Founder Sabet defends himself against bankruptcy

Geneva-based Flowbank is not giving up. On the contrary, the online bank, which was declared bankrupt last week by the Swiss Financial Markets Supervisory Authority (Finma), is preparing for a legal counterattack. On Friday, the bank’s majority shareholder, Charles Henri Sabet, addressed the public and condemned Finma’s decision “in the strongest possible terms”. The decision “lacks any factual basis,” he was quoted as saying in a statement.

Finma had declared Flowbank bankrupt because the bank had insufficient capital to operate its business and was also at risk of over-indebtedness. The online bank, founded in 2020, has been repeatedly reprimanded in recent years for violating banking regulations. Finma had opened two disciplinary proceedings (enforcements) against the institute and even revoked its banking license in March.

Liquidation instead of “rescue”

Despite this history, the bankruptcy came out of the blue for Flowbank boss Sabet: “I thought it was a joke. I was totally surprised. Security guards asked me to leave my office immediately,” he says in an interview.

A main reason for the forced bankruptcy is the capital base. As a small bank in category 5, the legal minimum requirement for Flowbank is 8 percent of the weighted positions. This requirement was violated, Finma confirmed upon request.

However, in the run-up to the bankruptcy order, the neobank had been instructed by Finma to carry out a capital increase of 25 million francs within five days. The money was transferred to a blocked account on time. “But instead of approving the capital measure, Finma decided to send us into liquidation,” says Sabet. “We had enough capital – if Finma had approved the capital increase.” There was also always enough liquidity for the bank’s operations.

“We do not understand Finma’s decision; we want to contest it,” he says. Whether and in what form the bank will take legal action will be decided in August. Lawyers are currently preparing a possible procedure. Sabet is seeking advice from a law firm that is familiar with Finma’s procedures. Numerous law firms appear to have found a new field of activity with controversial Finma decisions.

The well-known lobbyist Thomas Borer has also sided with Flowbank and is attacking Finma. For the former ambassador, the agency’s conduct is characterized by “serious legal misconduct and deficiencies”. It clearly shows “that Finma neither has the expertise to control institutions with new, innovative business models nor the legal expertise to implement its control correctly in accordance with the rule of law”.

Finma has fundamental doubts

Finma takes the view that the emergency financing proposed by Flowbank’s main shareholder Sabet was “not a solution that could be approved”. The intended capital increase raised such “fundamental doubts” that approval was out of the question, according to a written statement. According to reports, the planned capital injection was a loan from a third party. Against this background, Finma could no longer tolerate the serious violation of capital adequacy requirements with a view to protecting depositors.

Finma also defends itself against the allegation that the forced bankruptcy came as a surprise. The authority has been in very close contact with the bank for months, not only because of the failure to meet capital requirements, but also because of many other grievances. Flowbank has long been aware of Finma’s expectations regarding the capital situation: “The bank had sufficient time to inject capital in good time or to propose alternative solutions, such as a sale,” the banking supervisors wrote.

New hardness: Flowbank as an example

Flowbank’s failings are obvious. The list ranges from deficiencies in capital resources, organization, risk management to financial reporting. Nevertheless, the tough approach of the supervisors is surprising, especially since such crackdowns are rare. Most recently, in 2015, Finma sent Bank Hottinger into bankruptcy, also at the time due to impending over-indebtedness and because restructuring seemed hopeless.

So is Finma already taking a tougher stance under its new boss Stefan Walter? For Flowbank consultant Borer, the case is clear. After the disaster of the CS rescue, the new management wants to “show strength and willingness to act and thereby make up for their mistakes.” Flowbank is now being made an example.

Finma had already taken a decisive approach to the neobank before Walter took office in April. By revoking the bank’s banking license, the authority could have broken the bank’s neck as early as March. However, lawyers contested the decision, and the license withdrawal did not become legally binding. Neither Flowbank employees nor the public found out about it.

In accordance with its custom and legal restrictions, Finma did not make anything public about the many deficiencies at the neobank for years – until the liquidation order on June 13. Only media reports about frequent personnel changes and losses suggested that the bank had fundamental problems.

Finma must have been aware of the problems, as it was in the thick of things at Flowbank. After the bank’s license was revoked, the supervisory authority appointed a “monitor” at the bank, a watchdog commissioned by Finma. He had to ensure that no funds were withdrawn from the bank. In addition, dozens of consultants from the auditing company EY are said to have dealt with Flowbank on behalf of Finma. The consultants’ expenses, which are said to amount to more than 10 million francs, were charged to the neobank, which placed an additional financial burden on it.

Charles Henri Sabet admits that there were misunderstandings with the supervisors. “I think they don’t understand how small banks or startups work.” Now his time as bank boss is over. Nevertheless, he is convinced that Flowbank could have been a success story despite all the problems. “Our business model has proven itself and is profitable,” he says. But now he hopes that the 147 bank employees will find new jobs and that a “follow-up solution” will be found for the 22,000 customers.

Refund may take time

Meanwhile, lawyers from Walder and Wyss have taken over at the headquarters in Geneva and the branch in Zurich. Sources close to the bank say that all employees have been laid off, but wages are still being paid. Meanwhile, all remaining assets are flowing into the bankruptcy estate, which is being managed by the liquidators.

According to Finma, privileged customer deposits of up to 100,000 francs will be refunded quickly. Non-privileged deposits above this limit, which is said to affect many accounts, will be paid out according to a schedule of claims, which takes time.

The securities deposits are not included in the bankruptcy estate and are transferred separately to the customers. This process is likely to take several weeks. In the case of crypto assets, each product must be checked individually – so repayment is uncertain.