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Investment Funds – an Overview of the Swiss Market

Switzerland, as an important financial center, has always been very attractive for the asset management industry and in particular investment funds. Since Switzerland's decision not to access the European Economic Area (EEA) in 1992, the market for investment funds in Switzerland has been separated into two types of activities: the distribution of foreign collective investment schemes in Switzerland and the production of Swiss collective investment schemes.

Switzerland has become a very important market for the distribution of foreign funds but also has a very important domestic market for Swiss funds.

The distribution of foreign investment funds in Switzerland has grown significantly, particularly in the last decade. For retail investors, due to the fact that Switzerland is not a member of the European Union (EU) or of the EEA, Swiss funds cannot be marketed with the UCITS passport within the EU countries. Therefore, in order to have access to the European market, several Swiss actors have established fund management companies in the EU and set-up UCITS platforms. Such UCITS funds are then not duplicated for the Swiss market, but are distributed in Switzerland. The Swiss market is also very attractive for foreign fund management players who want to access the Swiss market and raise money in Switzerland for their products.

In terms of distribution of foreign funds in Switzerland, a difference has to be made between the distribution to retail investors and distribution to qualified investors. From a regulatory perspective, foreign investment funds distributed to retail investors need the prior approval from the Swiss Financial Markets Supervisory Authority FINMA. In that process, FINMA will check that the conditions for the distribution of foreign funds are fulfilled and that the fund has appointed a representative and a paying agent in Switzerland, both entities that need to be regulated in Switzerland. Furthermore, there is a need for a cooperation agreement between the fund's home regulator and FINMA. The aim of such an approval is to ensure that Swiss retail investors are protected in the same way if they invest in a foreign fund or in a Swiss fund. Basically, UCITS regulation is considered as being equivalent and the Swiss regulation has taken over all the conditions of UCITS for its own domestic securities funds.

The distribution of foreign funds to qualified investors was not regulated until March 2013, date of the entry into force of the amendments of the Collective Investment Schemes Act (CISA). The effective date of the change of regulation was in March 2015, after the 2 year transitional period. Since that date, all foreign funds distributed to non-regulated qualified investors in Switzerland (e.g. pension funds, HNWI) need to appoint a representative and a paying agent in Switzerland and fulfill certain obligations (such as additional information for the Swiss investors and transparency rules). The aim of this new regulation was mainly to provide qualified investors a point of contact in Switzerland (the representative) and have a supervision of the distribution network to qualified investors in Switzerland.

In terms of figures, the number of funds for retail investors approved by FINMA has been constantly growing in the past decade, with about 7250 foreign funds (sub-funds) approved for retail distribution in Switzerland at the end of April 2016. Most of the foreign funds approved by FINMA are UCITS funds domiciled in Luxemburg (over 4000), Ireland, France and Germany, but also certain AIFs (non-UCITS funds).

Foreign funds distributed to qualified investors in Switzerland do not need to be approved by FINMA and there are therefore no official figures as to the number of funds being distributed to qualified investors in Switzerland.

As to the amounts (AuM) invested in foreign funds through the distribution channels in Switzerland, no official statement can be made as, unlike Swiss funds, foreign funds distributed in Switzerland do not need to report their assets under management to the Swiss National Bank.

Although Switzerland can be defined as a very important hub for the distribution of foreign financial products, the domestic market for Swiss funds has also grown significantly since 2004 and in particular since the introduction of the - at the time - new CISA in 2007.

For Swiss funds, CISA foresees different categories of funds that can be set-up in form of contractual funds, SICAVs or Limited Partnerships (closed-end limited to qualified investors). Whereas securities funds need to fulfill the exact same requirements as UCITS funds, other funds for traditional investments and other funds for alternative investments allow a more flexible investment policy, investment techniques or risk diversification and are the ideal structure for "niche" products, private label funds or specific products for Swiss pension funds or other qualified investors for example. Swiss real estate funds have also proven their ability to succeed with an adapted liquidity on the primary market and a listing on a Swiss stock exchange in order to guarantee some liquidity through the secondary market. It is worth mentioning that all Swiss funds, should they be for retail or qualified investors, are approved and supervised by FINMA. In terms of asset management companies, fund management companies or custodian banks, Switzerland has adapted its regulation in order to be compliant and equivalent to the AIFM Directive. Swiss funds can also be of interest for foreign asset management companies as the portfolio management can be delegated to foreign fund managers, if they are subject to equivalent supervision as the one provided by Swiss law which is usually the case for full AIFMD compliant management companies.

In terms of figures, there are about 1500 Swiss funds approved by FINMA as of end of April 2016 and the vast majority is of the type "other funds for traditional investments" for qualified investors. In terms of AuM, Swiss funds represent about CHF 900 bn.

Therefore, depending on the asset class, the targeted investors and the distribution channels chosen, Switzerland offers a variety of opportunities for the fund industry, should it be for the distribution of funds or for the set-up of Swiss structures. The possible opportunity for Switzerland to obtain the third country AIFM passport might also have an impact for the Swiss market.