Investor and Client Protection: Upcoming Swiss Laws on Financial Services and Financial Institutions

client and investor protection

01 Aug 2018 Investor and Client Protection: Upcoming Swiss Laws on Financial Services and Financial Institutions

BACKGROUND

 

After the Financial Market Supervision Act (“FINMASA”) was enacted in 2009 and the Financial Market Infrastructure Act (“FMIA”) in 2016, Switzerland, with the goal of putting in place the Financial Services Act (“FinSA”) and the Financial Institutions Act (“FinIA”), will have, in 2020, a set of financial services laws which are up-to-date and consistent with standard practice in the sector.

 

FinSA and FinIA are the last two elements that were missing from the new Swiss financial market architecture. They lead to a paradigm shift, as we move from “regulatory silos” previously reserved for certain categories of establishments or products to legislation that covers all relevant operators and puts the focus on regulation of risky activities[1].

 

On the one hand, the main purpose of the FinSA is to increase client protection and to provide a coherent regulatory framework for both service providers and clients. On the other hand, the main purpose of the FinIA is to create a uniform prudential framework for wealth managers, securities dealers, trustees and sworn trade assayers.

 

With these new laws, Switzerland will have a legislation that will be recognized as equivalent by the EU, as both laws are based on the Markets in Financial Instruments Directive II (“MIFID II”)[2], Prospectus Directive and PRIIPs Regulation[3] while still maintaining some Swiss specificities such as self-regulation in certain circumstances and dual supervisory system[4].

 

Now that FinSA and FinIA are expected to enter in force as of 1 January 2020[5], we will see, with their introduction, the effect of implementing these new laws into the dynamic industry which is at the heart of the Swiss economy.


Who is Affected?

 

Providers of financial services, such as asset managers, investment advisors, securities firms, and banks will be subject to FinSA[6]. Meanwhile, licensing requirements for asset managers, trustees, managers of collective assets, fund management companies and securities firms will be set down in the FinIA[7].

 

Neither FinSA nor FinIA will affect insurance companies or insurance products, which are regulated by the Insurance Supervision Act and the Insurance Contract Act[8].

 

Requirements Concerning Supplies of Financial Services (FinSA)

 

All financial market participants will have to comply with the new rules set down by FinSA, whether they are subject to the supervision of the Swiss Financial Market Supervisory Authority (“FINMA”) or not.

 

Here are the key new rules that will be set forth by FinSA:

 

  • Client classification:

As with the Collective Investment Scheme Act (“CISA”), the FinSA distinguishes between two client categories: retail clients and professional clients (which shall include institutional clients as a subgroup of professional clients)[9]. Every client must be classify in a category. It has to be highlighted that the FinSA classification and the MIFID II classification are not exactly the same and could drive a provider of financial services to proceed to a double classification, EU and Swiss, for the same client[10].

 

  • Basic training and continuing professional development:

Only financial service providers with sufficient knowledge of the code of conduct will be allowed to act as a financial services provider. This extension is based on the principle of only allowing financial services providers who have the necessary expertise in their respective area to act as client advisers and intermediaries. The concept of “sufficient knowledge” will be defined in the future ordinance, which are currently being discussed[11].

 

  • Rules of conduct:

Financial providers shall act in the best interest of their clients and with the required level of skill, care and diligence. Therefore they must comply with the supervisory duties set out below when providing financial services. These rules are modelled on the duties imposed on investment firms in European Union through MIFID II[12] and include:

 

  • the duty to provide information to the client[13];
  • documentation and reporting duties[14]; and
  • the duty to assess appropriateness or suitability when providing portfolio management or investment advisory services[15].

 

Requirements in Terms of Organisation (FinIA)

 

FinIA will revise the regulatory landscape for financial institutions. Instead of the current sectorial approach, FinIA will propose to introduce a regulatory “pyramid” with a lighter regulatory framework for asset managers and trustees and an increasingly more stringent regime for collective asset managers that manage collective investment schemes and pension funds, securities houses and, at the top, banks as can be seen in the charts below[16].

 

For all financial institutions subject to authorisation and prudential supervision, the following organizational requirements must be put in place:

 

  • An internal control system

FinIA introduces for all financial institutions the duty to establish an effective internal control system that will be defined in the future ordinance[17].

 

  • A prudential audit or compliance report

Financial institutions will have to appoint an audit institution approved by the standards of the FINMASA to conduct an annual prudential audit or a compliance report about their activities.

 

  • Legal form and financial guarantees

FinIA establishes specific requirements for independent managers, trustees, asset managers, managers of collective assets, fund management companies, securities firms such as specific legal forms depending on the type of financial institution, entry in the commercial register or a minimum capital required by the FinIA or the future ordinance[18].

 

Entry into Force

 

As the Swiss Parliament passed the FinSA and FinIA last month, both laws and their respective ordinances are expected to enter in force as of 1 January 2020[19] and will impact several other laws that will need to be amended such as the Collective Investment Schemes Act of 23 June 2006 (CISA), the Financial Market Infrastructure Act of 19 June 2015 (FMIA) and the Financial Market Supervision Act of 22 June 2007 (FINMASA)[20].

 

The next 18 months and in particular discussions and works around both ordinances will define the scope of the supervision of the financial entities and how they will need to adapt their organisation to comply with these new rules.

 

 

Jocelyn

 

Author :

Jocelyn Roux

Litigious matters (both commercial and criminal), corporate structuring and incorporation, contractual drafting and also assists clients in obtaining residency permits in Switzerland.

 

 

 

Footnotes:

[1] BARFUSS Andreas, LSFin et LEFin : on touche au but, Swissbanking.org, 28 June 2018.

[2] Press release on 15 June 2018 of the Swiss Bankers Association « La LSFin et la LEFin modernisent la protection des clients ».

[3] LANDOLT Kaspar and KUERT Matthias, Switzerland adopts  new laws on financial services and financial institutions, Lexology, 22 June 2018.

[4] Press release on 15 June 2018 of the Swiss Bankers Association « La LSFin et la LEFin modernisent la protection des clients ».

[5] « LSFin et LEFin », admin.ch, département fédéral des finances, June 2018.

[6] Art. 2 al. 1 FinSA.

[7] Art. 2 al. 1 FinIA.

[8] Art. 2 al. 2 FinSA and art. 2 al. 2 FinIA.

[9] Art. 4 FinSA.

[10] GÖKOK Carmela, LSFin et LEFin, où en sommes-nous?, lha.ch, 15 March 2018

[11] GÖKOK Carmela, LSFin et LEFin, où en sommes-nous?, lha.ch, 15 March 2018

[12] Art. 24 to 27 MIFID II

[13] Art. 8 FinSA.

[14] Art. 15 and 16 FinSA.

[15] Art. 17 and 18 FinSA.

[16] Art. 5 and 6 FinIA.

[17] GÖKOK Carmela, LSFin et LEFin ou en sommes-nous?, lha.ch, 15 March 2018

[18] Art. 18, 22, 25, 28, 33, 36, 42, 45 FinIA.

[19] « LSFin et LEFin », admin.ch, département fédéral des finances, June 2018.

[20] Annex to art 94 FinSA.



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