As part of the 2017 strategic goals, FINMA will increase its focus on misconduct, with particular attention given to money laundering violations. The agency has said it will couple anticipatory supervision with proactive enforcement.

• Fintech Regulatory Regime – In November 2016, FINMA announced plans to bolster the regulatory regime for fintech firms. The changes are aimed at reducing regulatory burdens. The fintech sandbox model in Switzerland has allowed start-ups to flourish. A formal proposal is expected in 2017. In the agency’s three-year strategy, FINMA has adopted a “pro-innovation” approach to supervision and regulation.

Conclusion
The Swiss are building on the previous year’s agenda in an attempt to retain the stability that has served them so well. That said, its plans do include bringing further enforcement actions in response to misconduct in the financial services industry. And they have adopted a “pro-innovation” approach towards fintech to facilitate growth in the financial sector.

In contrast, Germany’s regulators and priorities are unsurprisingly politically motivated. In 2016, Germany’s economy saw the fastest growth in five years at 1.9%. This year, the country expects to see roughly 1.5% growth with continued improvements in the job market and exports. It appears that Frankfurt will capture a significant portion of the business leaving London in response to Brexit, especially considering the merger of the London Stock Exchange and Deutsche Boerse.

Both countries’ regulatory strategies will certainly be tested in the coming months.

 

Download Clutch’s 2017 Financial Services Regulatory Highlights Report now to learn more. In this insightful and informative report, Clutch Group tracks 2017’s  key global regulatory developments across the financial services industry to identify major rulemakings, legislative and regulatory implementations, supervisory priorities and enforcement trends.