The financial market regulator severely punished the Zurich financial firm and confiscated more than 9 million francs of its profits. Finma is already testing the introduction of the senior manager regime.
In 2023, Finma opened enforcement proceedings against Leonteq.
Gaëtan Bally / Keystone
The banking supervisors are taking aggressive action against Leonteq, a provider of structured products from Zurich. As can be seen from a statement on Thursday, the financial market supervisory authority (Finma) has completed so-called enforcement proceedings against the listed financial company. In this context, it has ordered the confiscation of 9.3 million francs of Leonteq’s profits and wants to appoint an audit officer.
Leonteq shares slumped on the Swiss stock exchange and temporarily lost more than 12 percent of their value on Thursday. Finma’s profit collection corresponds to almost half of the company’s profit last year. Even in relation to the expected profit of over 40 million for the current year, it is a painful sanction. Leonteq also published a profit warning on Thursday. Profit before taxes for the current financial year is now expected to be “in the single-digit million range”.
Finma: serious violations
Finma justifies its strict approach with serious violations. Leonteq “seriously violated its risk management obligations and warranty obligations”. As a provider of structured financial products, Leonteq works with its own products and those issued by partners. These are sold through external distributors.
Finma’s investigation showed that Leonteq inadequately monitored its distribution chain and in “some cases worked with dubious, unregulated distributors”. The problematic transactions with Caribbean parties were first revealed by the Financial Times in autumn 2022. The confiscation of profits relates to two transactions with two former distributors that took place between 2018 and 2022.
In a statement, Leonteq regretted the deficiencies identified and reiterated that it had fully cooperated with Finma. In the future, business will only be done with distributors who are regulated. Leonteq justifies the violations with the company’s rapid growth during this time.
“The weaknesses in our risk management should not have happened despite the rapid growth,” says Lukas Ruflin, the long-time CEO of Leonteq. The company will further strengthen its internal control system. The company also emphasizes that various allegations made in the media and by third parties have proven to be unfounded. There is no evidence that Leonteq was “intentionally involved in any money laundering or tax evasion.”
Test run for the senior manager regime?
Leonteq asserts that the company has invested significantly in improving compliance and risk management in recent years – in some cases the number of employees in these areas has been doubled, important positions have been filled and the number of sales markets has been reduced. In addition, the other measures ordered by Finma would be implemented with “high priority”.
Meanwhile, Finma is trying to play it safe. She wants to appoint an inspection officer for this. This “watchdog” is supposed to check whether all ordered measures have been implemented correctly. However, the representative will not be stationed at Leonteq, but will only be deployed after the work has been completed, according to the request.
Until all grievances have been remedied, Leonteq is not allowed to accept any new distributors who are classified as “high risk”. In addition, the company with 590 employees is only allowed to work with distributors who are subject to regulation comparable to Switzerland. It must end relationships with unregulated distributors.
Also noteworthy is the requirement that Leonteq must expand its corporate governance, i.e. its management structures. The required measures are reminiscent of the so-called “Senior Manager Regime”, which Finma would like to implement as an additional regulatory instrument. Finma demands that Leonteq “comprehensively explain and assign the responsibilities within its management in writing” and that reporting on “reputation-relevant governance issues” should also be introduced.
For Finma, Leonteq could therefore be a test case for the later, systematic introduction of the senior manager regime. Finma’s decisions are not yet legally binding. Company management could appeal against the measures. According to reports, she has no intention of doing so.
Negative trend continues
For Leonteq, Finma’s decision comes at a bad time. Although the conclusion of an enforcement procedure was foreseeable, the negative trend in business and share price development is likely to continue. Leonteq shares have been losing value for years, this year alone it has fallen by 40 percent. At their peak around ten years ago, they were worth almost ten times more.
In the last four years, Leonteq has had to publish four profit warnings, most recently in December 2023. At that time, Leonteq had significantly lowered its profit expectations. The reason was high investments and low market volatility. Providers of structured products benefit when market fluctuations are high.
Volatility remains low, meaning not only the profit collection hurts, but also the stable market environment. The hope for a more positive environment for structured products, which was expected after the US elections, has not been fulfilled, according to analysts at ZKB.
The financial experts also consider the extent of the profit collection ordered by Finma and the resulting profit warning to be “surprising”. Leonteq points to its continued solid equity base. But as long as Finma is in the house, the pressure on companies and stocks is unlikely to ease.
