Financial centers in a globalized free-market economy - The opportunities and limits to regulation

Speech of the Federal Councilor Christoph Blocher on capital market regulations (Liechtenstein Dialog 2005), 28th October 2005, Vaduz

Speeches, FDJP, 28.10.2005

Ladies and Gentlemen:

If you ask somebody who works at the public administration, or perhaps even a legal expert, about regulation on the capital market, the reaction you get will likely be:

“There is yet a great deal to be done!” Ask a Swiss banker, and the answer will be: “We will soon be drowning in all that regulation!”

Being a member of the Swiss Government and thus part of the administration,
perhaps I should not say so.

But if you ask me, I think the banker has it right and is closer to reality.
There is no denying that the capital market has developed drastically over the past few years — and so has regulation in this area. Regulation has come in the form of federal laws and ordinances of the government.

But there has also been much regulation

  • by the Swiss Federal Banking Commission in the form of
  • ordinances,
  • memoranda,
  • and guidelines.

And there has also been a commendable amount of self-regulation, which I call semi-governmental regulation.
I call it so because self-regulating bodies draft their guidelines and decrees in close cooperation with the Federal Banking Commission.

More often than not, such decrees become framework regulations. They lay down minimum standards and may gain binding force for all financial institutes in Switzerland.

Apart from these self-imposed binding acts, there is another kind of self-regulation tools—rules of conduct. These rules have statutory force, and the Swiss Bankers Association has authority to enforce these rules— if need be, by imposing penal sanctions. You see, there is a great number of bodies that issue laws, ordinances and regulations:

  • We have legislative ordinances issued by the lawmaker,
  • we have ordinances issued by the Federal Banking Commission;

and there are

  • self-regulating rules that have been adopted by the Swiss Bankers’ Association,

those of the

  • Swiss Funds Association,

the ones of the

  • SWS Swiss Exchange,

and last but not least, there are the self-regulating rules of the

  • Swiss Trusteeship Agency.

So, here we are with a vast jumble of regulations, topped only perhaps by the provisions of the Swiss agricultural law. One is tempted to ask…

Why are there so many regulations?

Of course, many of these regulations are homemade, but not all of them. In fact, a great deal of pressure for more regulation has been induced from abroad and by international organizations —organizations that you and I very well know.

In truth, Switzerland has been heavily lobbied into imposing more and tighter regulation on the Swiss financial market.

In fact, there are quite many players tinkering with new regulations. Quite a few seem to take it as a kind of sports to come up with ever-new ideas on regulation. Among them are

  • the International Monetary Fund in Washington,
  • the International Organization of Securities Commissions in Madrid,
  • and some people with the Financial Action Task Force on Money Laundering in Paris.


  • the Bank for International Settlements


  • the Basel Committee on Banking Supervision
    have constantly been pushing for ever more regulation.

Wherever you turn — coming up with yet another regulation seems to be the new name of the game.

Everywhere — it would seem— somebody is eagerly working away at some new guidelines, polishing or adapting rules, and putting the finishing touches to some new regulation.

But that is only the beginning of a long process, because all those nice and shiny rules and regulations that come along the assembly belt need yet to be ratified and implemented in the respective states. Small wonder, then, that such regulation zeal poses a heavy burden on the Swiss financial center.

According to an April 2004 survey conducted by the Swiss Banking Institute of the University of Zurich, regulation costs large banks as much as 4.1 percent of their total expenditures for regulation matters. In small banks, these costs amount to 9.8 percent.

But then, it may be asked, are we at the mercy of this trend of ever more and tighter regulation in the capital market? Is there nothing we can do about it? Well, I say we can! There are limits to everything. And there must be limits to rampant regulation. To respect limits, however, it is crucial to know where the limits begin and where they end.

The Swiss Federal Constitution is quite explicit about these limits:
Article 27 clearly provides for economic freedom. Of course, this freedom also applies to the financial market.

Moreover, article 13 of the Constitution provides for the fundamental right of protection of privacy — a right that also encompasses bank secrecy.
True, under article 36 paragraphs 2 and 3 of the Constitution, the lawmaker has a right to restrict fundamental rights.

However, any such restriction must be done so in the interest of the public and according to the principle of proportionality. These very criteria must also be respected when international agreements and standards are to be implemented into Swiss law.

As a rule, international agreements and standards include some room for interpretation. It is in our interest to take advantage of such leeway and forgo unnecessarily refined solutions. After all, the adage still holds true: less is often more.

While we consider adopting international agreements and regulations, an elemental issue must also be duly taken into account—costs.

It is also important to pay closer attention to how regulation may distort competition — competition not only between countries but also between the various banking institutions.
It is equally important that all regulation be neutral with regard to competition.
After all, banks are in the habit of passing costs incurred by regulation on to their clients.
Such costs are greater in small banks than in large ones, it appears.

Let me now briefly touch on two topics that are currently being reviewed: The first is about Implementing FATF recommendations

Early this year, the Federal Council submitted the revised recommendations by the Financial Action Task Force on Money Laundering for consultation.

The commentators have been unanimous in agreeing that it was important for the reputation of the Swiss financial center to be clean and incorruptible.
There was also consensus as to the importance of combating money laundering.

However, despite this consensus, quite a few of the proposals that the Federal Council presented met with critique.

In particular, commentators were deeply concerned that the fight against money laundering was increasingly extended to trades and activities outside the traditional financial market, such as real estate trade or gem trade.

They contended, for example, that respectable citizens who do nothing more than buy some expensive jewelry might be all too easily suspected of money laundering.

Given the harsh criticism the Federal Council’s proposal for implementing the recommendations provoked, it has been decided that the entire deliberations be shelved for the time being.

Meanwhile, the Swiss government has been reviewing the costs and benefits of the new regulation. Once all issues have been analyzed, the further course of procedure will be established.

The second topic I want to mention is about a single Capital Market Supervision Authority.

According to the maxim same business, - same risk, same rules, this authority would be responsible for supervising banks, - insurance companies, and the Swiss Money Laundering Reporting Office.

However, it is not planned for independent assets managers to be put under the control of the Supervision Authority.

A single authority that unites supervisory duties should help prevent the doubling of activities and render supervision more efficiently.


Let me summarize what follows from these considerations.

First, Switzerland as a financial center is fundamental to the national Swiss economy.

Second, this financial center competes with other globally oriented financial centers.

Third, regulating the capital market serves one major goal — keeping the Swiss financial place competitive internationally.
To remain competitive, investor protection, the safe functioning of banks, and the stability of the financial system are of crucial importance.

Whatever regulation Switzerland may adopt, it is essential that it do justice to the economic conditions and customs typical of Switzerland. These include, especially economic freedom and the client’s right to secrecy.

In addition, any new regulation needs to be scrutinized, especially whether it is in proportion

  • to the effort
  • and the benefit.

One thing is for certain: Currently, it is not too little regulation that we have to fear. On the contrary, the only thing we have to be cautious of is too much regulation.

Thank you.

to the top Last modification 28.10.2005