FINMA, the Swiss Financial Market Supervisory Authority, has concluded its enforcement proceedings against Raiffeisen Switzerland in relation to corporate governance issues, having decided that the private bank handled its conflicts of interest inadequately.

In addition, according to the regulator, Raiffeisen's board of directors in St Gallen failed to supervise its former CEO Pierin Vincenz adequately, thereby enabling him, at least potentially, to generate personal financial gain at the bank’s expense. The regulator is claiming that there has been a serious breach of supervisory law. It has instructed the bank to improve its corporate governance and notes that Raiffeisen has already taken some steps in this direction. FINMA will appoint an audit agent to monitor the process of reform and report back to it. According to Zurich prosecutors, Vincenz was released a few days ago from a three-month period of custody that was imposed on him because the authorities suspect him of being a fraudster.

The bank has not been fined, but then FINMA is not empowered to 'fine' the banks it regulates in the punitive sense of the word, only to force them to pay restitution for their misdeeds according to the amounts that they wrongly charged or acquired. The outcome of the Bruno Gehrig investigation (see below) of the Vincenz era will have a bearing on whether it does this to Raiffeisen in future.

In 2016, FINMA began to investigate Raiffeisen Switzerland because it had heard that the bank might be riven with conflicts of interest. In early 2017, it appointed an audit agent (Deloitte - regulators the world over seldom veer far from using the Big Four, which whom they have a 'cosy' relationship) to carry out a detailed forensic examination of the bank's corporate governance structures. Armed with the alarming results of this probe, which is estimated to have cost the bank SFr2½ million (€2.162 million) FINMA embarked on proceedings against Raiffeisen in October 2017 and concluded them just the other day.

The proceedings centred on the bank's holdings in Investnet AG, KMU Capital AG and Investnet Holding AG, which specialise in taking positions in the stock of small and medium-sized enterprises. Vincenz's actions were subject to particular scrutiny because he was a minority shareholder in Investnet Holding AG. In addition, FINMA looked into deficiencies in the granting of loans to the former CEO and to people with close links to the bank or its holdings and also looked at significant overruns in something it calls "the CEO budget." This apparently was an amount of money that the bank granted every year to the CEO to spend at his sole discretion for bank purposes. Vincenz allegedly spent more than his allowance because controls on the budget were inadequate and the other members of the board never queried his overspending. With this money, he paid high flat-rate fees to a consultant with whom he was closely associated. The CEO of a typical Swiss bank does not have near-dictatorial powers, but Vincenz seems to have been an exception to this rule.

FINMA did not analyse other Raiffeisen Switzerland shareholdings in detail. Holdings in the Aduno Group do not fall under FINMA’s supervisory aegis. However, the "Investnet case" investigation alone gave FINMA sufficient grounds to take steps in accordance with supervisory law to prevent any repetition of the aforementioned deficiencies.

A shareholding strategy with numerous conflicts of interest and few controls

Under the leadership of its former CEO, Raiffeisen Switzerland had built up a large number - scores if not hundreds - of shareholdings. These frequently led to many jobs being concentrated in few hands and to conflicts of interest. In a number of its shareholdings, Raiffeisen Switzerland was simultaneously a shareholder, a business partner and a creditor of this-or-that company or its executive body, while also being represented on the board of directors. This placed onerous demands on the management and the monitoring of conflicts of interest.

Vincenz's shareholding in Investnet Holding AG

The Investnet holdings in particular gave rise to a concentration of jobs and to conflicts of interest. Raiffeisen Switzerland owned most of Investnet AG, KMU Capital AG and, from 2015 onwards, Investnet Holding AG. In the initial phase, which began in 2012, a consultant to Raiffeisen Switzerland and a close associate of Vincenz's - the recipient of monies from the "CEO budget" - held an indirect minority stake in the shares of Investnet AG and KMU Capital AG. Raiffeisen Switzerland, with the exception of the former CEO, was unaware of this. In the second phase, beginning in 2015, the companies were restructured and Vincenz also became a minority shareholder by acquiring shares in Investnet Holding AG from his employer, Raiffeisen Switzerland.

Both Vincenz and the consultant in question were involved in the negotiations that led to the restructuring of the group. FINMA's investigation concentrated primarily on the negotiation process and on transactions executed in the context of the restructuring, with a special focus on Vincenz's job, the jobs of the board of directors, and the bank's other internal controls.

The former CEO did not adequately disclose to the board of directors his intention to acquire a holding in Investnet Holding AG. Although he, as CEO of the bank, was selling shares in Investnet Holding AG and at the same time, as a private individual, buying the same shares and was therefore involved in a clear conflict of interest, he did not recuse himself, as he should have done under the bank’s internal policies. For its part, the board of directors of Raiffeisen Switzerland also failed to investigate the obvious potential conflicts of interest and enforce the internal rules on disclosure and recusal.

The flow of information inside the bank that related to the sales process was inadequate. The people involved shared information selectively, with the result that decision-makers and various important bodies did not have a clear grasp of the overall situation. The board of directors failed to address, discuss and write down the decision regarding the sale of the minority stake in Investnet Holding AG to Vincenz adequately. The transaction was dealt with under “any other business”, with the former CEO making a brief presentation with a limited handout only, which impeded proper preparation and made discussion impossible. Moreover, somebody was guilty of redacting the minutes. The board of directors also failed to monitor the subsequent sales process adequately. For example, no written purchasing contract was concluded, and no investigation was conducted into the fairness of the purchase price before the sale occurred.

Inadequate risk management during the granting of loans

Deficiencies were also uncovered in the granting of loans to the former CEO and individuals closely associated with the bank or its shareholdings. Exceptions were made to the bank’s internal lending guidelines, and existing processes and the views of internal control functions were overridden. Contrary to the bank's policies, a loan to the former CEO for the full financing of his holding in Investnet Holding AG was not approved by the relevant committee of the board of directors. In another case, a substantial unsecured loan, which was granted on non-standard terms and should have been signed off by the board of directors, was approved by the executive board. In this case the bank also failed to identify cluster risks in so far as a member of a governing body of a shareholding and the company in question were not classified as associated counterparties despite their economic interdependence. The bank subsequently also miscalculated the regulatory capital. Overall, the bank's risk management proved inadequate in these areas.

Serious shortcomings in corporate governance

FINMA has therefore written on its website: "The board of directors of Raiffeisen Switzerland failed to perform its function adequately as the body responsible for overall managing, supervising and controlling the bank, particularly in the period from 2012 to 2015. The board neglected its duty to oversee the CEO by failing to enforce compliance with internal regulations. There was, for example, no disclosure or monitoring of the CEO’s personal shareholdings from 2012 onwards. As a result, the board of directors enabled the former CEO, at least potentially, to make personal financial gains at the expense of the bank. In connection with the granting of loans, insufficient compliance with internal regulations caused the bank to take risky financial positions vis-à-vis external related parties. As regards the sale of the bank's stake in Investnet Holding AG to the former CEO, the board failed to recognise the former CEO's conflict of interest and entered into a transaction involving substantial reputational risks, thereby breaching supervisory law and its own conduct of business regulations in relation to conflicts of interest. In their totality, these breaches and failures to act constitute a serious violation of supervisory law."

Raiffeisen takes action, FINMA waits

In the past two years, Raiffeisen Switzerland has taken a range of measures on its own initiative. FINMA is of the opinion that these measures, if rigorously implemented, will improve the bank's corporate governance and its handling of conflicts of interest. The bank has embarked on an unbundling strategy with the aim of reducing highly risky job concentrations and conflicts of interest. In addition, the bank has announced or already made changes to the composition of its board of directors.

In April it also commissioned a "warts and all" internal investigation of relevant shareholdings and intends to act on the results of this investigation by the end of 2018 - a date to which FINMA believes it will stick. The bank has selected Bruno Gehrig, a former member of the governing board of the Swiss National Bank. The bank has also announced that it is hiring the Zürich securities law firm of Homburger. The Swiss press has reported that Gehrig and Homburger will not be able to evaluate transactions and firms that the Zurich prosecutor is investigating at the moment. These include financial firms such as Aduno and Investnet.

FINMA will decide what to do when the investigation is over. Meanwhile, the Swiss magazine Bilanz has estimated that the damage done in the Vicenz era amounts to some SFr6 million (€5.2 million). This has already been eclipsed by Raiffeisen's expenditures on internal investigations. One such investigation, ordered and carried out by law firm Prager Dreifuss into Investnet in 2016, reportedly cost SFr2 million. In 2016, according to other reports, this was one of three investigations that the bank ordered, none of them turning up anything untoward. The Deloitte probe is thought to have cost SFr2½ million and the Gehrig probe is expected by some to cost SFr10 million (€8.65 million).

Further action for FINMA?

When it comes to making Raiffeisen obey the law, FINMA has a range of instruments at its disposal. It has decided, for example, that the board of directors requires some fresh blood and must strengthen its professional expertise. It has told the bank that it must ensure that at least two members of the board have experience of the banking sector, as befits an institution of such a size. In addition, it has dictated that at least one member must have compliance experience that is appropriate to the institution’s circumstances. It states on its website that this experience must be 'recognised' by someone-or-other, presumably by FINMA itself. Members of the audit and risk committees, for their part, must be qualified appropriately. FINMA will appoint an audit agent to assess the worthiness, execution and effectiveness of these measures on which it is insisting and of the action taken by Raiffeisen Switzerland itself to improve corporate governance and dismantle its convoluted shareholding structure. It has also required the bank to examine the pros and cons of converting Raiffeisen Switzerland into a limited company in detail, since a company’s legal form and the structure of the group in which it sits are always going to influence the health of its corporate governance.

Action against private individuals

In 2017, FINMA embarked on proceedings against Vincenz before dismissing them as obsolete in December 2017. On its website the regulator (which prefers to call itself a 'supervisor,' leaving the mantle of 'regulator' to the Swiss Parliament which sets all the rules - a very different set-up to that of the UK, where the regulator issues and enforces its own rules) has written: "As the former CEO has publicly undertaken not to assume an executive management position in the financial sector at any time in the future, FINMA could not have achieved anything more by continuing with the proceedings and, for example, imposing an industry ban. Continuing with the proceedings would have been no more than a symbolic gesture."

This is an inexplicably veiled reference to Helvetia, the Swiss insurance company, and the probe into Vincenz's activities as its chairman that FINMA stopped because he resigned his post. The reason for the probe was that this was the only company at whose helm the regulator could punish Vincenz for failing to act with 'finess and probity,' which in turn are the only grounds on which it can ban him from working in financial services. Vincenz resigned as chairman, but this did not end the probe - instead, he convinced FINMA that it was not worth pursuing because he announced to the world that he would never work in financial services again, thus fulfilling the only objective that FINMA could ever have had in its enquiry into his conduct at Helvetia. The insurance company itself was not the subject of the probe and has not been affected by it. FINMA evidently believes that Vincenz was telling the truth when he made his announcement, but obviously stands ready to re-open the investigation if he were ever to go back on his promise. Not to do so would be to invite catcalls and accusations that it lacks credibility as a regulator.

The public prosecutor of Canton Zürich has taken up the case and has benefited from the work that FINMA has already done on it. The criminal proceedings launched by the prosecuting authorities and FINMA's two supervisory proceedings are likely to produce the best outcome in this case. If the Swiss 'fitness and probity' regime works in a similar way to the British 'fitness and propriety' test, any conviction that Vincenz might sustain will be a sign that he lacks fitness and probity and might end in a lifetime ban regardless of his sworn intention to keep out of financial services.

FINMA will only decide whether to embark on further proceedings against individuals in the context of this case when the results of Bruno Gehrig's internal investigation are in its hands. Johannes Rüegg-Stürm, the chairman of the board of directors who resigned in March, might be in the firing line when this happens. The regulator has no evidence so far that would justify any enforcement proceedings against any current officers of Raiffeisen Switzerland.