Brexit and framework agreement are indirectly relevant for Swiss investment funds and asset management

Access to the EU internal market is a key issue for Switzerland. From the occasionally heated discussions on the framework agreement, it would seem that participants are keen to highlight the measures Switzerland should avoid, without however putting forward constructive ideas on approaches to future relations with Europe. What repercussions do these discussions have for the financial services sector – and for asset management in particular?

Internal market is not the same as free trade

The EU makes a clear distinction between participation in the internal market (to whatever degree) and a free trade agreement. The scope of cooperation and the economic advantages of both models are difficult to compare. In its free trade agreements with third countries, Brussels waives EU tariffs and volume restrictions, but other trade barriers that incur costs continue to apply. Participation in the internal market, on the other hand, grants third countries partial integration into the EU legal framework, so that even more trade barriers fall away.

Adoption of EU law brings advantages

Swiss financial service providers do not have a legal right to offer cross-border services in the eurozone. In addition, national regulations increasingly adopt a protectionist line. By incorporating, in spirit, MiFID rules into local financial market regulations, Switzerland has adopted EU law to a large extent. Although this is a somewhat bureaucratic approach, it is still the cheapest solution, as every deviating regulation creates more expensive trade barriers. Switzerland is introducing precisely the rules and standards that our financial industry must in any case observe when exporting to the EU. As a relatively small economy, it is vital we be allowed to offer our financial products and services abroad as well.

Switzerland is introducing precisely the rules and standards that our financial industry must in any case observe when exporting to the EU.

There are fewer national barriers in cross-border asset management for institutional clients. According to the EU’s Markets in Financial Instruments regulation (MiFIR), this service can be provided out of Switzerland as long as Swiss legislation is recognised as equivalent and a cooperation agreement has been signed between the supervisory authorities. Provided equivalence is assured, institutional clients with an EU ‘passport’ can be served anywhere in the EU/EEA area. However, the EU has yet to take the necessary decisions on equivalence.

To ensure the Swiss financial centre remains internationally competitive in future, our financial market legislation must align with international regulatory standards. This is particularly important for asset management, as the corresponding market in Switzerland is only set to achieve modest growth in the next few years. By contrast, the growth forecasts for the global market and for cross-border financial services are substantially higher, mainly due to demographic change caused by rising life expectancy and the associated financial burden placed on pension schemes. As Swiss asset managers export a considerable portion of their products and services to the EU, it is essential for legislation to be closely aligned with EU regulations.

Finding answers to the Europe question is a challenge both for the UK and CH

For Switzerland, the purpose of the bilateral agreements underpinning the institutional framework agreement is to secure the most non-discriminatory access possible to its most important export market, the EU internal market. This is a central pillar of the country’s prosperity. The quality of this access is gradually deteriorating, as we are no longer able to update the rules continuously.

The fact that the United Kingdom is still uncertain about how to manage the details of its relationship with the EU in the aftermath of Brexit highlights the lack of information available to British voters back in 2016 in the EU referendum. And it would be foolish to believe that a line was drawn under the Europe issue on 31 December 2020. The UK government will be preoccupied with the Europe question for years to come. The entire process is depriving the UK government of the time and energy required to tackle other reforms needed elsewhere. Similar considerations apply to Switzerland and its gridlocked relations with the EU. Here too, there is often a failure to look at the whole picture, while vested interests tend to block any solution to the EU question that promotes national goals and interests.

The UK government will be preoccupied with the Europe question for years to come.

Both countries need to find a trade-off between sovereignty and access to the EU internal market. At the same time, the majority of the population should be prepared to pay an economic price for an increase (UK) or preservation (CH) of their (presumed) national sovereignty. The question is how high the price can be.

Barriers need to be overcome for the framework agreement to be a success

Once the results on the clarification of the framework agreement are available, industry will expect an overall assessment from the Federal Council and will in turn need to make its own assessment. The uncertainty surrounding Switzerland’s policy vis-à-vis Europe ultimately undermines the country’s standing as a business location and the credibility of its foreign policy. Unfortunately the reality is different. As long as discussions about the best approach to Europe are allowed to continue without perceptible consequences, hollow phrases can be padded out with hopes, expectations and desires. Very little is likely to change here in the short term. Election and voting outcomes become more important than solving problems, polarisation and insistence on extreme positions threaten compromise, and personal attacks replace factual arguments. Effective solutions will only be possible once these attitudes are put to one side.

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