Swiss and Canadian Banking Systems: A Comparative Analysis

This report aims to compare and contrast the banking systems of Switzerland and Canada. It sets off with background information on the two countries and reviews their respective macro-economic policies, money laundering regulations, privacy laws and electronic payment schemes.

Canada is one of the world’s wealthiest nations with an economy largely dominated by service industries that employ about three-quarters of Canadians. Other important industries include transport, timber, paper products, minerals, natural gas, fish products and chemicals. Canada bears close similarity with the United Sates (US) in its market-oriented economic system, pattern of production and high living standards.

Canada has a thriving petroleum industry with the major crude oil reserves and production based in Alberta. Canada and the US enjoy the world’s most comprehensive bilateral trade and investment relationship, with goods and services exchanged totalling more than $680 billion in 2017 and reciprocal investment stocks of more than $800 billion. Over 75% of Canada’s exports are shipped to the US annually. Canada is the largest foreign supplier of energy to the US and a top source of US uranium imports (CIA 2020).

Similarly, Switzerland is a prosperous and modern market economy with low unemployment, a highly skilled labour for and a high per capita GDP. Switzerland’s economy benefits from a well-developed service sector, led by financial services, and a manufacturing industry that specialises in technology-based production. Switzerland is one of the world’s most competitive economies due mainly to its economic and political stability, transparent legal system, exceptional infrastructure, efficient capital markets and an investor-friendly corporate tax regime.

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Switzerland’s economic practices conform largely with those of the European Union which grants it access to the eurozone’s single market and enhance the country’s international competitiveness. The Swiss economy is closely connected to that of its neighbours in the eurozone which purchases half of Swiss exports (CIA 2020).

Macro-economic Overview of Banking Systems

A stable and efficient financial system is vital for a lasting economic growth and improved living standards of citizens. The Bank of Canada promotes the economic and financial welfare of Canadians by fostering a stable and efficient financial system which encompasses banks and credit unions, financial markets, clearing and settlement systems. The Bank achieves this by performing the following crucial roles:

• Providing central banking services such as maintaining liquidity and serving as the lender of last resort.
• Overseeing and acting as the resolution authority for critical financial market infrastructures.
• Conducting and publishing analyses, studies and research.
• Facilitating the implementation of government policy.

The Bank of Canada is the ultimate source of liquid funds to the financial system and serves as the system’s “lender of last resort.” The deployment of its routine and emergency liquidity tools are guided by the Bank’s framework for market operations and liquidity provision. The stability of Canadian financial system, as well as its ability to support the Canadian economy, depends on the capacity of financial institutions to absorb and manage major shocks, especially for the major banks which perform crucial services to the Canadian economy.

In addition, Bank of Canada staff conduct analysis and research to identify and mitigate systemic risks that could impair the functioning of the financial system, with results published annually in the Financial System Review. Again, the Financial System Research Centre promotes financial system research in Canada to inform policy and improve the economic and financial well-being of Canadians. Under the authority of Canada’s Payment Clearing and Settlement Act, the Bank conducts regulatory oversight of and acts as the resolution authority for designated financial market infrastructures. These include the critical payment systems, clearing and settlement systems. The Bank of Canada equally collaborates with federal, provincial and international authorities as well as industry participants to achieve its financial system goals.

A well-organised, stable banking system is a fundamental precondition for a prosperous economy. Thus, the Swiss National Bank (SNB) was established as Switzerland’s central bank. It is vested with the exclusive note-issuing privilege and has been authorized to conduct the country’s monetary policy. In accordance with the Constitution and Swiss law, the SNB is autonomous in the fulfilment of its mandate, holds regular discussions with the Federal Council, is accountable to the Federal Assembly and is obliged to provide the general public with regular information on its activities.

Its primary goal is to ensure price stability, while taking due account of economic developments thereby creating the appropriate environment for economic growth. The National Bank Act of Switzerland requires the SNB to oversee financial market infrastructures operated by the private sector nationally and in certain instances, abroad, with a view to promoting their security and efficiency. The SNB ensures that neither technical system failure nor financial difficulties on the part of financial market infrastructure operators give rise to major credit or liquidity problems for financial intermediaries or severe disruptions on financial markets. The sole objective of system oversight by the SNB is to ensure financial stability, which in turn is required for an effective monetary policy.

Money Laundering Regulations of Banking Systems

In Canada, money laundering is an illegal activity that covers any act or attempt to disguise the origin of funds or resources derived from criminal activity. The activity involves converting ‘dirty money’ obtained from criminal acts into ‘clean money’. These activities include theft, forgery, fraud, drug trafficking, bribery, robbery, murder, kidnapping, fraudulent manipulation of stock transactions, as well as possessing, issuing or circulating counterfeit money.

The money laundering process is an incessant one with new dirty money frequently being introduced into the financial system. Canada’s national initiative to combat money laundering was launched in 1999. The events of September 11, 2001 extended the mandate to include the fight against terrorist financing activities, thereby resulting in an expanded drive now referred to as the Anti-Money Laundering and Anti-Terrorist Financing Regime. One of the key elements of this Regime is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

The PCMLTFA facilitates investigations and prosecutions of offences relating to money laundering and terrorist financing activity. The PCMLTFA creates a mandatory reporting system and establishes an independent anti-money laundering agency called the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The mandate of FINTRAC is to collect, analyze, assess and, where appropriate, disclose information relevant to the investigation and prosecution of money laundering and terrorist financing offences.

Switzerland is perceived as one if the least corrupt countries in the world. However, the magnitude and internationalisation of its financial services sector increases the probability of its being used as conduit for criminal activities such as money laundering, including proceeds of foreign corruption and bribery. Around 25% of foreign wealth management is dominated in Switzerland. Many multinational businesses that have a registered office in Switzerland are equally exposed to bribery in international trade, especially for trading companies.

Switzerland has strict regulations in place to prevent money laundering and terrorist financing. Money laundering is a criminal offence punishable by the authorities under the Swiss Criminal Code. In addition, the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector Anti-Money Laundering Act requires financial intermediaries to comply with due diligence and disclosure requirements in respect of client transactions. Switzerland also implements the international standards of the Financial Action Task Force (FATF) which defines global standards relating to money laundering.

Incidentally, Switzerland was one of the first countries to introduce measures against money laundering. With the Agreement on the Swiss banks’ code of conduct regarding the exercise of due diligence (CDB) introduced in 1977, Switzerland became a pioneer leader in identifying contracting parties and determining the identity of beneficial owners. The CDB which is issued by the Swiss Bankers Association (SBA), sets out the duties of banks relating to the identification of contracting partners as well as the establishment of controlling persons.

The CDB is one of the main pillars in the fight against money laundering and is revised periodically, with its current version as CDB 20 issued in January 2020. Switzerland’s mechanism for combating money laundering have expanded progressively over the years. In addition to the provisions contained in the Swiss Criminal Cod Switzerland now has the Federal Act on Combating Money Laundering and Terrorist Financing (AMLA) and a corresponding ordinance of the Swiss Financial Market Supervisory Authority (FINMA) on the prevention of money laundering and terrorist financing (FINMA Anti-Money Laundering Ordinance, AMLO-FINMA), including the CDB earlier stated. Through these measures, Switzerland ensures that the FATF’s recommendations are met to the greatest extent possible.

Privacy Laws of Banking Systems

Canadian privacy laws serve two purposes. First, they govern how organizations are allowed to collect, use and disclose personal information. Secondly, they enable individuals to access and manage personal information collected by organisations. Requesting access to personal information is usually provided free or at a minimal cost depending on the amount of information requested, the jurisdiction under which the information is accessed, and whether the information is provided by a private sector organisation or a public body.

Privacy legislation enables an individual to request a free credit report from any Canadian credit bureau and demand correction of errors in their personal information. At the Federal level, Canada has two different privacy acts which are enforced by the Office of the Privacy Commissioner of Canada. These two acts are the Personal Information Protection and Electronic Documents Act and the Privacy Act (PIPEDA). PIPEDA applies to the commercial transactions of organisations that operate in Canada’s private sector. It applies specifically to organisations that are federally regulated and fall under the legislative authority of Canada’s Parliament.

PIPEDA equally applies to the private sector of each province unless a province has enacted its own privacy legislation that is substantially similar to PIPEDA. The Privacy Act is similar to PIPEDA in a way that explains how federally regulated bodies can collect use and disclose personal information as well as explain how users can request to access and update their information. Federally regulated public bodies include Bank of Canada, Canada Revenue Agency (CRA), Canada Space Agency, National Research Council Canada, Statistics Canada and the Treasury Board of Canada. All provinces must comply with PIPEDA with the exception of British Columbia, Alberta a nd Québec, with their own private sector privacy legislation which supersede PIPEDA.

Data protection and privacy are fundamental constitutional rights protected by the Swiss Constitution. Swiss data protection law is set out in the Swiss Federal Data Protection Act of 19 June 1992 (DPA) and the accompanying Swiss Federal Ordinance to the Federal Act on Data Protection of 14 June 1993 (DPO). Further data protection provisions regulating particular issues are spread throughout a large number of legislative acts. Since Switzerland is neither a member of the European Union (EU) nor the European Economic Area (EEA), it has no obligation to implement or comply with EU laws.

Accordingly, Swiss data protection law has some peculiarities that vary from the legal framework provided by the EU General Data Protection Regulation (GDPR). However, because of Switzerland’s location in central Europe and its close economic ties with the EU, Swiss law is in generally shaped by EU law in terms of content and interpretation. A closer alignment of Swiss data protection law with the GDPR is also one of the aims of the ongoing reform of the DPA, which the Swiss Federal Council initiated in April 2015.

The Swiss Data Protection and Information Commissioner (Commissioner) is the responsible authority for supervising both private and federal public bodies with respect to data protection. Further relevant data protection provisions are contained in the Federal Ordinance on Data Protection Certification of 28 September 2007. Specific data protection issues such as transfers of data abroad, and data protection relating to employees or regarding the health sector, are dealt with in more details in the relevant guidelines published by the Commissioner.

Electronic and Payment Schemes of Banking Systems

Canadians use various “payment instruments” to purchase goods and services, to make financial investments and to transfer funds from one person to another. Some of the instruments used include cash, cheques, debit and credit cards and electronic money. Thus, a payment system is the set of instruments, technical arrangements, procedures and rules used to transfer these funds. Canada has two payment systems namely the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS).

Payment systems also play a role in clearing and settlement transactions involving assets such as securities, derivatives and foreign exchange. The LVTS is a real-time, electronic wire transfer that processes large-value, time critical payments quickly and continuously throughout the day. Owned and operated by Payments Canada, LVTS was launched on February 4, 1999. The system provides participants and their customers with the certainty that once a payment message has passed the system’s real time risk-control tests, it is final and irrevocable. These transactions will settle on the books of Bank of Canada at the end of the processing day.

LVTS participants provide their customers, which include other financial institutions as well as commercial and government entities, with indirect access to the system. The Automated Clearing Settlement System (ACSS) is owned and operated by Payments Canada. It is a deferred net settlement system that clears retails payments, including paper-baes payment items (mostly cheques), pre-authorized debit and credits as well as small-value electronic payment items, such as point-of-sale debit card or automated banking machine transactions. Payments obligations cleared in the ACSS are settled in the LVTS.

The Swiss National Bank is vested with the task of ensuring and facilitating the efficient functioning of cashless payment system. It fulfills this duty primarily by serving as both the commissioning party and system manager of the Swiss Interbank Clearing System (SIC). SIC is the central payment system in Switzerland for payments in Swiss francs. Through SIC, banks and other financial market participants conduct interbank payments (also called large-value payments) as well as a sizeable share of retail payments (low-value or customer payments). Retail payments mainly take the form of payment orders such as bank transfers and direct debits.

Similarly, some liabilities arising from card transactions are bundled and settled among system participants via SIC. SIC is a real-time gross settlement system i.e. payment orders are executed individually and irrevocably in real time. Payments are settled through the SIC settlement accounts, with the account balances of sight deposit accounts held at the SNB changed accordingly. The SNB steers SIC in its capacity as commissioning party and system manager. It determines the admission criteria, provides the system with liquidity, and defines the functionalities and settlement rules.

The SNB has entrusted the operation of SIC to SIX Interbank Clearing Ltd, a subsidiary of SIX Group Ltd (SIX). SIX was jointly set up by Swiss banks and operates Switzerland’s financial market infrastructure. As a systemically important financial market infrastructure, SIC is overseen by the SNB. SIC has a link to SECOM, the securities settlement system operated by SIX SIS Ltd. This link ensures that securities transactions are settled according to the delivery-versus-payment principle, i.e. the transfer of securities in SECOM takes place if, and only if, payment in SIC was effected.

This eliminates the principal risk in securities transactions. Also of importance is Continuous Linked Settlement (CLS), a multilateral foreign exchange settlement system which eliminates settlement risk in foreign exchange transactions. The settlement of amounts in Swiss francs (against another CLS settlement currency) is made possible via a link between SIC and CLS Bank, which operates CLS.

Conclusion

The foregoing examines the Canadian and Swiss Banking systems with a view to highlighting the structures, legal and regulatory framework that support their respective economies. A well-established central bank with autonomous mandate to manage the monetary and payment structures of the economy is a pre-requisite for a sound financial system.

The creation of favourable macro-economic policies and enactment of stringent anti-money laundering legislation are measures Canadian and Swiss authorities have instituted to strengthen their respective financial systems. The central banks also serve as the ultimate source of liquidity of their financial systems, while ensuring the safety and stability of their payment systems.