Portfolio Managers and Trustees - Delegation of Tasks under FINIA

Portfolio managers and Trustees[1] are in the process of filing their licence applications with FINMA. In this context, several questions arise, particularly in relation to the organisation of the company. This article will examine under what conditions and in what form portfolio managers can delegate certain tasks to third parties under the Financial Institutions Act (FinIA) and the Financial Institutions Ordinance (FinIO).

Introduction

The asset manager often delegates certain tasks to third parties. One can for example think of certain compliance aspects (fight against money laundering, automatic exchange of information or accounting). FinIA does not exclude delegation, but it is strictly regulated in order to safeguard the interests of the clients.[2]

Three categories of tasks can be distinguished:

• tasks that cannot be delegated at all;
• tasks for which delegation is possible, but subject to qualified conditions;
• other tasks, for which delegation is possible without being subject to qualified conditions.

Not Delegable Tasks

It goes without saying that the main activity or the activity subject to authorisation as such cannot be delegated in its entirety, otherwise the delegation of tasks could turn the company into an empty shell.[3]

This is why portfolio managers may delegate to third parties only tasks which do not need to be within the decision-making remit of the body responsible for management or for governance, supervision and control.[4]

Possible Delegation

Tasks whose delegation to third parties is subject to qualified conditions are those that meet the following four criteria:

• the task is material;
• the delegatee performs it autonomously;
• he performs it permanently; and
• change the circumstances underlying the authorisation.[5]

A task is deemed to be material when it falls within the scope of the definition of the duties of the portfolio manager set out in article 19 FinIA: The portfolio manager manages individual portfolios and may also provide investment advice, portfolio analysis or offering of financial instruments.[6]

• Furthermore, material tasks include the performance of compliance and risk management tasks, the outsourcing of data processing containing client-relevant data as well as the storage of business files in premises not belonging to the portfolio manager or rented by him.[7]

With regards to the qualified conditions to which the permanent and autonomous delegation of material tasks is subject, the delegatee must have necessary skills, sufficient knowledge and experience and must own the required authorisations for the particular activity.

Instruction and Supervision

The portfolio manager must choose the third party with great care. Once this choice has been made, the manager cannot turn a blind eye to the activities delegated to the third party: on the contrary, he will have to instruct and supervise it adequately and carefully.[8]

The requirement for careful instruction and supervision when delegating tasks to third parties is also found in this form in article 23 para. 2 of the Financial Services Act (FinSA). It is indeed a condition for the provision of financial services, which is the purpose and object of financial services regulation. In addition, the qualification as a licensing requirement could even result in the withdrawal of the license as ultima ratio in the event of a violation of article 14 FinIA.[9]

Written Agreement

The portfolio manager and the delegatee will agree on the delegated tasks by a written or provable written agreement. This agreement shall in particular regulate:

• the competences and responsibilities;
• the principle and modalities of a possible sub-delegation;
• the accountability of the delegatee; and
• the right of control of the manager.[10]

Organisation

Portfolio managers shall lay down in their organisational principles (e.g. by-laws or in a specific internal directive) the tasks delegated as well as details of the possibility of sub-delegation.[11]

Delegation is to be defined such that the portfolio manager, its internal auditors, the audit firm, the supervisory organisation and FINMA can inspect and review the delegated task.[12] This includes in particular access to the delegatee’s documents and technical systems. Delegation of tasks must not interfere with supervision.[13]

Finally, delegation must not impair the appropriateness of the operational organisation.[14]

Such an infringement occurs when the portfolio manager does not have the necessary personnel resources and specialist knowledge to ensure the selection, instruction, supervision of the delegatee and manage the associated risk or when he does not have the necessary rights to instruct or control the delegatee.[15]

Approval Requirement

Under the general provisions of FinIA, portfolio managers must notify the supervisory organisation of all changes to facts on which the license is based.[16] The notification of a change to facts on which the license is based is forwarded by the supervisory organisation to FINMA periodically but promptly.[17]

However, if the delegation of tasks has already been disclosed in the FINMA authorisation, Art. 14 FinIA does not apply.[18] If a significant task is transferred during the course of business activity, this falls under changes of facts, which are subject to at least notification, if not prior authorisation, by FINMA.[19]

Since the delegation of tasks is usually accompanied by a change in the organisational documents it requires prior FINMA's approval.[20] In this context, FINMA shall hear the supervisory organisation in advance as part of its assessment.[21]

From a practical point of view it is therefore important for portfolio managers to think carefully about the desired structure and the possible delegation of tasks. It is easier to transmit the delegation agreements and to have the internal directives up to date at the time of the application for authorisation than to have to do so afterwards.

Other Tasks

As a rule, the outsourcing of financial accounting, the involvement of experts in asset structuring as well as in the area of legal and tax advice, the hosting of websites without client-related data as well as the maintenance of internal data processing systems are not covered by article 15 FinIO.

Although the delegation of these tasks does not have to meet the qualified conditions mentioned above, the portfolio manager must still safeguard the interests of the clients and his company by carefully selecting the third party to whom he or she intends to delegate the tasks, and we recommend that a written agreement be drawn up specifying the conditions of the delegation.

Delegation Abroad?

A special case of the delegation of tasks is regulated in Art. 14 para. 2 FinIA: “FINMA may make the delegation of investment decisions to a person located abroad subject to an agreement on cooperation and information exchange between FINMA and the competent foreign supervisory authority, in particular if such an agreement is required under the other country's legislation”.

The provision was taken from the Collective Investment Schemes Act (CISA).[22] While it used to apply only to asset managers of collective investment schemes and fund management companies, it now applies to all financial institutions, including portfolio managers.

The law does not specify the conditions for delegation abroad for tasks other than investment decisions. We can infer from this that delegation abroad is therefore permitted as long as the conditions developed above are met and respected.

Conclusions

Art. 14 para. 1 FinIA is based on the liability provision of the law of agency contracts (contrat de mandat)[23] as well as on the liability provision for the safekeeping of book-entry securities at a third-party custodian.[24] In contrast to the preliminary draft of FinIA, the standard has been relaxed in that only careful instruction and supervision, but no control of the execution of the mandate, is required[25]. The portfolio manager nevertheless remains responsible for the safeguard of the interests of his client.

The art of delegation allows businesses to gain efficiency and reduce costs, but not at the expense of good business management!

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This article is for information purposes only. It does not constitute professional advice or an opinion. Please contact us for any questions.

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Footnote

[1] The following presentation refers to portfolio managers but the delegation conditions discussed also apply to trustees.

[2] Article 17 para. 1 FinIO

[3] Comments of  6. 11. 2019 on the Financial Services Ordinance (FINSO), the Financial Institutions Ordinance (FinIO), p. 88.

[4] Article 16 para. 1 FinIO

[5] Article 15 para. 1 FinIO

[6] Article 19 para. 1 and 2 FinIA

[7] Stutz Manuel, Finanzinstitusregulierung: Bewilligungsvoraussetzungen für Vermögensverwalter, GesKR 2020 p. 245 ss, p. 249.

[8] Article 14 para. 1 FinIA

[9] Stutz Manuel, Finanzinstitusregulierung: Bewilligungsvoraussetzungen für Vermögensverwalter, GesKR 2020 p. 245 ss, p. 250.

[10] Article 17 para. 2 FinIO

[11] Article 17 para. 3 FinIO

[12] Article 17 para. 4 FinIO

[13] Comments of  6. 11. 2019 on the Financial Services Ordinance (FINSO), the Financial Institutions Ordinance (FinIO), p. 88.

[14] Artcile 16 para. 2 FinIO

[15] Article 16 para. 3 FinIO

[16] Article 8 para. 1 FinIA.

[17] Article 22 para. 1 FinIO.

[18] Comments of  6. 11. 2019 on the Financial Services Ordinance (FINSO), the Financial Institutions Ordinance (FinIO), p. 88.

[19] Stutz Manuel, Finanzinstitusregulierung: Bewilligungsvoraussetzungen für Vermögensverwalter, GesKR 2020 p. 245 ss, p. 250.

[20] Article 8 para. 2 FinIA.

[21] Article 22 para. 2 FinIO.

[22] Article 18b and 31 former CISA.

[23] Article 399 para. 2 of the Swiss code of obligations.

[24] Stutz Manuel, Finanzinstitusregulierung: Bewilligungsvoraussetzungen für Vermögensverwalter, GesKR 2020 p. 245 ss, p. 250.

[25] Stutz Manuel, Finanzinstitusregulierung: Bewilligungsvoraussetzungen für Vermögensverwalter, GesKR 2020 p. 245 ss, p. 250.

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