As the Swiss financial services industry prepares for the introduction of FinSA and FinIA next year, two legal experts explain the implications
In June 2018, after an exhaustive consultation process, the Swiss parliament enacted the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The acts, which are expected to come into force on 1 January 2020, include some new rules for managers and institutions. With the introduction of the new laws, Switzerland hopes to create uniform competitive conditions for financial intermediaries, improve client protection and receive equivalency recognition from the EU, as both new laws are based on the Markets in Financial Instruments Directive II (MiFID II), the Prospectus Directive and the Packaged Retail and Insurance-based Investment Products Regulation. However, Switzerland will still maintain some distinct features, such as self-regulation in certain circumstances and a dual supervisory system.FinSA regulates the provision of financial services and the offering of financial instruments. It creates uniform prospectus rules generally applicable to all offerings of securities in Switzerland, as well as comprehensive rules of conduct for providers of financial services in Switzerland. The aim, therefore, is to create a level playing field. Meanwhile, FinIA introduces prudential supervision of all financial services providers operating a portfolio or asset management business in Switzerland and sets out uniform licensing requirements for financial intermediaries other than banks and insurance companies.The new laws have significant implications – especially for the asset management industry and Swiss-based collective investment schemes. Entire sections of the Collective Investment Schemes Act will be integrated into FinIA, and other businesses will be affected by FinSA.
The new architecture
FinSA and FinIA are just two parts of the Swiss financial market’s new architecture. By creating uniform competitive conditions for financial intermediaries and improving client protection, the aim of legislators has been to put Switzerland on a par with EU regulations. This new legislative framework will be applicable to any entity providing financial services in Switzerland. Financial service providers will need to adhere to the new rules of conduct and be associated with a recognised ombudsman.As these new laws come into force, the current legal framework for financial services in Switzerland – which is currently based on a vertical pillar model with federal acts governing each financial sector (such as the Swiss Banking Act, the Swiss Stock Exchange Act, the Swiss Insurance Act and the Swiss Collective Investment Schemes Act) – will be completely overhauled. Instead, a horizontal legislative framework will be introduced, whereby regulation takes effect at different levels. Certain areas suitable for harmonised regulation across different sectors will be carved out and incorporated into the new financial market acts, and only certain vertical product- or sector-oriented regulations will remain in place. This means that the provisions of the federal acts relating to the regulation of financial services and the financial institutions will be integrated into FinSA and FinIA. What’s more, the level of supervision will become more intense. The implementation of the new financial market architecture will have a substantial impact on the longstanding business models of all types of Swiss financial intermediaries. Both laws and their respective ordinances are expected to come into force as of 1 January 2020. They will affect several other laws that will need to be amended, such as the Collective Investment Schemes Act, the Financial Market Infrastructure Act and the Financial Market Supervision Act. In the coming months, work and discussion around both ordinances will define the scope of the supervision that financial entities will receive and how they will need to adapt their organisations to comply with these new rules. Overall, the new laws are milestones in the Swiss financial market architecture. Switzerland is catching up with international developments, particularly those within the EU.
Important elements of the new law
FinIA introduces a differentiated supervisory regime for portfolio managers, managers of collective assets, fund management companies and securities firms. The main change concerns the prudential supervision of managers of individual client assets, managers of the assets of occupational benefits schemes and trustees. Not all financial institutions will be supervised by Finma. Portfolio managers for pension schemes and portfolio managers for collective investment schemes will remain under Finma, while managers of individual client assets and trustees will be overseen by a supervisory organisation that is independent in its supervisory activity (but authorised by Finma). Multiple different supervisory organisations may be formed. Overall, the fund industry itself will only be marginally affected by the new laws, but the current licensing requirement for entities distributing collective investment schemes will be abolished. In the case of the cross-border offering of collective investment schemes into Switzerland to qualified investors, a Swiss paying agent and representative will no longer be required. The supervisory authorities will be given the power to set out specific guidelines to give them the opportunity to conduct specific portfolio management audits, depending on the risk and the activities of those supervised.
FinSA introduces a new set of rules of conduct, including the duty to provide information to the client, documentation and reporting duties, the duty to assess appropriateness or suitability when providing portfolio management or investment advisory services, and accountability duties. The rules of conduct will not apply to interactions with institutional clients, and professional clients will have the option to waive the requirements to comply with the information, documentation and accountability duties under FinSA.
As with the Collective Investment Scheme Act and based on the provisions of MiFID II, FinSA establishes a new client categorisation regime, distinguishing between the following three categories: private, professional and institutional clients. The classification plays an important role in the application of the rules of conduct, as depending on the client’s classification, the financial services provider must offer different levels of client protection. As a rule, financial services providers will have to verify beforehand whether a specific service or instrument is suitable or appropriate for a specific client and give clients appropriate explanations and advice. The suitability and appropriateness testing will depend on the type of financial services offered. A financial services provider may opt to forego the classification of clients, but would then need to treat all its clients as retail clients. It is important to understand that the FinSA classification and the MiFID II classification are not the same, so a provider of financial services may need to produce an EU and a Swiss classification for the same client.
Prospectus and key information document
Like the EU’s Prospectus Directive, FinSA contains new prospectus rules. Issuers are required to draw up and publish a prospectus if they intend to offer securities for subscription, or to request authorisation to trade securities on a trading platform. As a key obligation, the prospectus shall include all material information so that investors are able to make an informed investment decision. In addition to the obligation to draw up a prospectus, FinSA sets out the requirement for certain financial instruments to have a key information document (KID), which is similar to the key investor information document (KIID) under the EU regulations. Financial instruments include not just securities, but also units of collective investment schemes and structured products.