FinSA at the gates an overview Christian Koller, LL.M., Attorney at - - PowerPoint PPT Presentation

• 25. Juni 2018

LGT – Regulatory Update for EAMs

FinSA at the gates – an overview

Christian Koller, LL.M., Attorney at Law

• 25. Juni 2018

FinSA – an overview | Slide 1

Contents

• 25. Juni 2018

− Preliminary remarks − General provisions − Requirements for providing financial services − Offering financial instruments − Issuing documentation − Ombudsman services − Supervision and exchange of information − Penal provisions − Final provisions − Brief summary

FinSA – an overview | Slide 2

Preliminary remarks

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• February 2012: FINMA position paper on distribution rules: “not enough protection for

clients!”

• June 15, 2018: wording of the FinSA/FinIA laws prepared; draft ordinances to be consulted on

in fall 2018

• Entry into force expected in January 2020
• Parliament has watered down draft Dispatch (in various respects):
• SAAM press release from November 4, 2015: “An unnecessary bloating of the monitoring

mechanism that brings no benefit to investors and no improvement to market access”

• SAAM press release from June 15, 2018: “Independent asset managers welcome the

recognition afforded by the new FinSA/FinIA financial market legislation – Parliament is recognizing the diverse nature of the financial center”

• The FinSA is primarily a piece of supervisory law  Non-compliance will result in sanctions

under supervisory and criminal law

FinSA – an overview | Slide 3

Title 1: General provisions (Art. 1–5)

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Purpose (Art. 1 para. 1)

• Protecting clients
• Establishing comparable conditions for providing financial services: “level playing field”
• Enhancing the reputation and competitiveness of Switzerland as a financial center:

Alignment with EU directives (especially MiFID II)

Subject matter (Art. 1 para. 2)

• The FinSA sets out requirements for providing financial services in a trustworthy,

diligent and transparent manner; and

• The FinSA regulates how financial instruments are offered (prospectus rules)

FinSA – an overview | Slide 4

Title 1: General provisions (Art. 1–5)

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Scope (Art. 2)

• The legislation applies to the following, independent of their legal form:
• Financial service providers: persons who provide financial services in Switzerland or
• n behalf of clients in Switzerland on a commercial basis
• Relationship managers
• Persons who create and offer financial instruments
• Exceptions:
• SNB and BIS
• Pension schemes and similar institutions
• If their activities are governed by the Insurance Oversight Act, also:
• Insurance companies
• Insurance brokers and ombudsman services
• Insurance institutions under public law in accordance with OPA 67 I

FinSA – an overview | Slide 5

Title 1: General provisions (Art. 1–5)

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A few definitions (Art. 3)

• Financial services = the following services provided on behalf of clients: (i) purchasing

and selling financial instruments, (ii) the acceptance and forwarding of orders relating to financial instruments, (iii) portfolio management, (iv) investment advisory and (v) granting loans to fund transactions in financial instruments

• Financial service providers:
• Persons who provide financial services in Switzerland on behalf of clients in

Switzerland on a commercial basis

• Definition of “on a commercial basis”: independent economic activity geared toward

making a profit

• Relationship manager: natural person who provides financial services on behalf of a

financial service provider or in his own name

FinSA – an overview | Slide 6

Title 1: General provisions (Art. 1–5)

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Client categorization (Art. 4 f.)

• Financial service providers assign their clients to the following categories:
• Private clients not wishing to opt out (≠ professional clients)
• High-net-worth private clients wishing to opt out (= professional clients)
• Professional clients, particularly:

i. Central banks / financial intermediaries under the BankA, FinIA and CISA / insurance companies under the IOA ii. Foreign clients subject to an equivalent level of prudential supervision iii. Corporations under public law / companies with professional treasury operations

iv. Large companies

v. Private investment vehicles with professional treasury operations set up on behalf of high-net-worth private clients

• Institutional clients: (i) and (ii) above plus national and supranational corporations

under public law with professional treasury operations

• No categorization is required if the financial service provider treats all its clients as

private clients (Art. 4 para. 7)

FinSA – an overview | Slide 7

Title 1: General provisions (Art. 1–5)

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Client categorization (Art. 4 f.)

• Opting out:
• Voluntary waiver of client protection
• Less stringent conditions for high-net-worth private clients compared to the current

definition of a “high-net-worth individual” in the CISA

• Opting in if greater client protection is required
• Intentions to opt out or in must be expressed in writing or in another form that can be

documented as text

• Information obligations of financial service providers
• In terms of the facts: options for opting in
• In terms of time: before providing financial services
• In terms of personnel: all clients except private clients

FinSA – an overview | Slide 8

Title 1: General provisions (Art. 1–5)

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Private clients High-net-worth individuals / private investment vehicles Professional clients Institutional clients

Investor protection

Opting in Opting out

(in part)

FinSA – an overview | Slide 9

Title 2: Requirements for providing financial services (Art. 6–34)

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Requisite knowledge (Art. 6)

• Relationship managers must have sufficient knowledge of the FinSA rules of conduct

and the specialist expertise required for their work

• Proposal by the Federal Council (in addition): Financial service providers have to

ensure that their relationship managers have completed the necessary continuing professional development – struck out by the Council of States and National Council

FinSA – an overview | Slide 10

Requisite knowledge (Art. 6)

• Relationship managers must have sufficient knowledge of the FinSA rules of conduct

and the specialist expertise required for their work

• Proposal by the Federal Council (in addition): Financial service providers have to

ensure that their relationship managers have completed the necessary continuing professional development – struck out by the Council of States and National Council

Title 2: Requirements for providing financial services (Art. 6–34)

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Preliminary remarks on rules of conduct (Art. 7–20)

• Content: information obligations, suitability and appropriateness test, documentation

and accountability, and transparency in client orders

• Not applied to institutional clients (Art. 20 para. 1)
• Professional clients:
• Suitability and appropriateness are assumed (Art. 13 para. 3)
• The requirement to follow the remaining rules of conduct may be waived except for

“transparency in client orders”

• “When providing financial services, financial service providers must comply with the
• bligations under supervisory law as laid out in this Title” (Art. 7)
• “Compliance with them shall also be deemed to represent compliance with aligned
• bligations under civil law” has been struck out  the sense thus remains one of a

“radiating effect touching civil law” as set out in the Dispatch

FinSA – an overview | Slide 11

Title 2: Requirements for providing financial services (Art. 6–34)

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Rules of conduct

Financial service providers shall inform clients of (Art. 8):

• Their name, address, field of activity, supervisory status, possibility of mediation by an
• mbudsman service, general risks associated with financial instruments
• Personally recommended financial services (including risks and costs)
• Existing commercial links with third parties / market offering taken into account
• When personally recommending a financial instrument to private clients: key information

document and, if requested, prospectus Timing and format of information provision (Art. 9):

• Standardized, electronically or as hard copy
• Before the contract is signed or the service provided as a basic principle
• If advice is not being given face to face, provision of the key information document to

clients may, with their consent, also be delayed until after signing

FinSA – an overview | Slide 12

Title 2: Requirements for providing financial services (Art. 6–34)

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Rules of conduct: suitability and appropriateness (Art. 10–14)

Suitability test Appropriateness test Product/service has to be suitable considering the client’s knowledge and experience Product/service has to be appropriate for the client Ensures that the client can assess the risks adequately Takes account of risk appetite and risk capacity  Risk profile

• Age
• Family circumstances
• Professional circumstances
• Education
• Previous and current occupation
• Nature, extent, frequency and time period of

knowledge and experience

• Purpose and term of investment / time horizon
• Awareness of and attitude to risk
• Desire/need for liquidity (short, medium and long term)
• Investment restrictions
• Income
• Financial commitments
• Other assets
• Taking account of costs

FinSA – an overview | Slide 13

Title 2: Requirements for providing financial services (Art. 6–34)

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Rules of conduct: suitability and appropriateness (Art. 10–14)

Prior notification

(that no S&A test is to be carried out including obligation to document this)

Suitability Appropriateness

Execution-only Portfolio-specific investment advisory Discretionary portfolio management Transaction-specific investment advisory

• For professional clients, it is assumed “that they possess the requisite

knowledge and experience and can cope financially with the investment risks associated with the financial service” (Art. 13 para. 3)  Conclusion: The extent of the obligation to test depends on service type and client category

FinSA – an overview | Slide 14

Title 2: Requirements for providing financial services (Art. 6–34)

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Rules of conduct: suitability and appropriateness (Art. 10–14)

How the financial service provider should behave if:

• The client lacks knowledge and experience:

 Provide information to fill the gaps

• A suitability and appropriateness test cannot be conducted because the client has not

provided enough information:  Tell the client that no assessment will be carried out

• Service deemed unsuitable/inappropriate:

 Advise the client against the service  The client can continue to request the service and the financial service provider is permitted to perform it  The financial service provider has to document instances where they advised against performing a service

FinSA – an overview | Slide 15

Title 2: Requirements for providing financial services (Art. 6–34)

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Other rules of conduct

Documentation (Art. 15) of:

• Financial services agreed and information gathered on clients
• Prior notification that no S&A test will be carried out in the case of “execution-only”
• Advice given against performing a service deemed unsuitable or inappropriate
• Additional requirements for investment advisory: clients’ needs and reasons

behind every recommendation to purchase or sell a financial instrument Giving an account (at client’s request) (Art. 16) of:

• Documentation prepared in accordance with Art. 15
• Financial services agreed and provided
• Composition, valuation and evolution of the portfolio
• Costs associated with financial services

 FC deciding on minimum content

FinSA – an overview | Slide 16

Title 2: Requirements for providing financial services (Art. 6–34)

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Other rules of conduct

Processing client orders (Art. 17)

• Principle of good faith
• Principle of equal treatment

Best execution of client orders (Art. 18)

• Achieving the best result possible from a financial, time and quality perspective
• Issuing a corresponding directive

Securities lending (Art. 19)

• Only with the client’s consent “in a form that can be documented as text”
• Consent is only valid if it is preceded by an explanation of the risks and if compensation

is paid for income from instruments lent and for the lending in itself

FinSA – an overview | Slide 17

Title 2: Requirements for providing financial services (Art. 6–34)

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Organization (Art. 21–34)

• Appropriate level of organization (Art. 21): ensuring compliance with the FinSA by

means of internal regulations and an appropriate corporate structure

• The financial service provider shall ensure that employees have the requisite skills,

knowledge and experience (Art. 22)

• Consulting third parties (Art. 23 f.) is permitted as a basic principle  Obligation to

instruct and monitor

• Handling conflicts of interest (Art. 25 ff.):
• Organizational measures designed to prevent COIs; explanation given to client if it

cannot be ruled out that a COI will put him at a disadvantage; FC deciding on specifics, including prohibited COIs

• Compensation from third parties (payments) is permitted if the client has been told in

advance about their nature and scope and is waiving his own entitlement to the compensation or if the compensation is being passed on to the client in full  Transparency requirement, no ban

• Internal directive on measures required to monitor employee transactions

FinSA – an overview | Slide 18

Title 2: Requirements for providing financial services (Art. 6–34)

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Organization (Art. 21–34)

Register of advisors (Art. 28 ff.)

• Relationship managers at Swiss-based financial service providers

not subject to supervision have to register, as must those at foreign financial service providers; applies e.g. to simple investment advisors (not asset managers)

• Rationale: no monitoring mechanism under supervisory law for these financial service

providers; possibility of imposing sanctions via the FinSA’s penal provisions

• Registration requirements: (i) sufficient specialist knowledge and knowledge of the

FinSA rules of conduct, (ii) professional liability insurance (or equivalent financial guarantees), (iii) membership of an ombudsman service, (iv) registration prohibited in the event of certain criminal convictions or disqualifications from practicing certain professions or activities under the FINMASA

• Registration body licensed by FINMA; strikes relationship managers off the register if

the registration requirements are no longer met

FinSA – an overview | Slide 19

Title 3: Offering financial instruments (Art. 35–71)

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Obligation to produce a prospectus (Art. 35 ff.)

• Obligation to produce a prospectus for all securities in the event of:
• Disseminating a public offer “to purchase” in Switzerland
• Requesting the admission of securities for trading at a trading venue in accordance with the FMIA
• FINMA-licensed verification body ensures that the requirements for the prospectus are met;

exception: prospectuses for collective investment schemes

• Various exemptions from the obligation to produce a prospectus (Art. 36 f.):
• Based on the type of offer (e.g. offered only to professional clients)
• Based on the type of securities (e.g. securities granted by employers to their staff)
• Various scenarios in which the obligation to produce a prospectus is less stringent (Art. 47)
• Requirements for prospectus content in accordance with Art. 40 ff.

 To date, the obligation to produce a prospectus has only applied in some cases to collective investment schemes, structured products and the public issue of shares and bonds. The new prospectus legislation will trigger a paradigm shift in line with EU law.

FinSA – an overview | Slide 20

Title 3: Offering financial instruments (Art. 35–71)

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Key Information Document (KID) (Art. 58 ff.)

• The “creator” of a financial instrument is obliged to prepare the KID if offering the

instrument to private clients

• Purpose and content:
• The investor is to make an informed investment decision and must be able to

compare different product types and products from different providers

• The KID must be a self-contained document that is easy to understand
• Content in accordance with Art. 60; specifics are to be regulated in the Ordinance
• Exemptions: No KID is required for shares (or equivalent securities), for non-derivative

debt securities or for financial instruments that “may only be purchased on behalf of private clients under a portfolio management mandate”

FinSA – an overview | Slide 21

Title 3: Offering financial instruments (Art. 35–71)

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Additional information on the obligation to produce a prospectus

• Publication (Art. 64 ff.):
• Basic principle: when the public offer begins or the instrument is admitted to trading

at the latest

• Prospectus must be filed with the verification body after approval
• Advertising (Art. 68): indication and reference to prospectus/KID
• Liability for the prospectus (Art. 69):
• Anyone who provides incorrect or misleading information in the prospectus or KID or

makes statements therein that do not meet the statutory requirements and does not act with the requisite care

• Negligent liability without relief for incorrect or misleading information about facts

(i.e. liability even for slight negligence)

• Negligent liability with relief for incorrect or misleading information on future

prospects (e.g. liability only if information is provided against better judgment or without indicating the uncertainty of future developments)

FinSA – an overview | Slide 22

Title 4: Issuing documentation (Art. 72–73)

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The entitlement to be issued with documentation (Art. 72) is more extensive than the documentation and accountability obligation under Art. 15 and 16:

• Covers the client’s file and all other documents relating to the client that the financial

service provider has prepared as part of their business relationship; does not apply to “purely internal documents”

• The entitlement is one under private law and corresponds to Art. 400 CO in terms of its

content; however, it forms the basis for Art. 73, which governs the issuing procedure:

• The client submits a written request and the financial service provider then has 30

days to provide a copy free of charge

• A refusal to issue documents can “be taken into account by the court when deciding
• n the legal costs” in a subsequent legal dispute

FinSA – an overview | Slide 23

Title 5: Ombudsman services (Art. 74–86)

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In the event of a dispute, the client or the financial service provider can call in an

• mbudsman service of which the financial service is a member and can request

mediation

• The process is quick, confidential and inexpensive for the client
• The ombudsman service selects mediation measures
• If no agreement is reached, the ombudsman can make its own assessment, which serves as a

proposal for resolving the dispute

• No decision-making powers
• After the ombudsman process has come to an end, the plaintiff can forgo arbitration proceedings in

accordance with the CPC

No obligation to arrange mediation

• Both parties can go directly to a civil court
• Exception: If the client has requested mediation, the financial service provider must participate

(Art. 78); if it is the other way round, however, the client has no obligation to take part

FinSA – an overview | Slide 24

Title 5: Ombudsman services (Art. 74–86)

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• Obligations of the financial service provider (Art. 77–80): obligation to join an
• mbudsman service, participate in mediation, provide information and contribute

financially (contributions collected from the party responsible for them)

• Ombudsman services are obliged to accept the membership of a financial service

provider (Art. 81) if it meets the relevant requirements

• Possibility of exclusion (Art. 82) in the event of repeated breaches of Art. 77–80

 A licensing requirement is no longer met, bringing consequences under supervisory law

• The ombudsman service is obliged to disclose information (Art. 83) to supervisory

authorities and/or the registration body about financial service providers that have joined, been refused or been excluded

• Ombudsman services must be accredited by the FDF (Art. 84)

 Requirement for independence, transparency, impartiality and specialist knowledge

FinSA – an overview | Slide 25

Title 6: Supervision and exchange of information (Art. 87– 88)

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The competent supervisory authority monitors to ensure that the financial service providers subject to supervision are complying with the FinSA (Art. 87) FINMA, the supervisory organization, the registration body, the verification body for prospectuses, the ombudsman service and the FDF exchange the information not in the public domain that they need to perform their work (Art. 88)

FinSA – an overview | Slide 26

Title 7: Penal provisions (Art. 89–92)

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• Criminal offenses
• Art. 89: violating the rules of conduct
• Art. 90: violating the provisions governing prospectuses and KIDs
• Art. 91: the prohibited offering of structured products or creation of in-house funds
• All three criminal law provisions require intent to be present
• Fines of between CHF 100,000.00 and CHF 500,000.00
• Penal provisions do not apply to entities subject to supervision in accordance

with Art. 3 FINMASA or to persons acting on their behalf

• These entities and persons are covered by the sanctions under supervisory and

criminal law in accordance with the FINMASA

• The scope of application of the penal provisions under the FinSA is thus severely

restricted

FinSA – an overview | Slide 27

Title 8: Transitional provisions (Art. 95 f.)

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• The Federal Council can stipulate a transitional period for meeting the

requirements of Art. 6 (“Requisite knowledge”); now that the obligation to undertake continuing professional development has been dropped, this provision has lost relevance

• Relationship managers at financial service providers have to request

registration with the registration body within six months of the FinSA entering into force

• Minor transitional periods in the prospectus legislation
• Financial service providers have to join an ombudsman service within six

months of the FinSA entering into force  The FinSA is applicable from the first day it enters into force as a basic

• principle. What is the situation for financial service providers (especially asset

managers) that are not yet subject to supervision at that point, but will have to submit a licensing request in accordance with the FinIA within three years?

FinSA – an overview | Slide 28

Brief summary

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− The FinSA/FinIA have been steadily reduced to a manageable volume ever since the consultation draft was produced in June 2014

 Examples: no ban on EAMs retaining payments, no statutory obligation to undertake CPD, no general registration obligation for relationship managers, no reversal of the burden of proof in civil proceedings, modification of the FinIA licensing requirements in line with “small” EAMs, etc.

− Does the FinSA fulfill the equivalence requirements under MiFID II?

 Examples from MiFID II: ban on EAMs accepting payments, appropriateness test for “execution-

• nly”, suitability test for transaction-specific investment advisory

− The FinSA/FinIA will have very little impact in material terms on financial service providers that are already regulated. However, a precise analysis of the internal

• rganizational structure, documentation and client communication is required here too.

− There will be a significant impact on investment advisors, trustees, EAMs, “small” managers of collective investment schemes and managers of pension assets  Transitional periods under the FinIA will enable requests to be submitted within three years of it entering into force; the FinSA, however, will be applicable immediately  Firms need to analyze their own organizational structure and procedures

FinSA – an overview | Slide 29

Thank you very much for listening!

Contact: Christian Koller, LL.M. / Partner Blum & Grob Attorneys at Law Ltd Neumühlequai 6 | P.O. Box CH-8021 Zurich P +41 58 320 00 00 | F +41 58 320 00 01 E-mail c.koller@blumgrob.ch | www.blumgrob.ch Visit our “Financial Law Update” blog: https://blumgrob.ch/de/financial-law-update

N.B.: The information in this presentation is for information purposes only and is not to be understood as legal advice. Although we have taken every care to ensure that the information is correct at the time of publication, we cannot accept any liability for incorrect or incomplete information or for any use whatsoever of the information published in this presentation.

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FinSA – an overview | Slide 30