Switzerland’s Federal Administrative Court has determined that the write-off of AT1 capital instruments associated with a renowned financial institution, which was mandated by the Swiss Financial Market Supervisory Authority (FINMA) in March 2023, was conducted without a legal basis. Consequently, the court has nullified the decree issued by FINMA in a partial ruling.
On March 19, 2023, representatives from the Federal Department of Finance, FINMA, the Swiss National Bank (SNB), and the involved banking entities announced a comprehensive strategy for the acquisition of the institution in question by another major bank. This strategy included the cancellation of the entire Additional Tier 1 (AT1) capital instruments, with a nominal value approximately amounting to CHF 16.5 billion. On the same day, the Federal Council amended a recently passed Emergency Ordinance to give FINMA the authority to require a bank to write off its core capital. Subsequently, under this authority, FINMA instructed the bank to immediately write off all AT1 bonds and to inform the respective bondholders, which the bank proceeded to do.
Over 3,000 individuals contested this decree through appeals filed with the Federal Administrative Court, leading to around 360 separate cases. This resulted in a singular multi-party procedure wherein all complainants were consolidated into one shared legal proceeding. Notably, each complainant’s right to be heard included access to the submissions and evidence presented by all parties involved, relevant to their claims.
The complainants primarily argued for the revocation of the decree and sought the reversal of the write-off, claiming that there was neither a contractual nor sufficient legal basis to justify the action taken against the AT1 bonds. Conversely, FINMA and the acquiring bank questioned the complainants’ right to challenge the decree, contending that the contractual conditions justifying the write-off were fulfilled as of March 19, 2023. They also asserted that existing articles within banking law provided a sound legal foundation for the decree.
On October 1, 2025, the Federal Administrative Court ruled in favor of the complainants in one appeal case, affirming their right to appeal and annulling the decree from March 2023. However, the court has yet to address the request to reverse the write-off itself. As a result, all other related cases are currently on hold until the revocation of the decree is finalized.
For regulatory clarity, AT1 capital instruments are classified as part of a bank’s additional core equity. Typically structured as conditional mandatory convertible bonds, the impacted bonds are ones that include potential write-off features that can be exercised upon certain predefined events known as “viability events.” The court established that the requirements for initiating the write-off were not met because the contractual viability event had not occurred; at the time of the write-off, the bank was sufficiently capitalized to fulfill regulatory standards. The federal government and the SNB had taken measures solely to maintain liquidity, which, as interpreted through a trust-theory perspective on the bond prospectus, did not directly affect the institution’s equity base.
The court also assessed whether a statutory grounding existed for the orders made concerning the write-off. It concluded that the bondholders’ property rights had been significantly compromised, thereby necessitating a clear legal framework to substantiate any action taken. However, the court found no such framework, stating that relevant articles designed to address insolvency concerns were insufficiently specific to justify the write-off of third-party rights based on legal principles. This analysis extended to articles within both the Banking Act and the Financial Market Supervision Act, as well as the amendments made in the Emergency Ordinance.
In addition to evaluating the legal underpinnings, the court expressed concerns regarding the constitutionality of the Emergency Ordinance itself. It identified several constitutional violations related to the provisions allowing expropriation and ownership guarantees, thereby questioning the legitimacy of the legal foundation for the write-off.
This ruling remains open to appeal to the Federal Supreme Court, with FINMA indicating an intention to challenge the court’s decision within the allotted 30-day appeal period.