Mark Branson has been a Director of FINMA since 1 April 2014. The British-Swiss dual citizen and former investment banker is confronted with a dynamically changing Swiss financial industry. He comments on the state of the Swiss Financial sector and explores on regulation for sustainable investing.
Mark Branson, you have been CEO of FINMA for five years. How has this institution changed over the course of your employment and how do you plan to shape it in the future?
I personally have worked at FINMA for a good deal longer. But it is not about me personally. It is about the question of whether we as an authority are doing the most that we can. We have been asking ourselves this question since FINMA took up its work ten years ago. As FINMA our goal is to carry out professional, direct, risk-oriented and credible supervision. This is something we are working on. And something I believe we have done well in recent years.
After the financial crisis we saw a tremendous amount of new regulation introduced in Switzerland but also on a global scale. Over the years, Finma has expanded significantly, from 328 full–time employees in 2009 to 534 in 2017. Is this an indicator of over-regulation in the financial industry?
No, the targeted increase in our resources has little relation to the changes in the regulatory environment. It is more a matter of learning from the lessons of the financial crisis. Supervision before the crisis was not sufficiently direct and personnel resources were inadequate. Expectations of the regulating authorities rightly increased following the crisis. Supervision should no longer only be preached down from a pulpit or carried out through an audit firm. This meant that growth was necessary – quantitative, but also qualitative in certain areas. And that is why a targeted increase in staff numbers took place over FINMA’s first four years. Staffing levels remained more or less stable after this.
Switzerland has the potential to become a major player in the FinTech ecosystem. However, this requires innovative and dynamic regulation. Yet in recent years Finma has shown a rather pragmatic approach by acting on a case–by–case basis. Where does FINMA stand on FinTech companies and where do you see major challenges for Finma in adapting to these innovative business models?
Innovation is important for the financial centre. New technologies offer new possibilities here. On the one hand, we try to make sure that innovators do not fail due to unnecessary regulatory hurdles. One example of this is the digital identification of customers. Another is the FinTech licence, which has been available since the beginning of 2019 and which we helped initiate. Additionally, we have attempted to provide legal certainty around ICOs by publishing guidelines. On the other hand, however, we systematically take action against business models that attempt to circumvent supervisory law under the guise of innovation or new technologies. Let me put it like this: FINMA says “yes” to innovation, but “no” to misuse.
Do you observe an increasing cyber threat level to the financial sector due to technological innovations, e.g. digitalisation within banks or FinTech companies in general?
We view cybercrime as the top risk to the industry at an operational level. As you say, the risks are increasing as a result of digitalisation. Increased outsourcing also plays a role here. Overall the banks and other financial market players seem to be well aware of the risks. For obvious reputational and financial reasons it is in their own self-interest to manage these risks. But this does not mean that they are all equally well prepared. In some cases the IT infrastructures have grown outdated. We as FINMA have increased the intensity of our supervision in this area and have recruited specialists with the necessary expertise. We must be in a position to ask the right questions and to analyse and assess the answers. But the risks do not only affect the individual financial institutions. They can affect the whole system. Besides the measures taken by the individual institutions, Switzerland needs a defence mechanism for dealing with cyber risks across the entire system.
Due to the recent low interest rate environment, many investors are seeking alternative investments. As a consequence, real estate prices have surged. Is this at all worrying given where we came from in the last financial crisis?
As you say, supposedly low-risk return opportunities are rare. This is encouraging more people to invest in real estate. We have seen extremely strong growth in mortgage lending. This amount has doubled in Switzerland over the last 15 years! Initially we were concerned about the growth in mortgages for citizens financing their own home. Measures have been taken to counter the overheating tendencies here. In recent years we have turned our focus to investment properties. Growth remains as strong as ever here: high levels of construction activity, high prices and also record-high vacancy rates. Just imagine a city the size of Bern or Lausanne standing completely empty. Overall it is a risky mix. We will therefore continue to focus on this area.
You used to work in banking and decided to move to a regulator. Has this experience at all affected the way your institution approaches banks and designs its regulatory endeavours?
In general, as a supervisory authority it is beneficial to have employees with industry experience who know the business. We rely on that for our direct supervision. To ask the right questions we need practical and not just theoretical experience and expertise.
You studied mathematics. Were there any specific factors that led you to pursue a career in finance and regulation as opposed to a career in academics?
At English universities – back then, at least – a student’s choice of degree was not necessarily motivated by a desire for a career in a particular sector. Things were less cut and dried. It was about being interested in a specific subject. It was about training for the mind. It was about getting a good grounding through education. Whether this led to an academic career or employment in the financial industry – as in my case – or in another industry was not predetermined by the choice of degree.
In your opinion, what are the most effective means of mastering the balancing act of ensuring security and stability in the financial sector and remaining attractive as a location for international financial institutions?
Firstly, security and stability are by no means incompatible with competitiveness. They can even be a competitive advantage. It is difficult to say where the limits of this balancing act lie. It is clear that credible international standards provide a good point of reference today. As far as calibrating prudential requirements is concerned, as a small economy with a large financial centre Switzerland has tended to opt for a strategy of stability. Regarding the question of how business should be conducted, Switzerland is comparatively liberal and very principle-based. Here we try to keep complexity as low as possible. But ultimately it is always a combination of factors that make a financial centre competitive. This goes beyond purely regulatory issues. And Switzerland has some trump cards to play here.
For the last ten years we have seen continuous economic growth, yet recently an increasing number of financial analysts have predicted a downturn in the economy. How fit is the Swiss financial sector to overcome these challenges and where do you still see potential for improvement?
Fundamentally, the financial sector in Switzerland is healthy and well capitalised. But there are big challenges. Virtually all financial intermediaries – and this applies across the whole world – are affected by the prevailing low interest rate environment. For some providers in Switzerland the altered tax framework is also having an impact. But such challenges also make the market participants fitter. In my opinion, the deciding factor is how the players cope with the low interest rate environment. The scarcity of investment opportunities and tendency towards overheating if interest rates remain low is one issue. The consequences of an exit from the low interest rate environment are another.
The Great Recession has shown that structured products can be highly profitable but still pose a significant risk to the international financial sector. What do you think of these financial instruments?
Banks in the Swiss financial sector, and primarily our systemic banks, have been in the focus of foreign authorities for some time, most recently UBS in France. How does Finma engage in this dialogue with the management of the accused banks?
Here we are dealing with legacy issues from a time when cross-border wealth management operated under very different circumstances in Switzerland. But a lot has changed here – just think of the AEOI. However, we monitor how institutions are dealing with that kind of legacy issues.
Will Mark Branson ever return to a financial institution as a board member or CEO?
There are no plans. I am focusing on my current role. I want to do a good job here.
Larry Fink recently predicted that within five years everyone would calculate the value of a business through its impact on society, politics and the environment. Do you agree? And do you think a shift away from traditional, financial valuation methods would be at all possible?
If the question is whether political, regulatory or environmental risks are important in how a company is valued, then the answer is yes. Such risks can strongly influence a company’s future growth prospects.
Many companies voluntarily publish a Corporate Social Responsibility Report. Should this be mandatory, and would it have an impact on the way companies engage in business?
Identifying and disclosing such risks can be an important step towards raising awareness. But it is important to ask what really happens to such reports and what they aim to achieve. If such reports are published to serve as a fig leaf or as a form of greenwashing, then their impact would seem to me to be relatively limited.