On 15 May 2024, the Swiss Financial Market Supervisory Authority (FINMA) has published a new circular aimed at clarifying and strengthening supervisory practices related to the Financial Services Act (FinSA) and the Financial Services Ordinance (FinSO)[1].
The circular is addressed to financial service providers supervised by FINMA or a supervisory organisation and creates transparency regarding FINMA’s practice relating to selected aspects of rules of conduct under FinSA/FinSO
FINMA’s public consultation on the draft circular ends on 15 July 2024. This approach aims to incorporate feedback for effective and practical implementation of the new circular.
Clarification of Financial Services
The circular provides more precise criteria to distinguish corporate finance activities from financial services. The distinction will now be based on the client’s objective: services will be considered financial if they aim at investment or hedging purposes, while those with industrial, strategic, or entrepreneurial objectives will be classified as corporate finance activities.
This clarification aims to reduce ambiguities and ensure better application of Article 3 para 3 lit. a to c FinSO, according to which (i) the provision of advice on corporate finance and M&A matters, (ii) the placement of financial instruments with or without a firm commitment and (iii) financing in connection with the services listed under (i) and (ii) are not deemed to be financial services within the meaning of the FinSA.
The services listed in Art. 3 para 3 lit. a to c FinSO would fall within the scope of the FinSA if they are provided to clients acting as investors as opposed to the company, its shareholders or an issuer of securities. In particular, buy-side M&A advisory services could therefore qualify as financial services in the scope of the FinSA if the clients are considering the transaction primarily for investment purposes.
Similarly, the services of a crowd funding platform that helps public limited companies (their shareholders) to raise funds and place shares as part of a company foundation, capital increase or transformation can be considered financial services when they relate to the relationship between the platform operators and the purchasers of the shares issued through the platform.
Duty of Information
FINMA emphasizes increased transparency regarding the nature of financial services provided. Advisors must clearly indicate whether their advice pertains to the entire portfolio or specific transactions, in accordance with Article 8 FinSA.
FinSA differentiates between "investment advice for individual transactions" pursuant to art. 11 FinSA ("transaction-related advice") on one hand and "investment advice taking account of the client portfolio" pursuant to art. 12 FinSA ("portfolio-related advice").
FINMA has found in its supervisory practice, that financial service providers sometimes do not adequately distinguish between the two forms of investment advice and that they provide insufficient information about the nature of the service provided[3]. As a result, clients would sometimes assume that the financial service provider is providing them with portfolio-related advice and thus has carried out a suitability assessment for investment recommendations. Similarly, financial service providers face a risk that advisory services are wrongly classified as transaction-related advice and thus, in the absence of a suitability assessment, the conduct obligations under FinSA would be systematically breached.
The circular requires financial service providers to inform their clients explicitly (i.e. in writing or equivalent form) before or upon conclusion of the mandate, or the during the process of providing the financial service, on whether the advisory service offered is portfolio-related or transaction-related. In the latter case, the financial service provider must also inform the client that the advice provided is purely instrument-based, i.e. that the client portfolio is not being considered at all and that only an appropriateness assessment, and no suitability assessment, is carried out[4].
Risk Concentration
FINMA wants to introduce specific risk disclosure requirements in connection with complex products offered to retail clients such as contracts for differences (CFDs), particularly with regard to their leverage effect and potential margin calls for the client.
When disclosing the risks associated with financial instruments, the provider must inform its clients of:
- the proportion of clients who lose money in connection with CFDs
- the existence of any margin calls and the risk of potentially unlimited losses
- leverage, margin rules, counterparty risk and default risk[5].
FINMA also notes that the measures for avoiding risk concentrations vary widely amongst financial service providers. The circular require financial service providers who engage in asset management and portfolio-related investment advice to draw their clients' attention to the nature and extent of risk concentration, if such risk concentration is not customary in the market.
According to FINMA, this information must be provided to the clients if a concentration of 10% or more in individual securities or a concentration of 20% or more in certain issuers cannot be excluded[6].
Conflict of Interest
FINMA noticed that the majority of financial services providers include their own financial instruments for their investment solutions. These practices are a source of conflicts of interest. In particular, they run the risk of not selecting the best product for their clients, but rather the product offering the highest additional remuneration for the financial service provider.
The conflicts of interest must be disclosed in sufficient detail to enable clients to make an informed decision on whether or not to use the financial services. In particular, the provider should indicate how the selection of proprietary products may expose it to conflicts of interest[7].
Retrocessions
According to the information available to FINMA, most institutions continue to receive remuneration from third parties (“retrocessions”).
The new circular outlines the information that must be provided to clients in connection with retrocessions pursuant to Art. 26 FinSA.
A prior waiver of retrocessions requires full and accurate disclosure. In addition, clients must be able to find out about them without difficulty. If they are included in standardized contracts, details of retrocessions must be provided in a complete and accurate manner (highlighted visually e.g. in bold print or in colour). Another possibility is to inform clients by means of a separate letter or notice[8].
If it is not possible to determine the amount of the retrocessions before the financial service is provided, the provider must indicate:
- Calculation parameters and a range of expected retrocessions (applies to all financial services, in particular, also to transaction-based advice and execution-only relationships)
- for portfolio management and investment advice taking into account the client's entire portfolio (but not advice on individual transactions) the financial service provider must also provide information on the range of compensation, based on the portfolio value and the agreed upon investment strategy.
Ultimately, financial service providers must disclose to their clients any retrocessions they have actually received upon the client's request free of charge[9].
Next steps
Following the public consultation, FINMA will analyse and evaluate the comments received, and will report on the extent to which they have been implemented.
FINMA plans for the circular to enter into force at the beginning of 2025.
[1] Draft FINMA Circular
[2] FINMA's explanatory report, p. 10 ; Règles de comportement selon la LSFin : la FINMA ouvre une audition sur la nouvellecirculaire | FINMA
[3] FINMA's explanatory report, p. 11.
[4] FINMA's explanatory report p. 12.
[5] FINMA's explanatory report, p. 13.
[6] FINMA's explanatory report p. 14.
[7] FINMA's explanatory report p. 17
[8] FINMA's explanatory report p. 19
[9] Art. 26
