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“Good location policies also make for good digitalization policies”

“Good location make for good digitalization policies”

Mounting regulatory pressure, interventions in the digital economy and the upcoming revision of the Swiss Federal Data Protection Act are not only fueling legal uncertainty, but also tarnishing Switzerland’s location attractiveness. Erich Herzog explains that this isn’t the only possible scenario.

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“Good location policies also make for good digitalization policies”

Erich Herzog, Deputy Head of Competition & Regulatory Affairs at economiesuisse

How is Switzerland positioning itself as a location in the digital realm? Do you see any signs that Switzerland might be developing a Silicon Valley-style culture?

Given its special situation, slapping a Silicon Valley label on Switzerland’s culture would be wrong. Digitalization can only progress in Switzerland if we focus on our country’s strengths and economy, not by adopting other cultures and systems. Switzerland has always been a place of great innovative strength and has topped the international rankings for years now. But if we want to make sure that Switzerland keeps its competitive edge going forward, we also have to secure our success factors – including legal safeguards, planning certainty and favorable conditions – for the digital future. For that, we have to call existing regulatory approaches into question – calmly and judiciously – without turning everything upside down. The state needs to set itself the goal of structuring both regulations and the application of those regulations in such a way that citizens and companies perceive them as having as little impact as possible, while also taking into account the new opportunities opened up by technology.

If the Council of States has its way, an address for service will be mandatory for all major commercial Internet platforms. What do you think about this and other interventions in the digital economy?

As the idea proposed by the Council of States shows, there are only a very few instances where Internet regulation is meaningful at the national level. How will a legal obligation to establish a physical presence in a specific country, or in every country, impact a digital company with global operations? Small start-ups can’t afford to set up domiciles everywhere they are active. Large corporations, on the other hand, can easily afford to ignore these kinds of requirements. The motion is nothing more than political marketing. It might reassure the base for a brief moment, but interventions such as these simultaneously risk jeopardizing the factors that make the digital economy such a big success.

One big challenge in terms of regulating the digital economy is that national borders in the digital realm simply do not have the same significance as those in the physical world. In today’s world, sending data across the globe to exchange information about business and personal matters couldn’t be any easier. The state’s legislative authority, however, is normally restricted to Switzerland. It will therefore become increasingly impossible for the legislator to pursue a path that would be ideal from a domestic policy point of view. Instead, it will have to try to address international trends and thus recognized principles in national law. If a small country creates a stand-alone solution that’s out of sync with the rest of the world, the immediate online response will be to bypass that solution or shutter the country. In the medium term, stand-alone solutions also undermine federal authority: how do we plan to deal with international Internet companies that disregard special national legislation? Should we ban their offerings in Switzerland? Eliminating access to those offerings in Switzerland would primarily penalize users in Switzerland rather than the providers abroad who refused to comply with a special Swiss solution. This illustrates the need to adopt an internationally coordinated approach on these issues rather than pursuing isolated solutions or copying flawed foreign solutions.

First of all, the state has to be able to finance itself. Second, we cannot allow innovation to be stifled by ramped-up regulations. How can we master this balancing act successfully?

A good regulation is one that permits an innovative response which, in turn, generates competition among the regulated players on the question of how to deal with the regulation. Looking at our current regulations, we have to bear in mind that many of their concepts still hail from the days when account ledgers were kept with ink and ballpoint pens. In areas like these, in particular, there’s a tendency to follow similar patterns rather than to delve into the new options opened up by technological advances. If you succeed in transferring the gains in efficiency and interconnectedness into an administration, its efficiency will rise. When all is said and done, it’s vital that efficiency gains achieved in regulations not be undone by simply intensifying those regulations.

How does Switzerland need to position itself in the digital economy to preserve its location attractiveness?

Good location policies also make for good digitalization policies. What’s needed is scope for economic development, attractive framework conditions, an excellent infrastructure and the availability of specialists who can ensure Switzerland’s ability to preserve its international appeal as a location for the digital economy.

Industrial policy measures, like the promotion of certain technologies, need to be rejected unequivocally. These run the risk of creating a regulatory framework that encourages specific developments while failing to sufficiently take market forces into consideration. Regulations must always be appropriate, and the state must focus on its actual performance mandate so that the tax burden for local companies remains competitive. 

To what extent do the interests of consumers and business diverge with the revision of the Swiss Federal Data Protection Act, which is expected to stretch on until the end of 2019?

Misconceptions about data protection lead to situations in which consumers are treated in a patronizing manner rather than protected. But the Data Protection Act’s revision doesn’t focus on the question of what constitutes well-designed data protection. Instead, in view of the dynamic international developments of recent years, it aims to modernize Swiss data protection legislation and make it compatible with that of other countries. With its General Data Protection Regulation, the EU created something that is, for all practical purposes, a new international standard in data protection that not even Switzerland can ignore. Because of this, both consumers and businesses are interested in a swift, balanced revision of the Swiss Federal Data Protection Act.

Isolated Swiss solutions are not expedient here, either, and will ultimately have an adverse effect on consumers and businesses alike. However, copying the EU regulation wouldn’t help us reach our goal, either. Switzerland must make the most of its regulatory discretion. The draft bill for revision therefore needs to curtail any restrictions that would entail massive operational expenditures without offering any added value in terms of data protection law. For instance, the draft bill for revision placed stricter requirements on certain tools that could prove beneficial to consumers, one example of which being profiling, a method used for identifying credit card fraud.  

Which legal uncertainties could potentially arise for Swiss companies in the meantime? What can be done to put a stop to them?

It all depends on whether Swiss companies fall within the scope of the European GDPR or not. If they are indeed subject to the GDPR and for as long as efforts to revise the Swiss Federal Data Protection Act are still ongoing, they will need to bring themselves in line with two different data protection regulations. Given the discrepancies in the content of the existing, still unrevised Swiss Federal Data Protection Act and the GDPR, this could result not only in additional administrative expenditures but also legal uncertainty if demarcation-related questions arise as a consequence of the differences between the two sets of rules. The DPA is being revised with the goal of creating legal certainty: if a company complies with the requirements of the GDPR, it should be able to safely assume that implementation of the revised Swiss DPA will be possible without any major additional administrative effort.

Legal uncertainty could have an impact on business partners within an international context. If revision efforts in Switzerland are delayed significantly, there is no guarantee that foreign business partners won’t start avoiding Switzerland as a trading partner, and that would negatively impact the country’s location attractiveness. The only way to prevent legal uncertainty is by bringing the entire revision project to a swift conclusion. 

© 2019 KPMG Holding AG is a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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