By Martin Liebi
The new Swiss Financial Services Act (FinSA) and the implementing ordinance FinSO are expected to enter into force on Jan. 1, 2020 and will affect for the first time U.S. financial service providers that provide financial services on a cross-border basis from outside of Switzerland to Swiss clients—no matter whether they are retail, professional or institutional clients. The production of financial instruments for the Swiss market by U.S. producers is also for the first time comprehensively regulated. FinSA aims to create uniform competitive conditions for financial intermediaries, improve client protection and harmonize the authorization rules for financial service providers.
The new provisions will introduce certain information, documentation, and behavioral rules as well as organizational requirements, such as rules to prevent conflict of interests and how to handle commissions paid by third parties. These obligations are in their core similar to the ones imposed by the revised Markets In Financial Instruments Directive (MiFID II). They vary, however, often, considerably when all the details are considered. The new obligations affect also the client advisor on a personal level. They must be entered into a newly established client advisor register. The obligation to affiliate with an ombudsman applies to financial institutions that provide cross-border financial services in Switzerland.
Extensive obligations apply also to U.S. producers of financial instruments for distribution in the Swiss market. The public offering of securities requires the publication of a prospectus which must be reviewed or approved by the newly established prospectus reviewing body as currently customary in the European Union. The obligation to produce a key investor information document (KIID) applies if financial instruments are distributed to retail clients. It’s possible to make use of the Packaged Retail and Insurance-based Investment Products (PRIIPS) KIID, which is used in the European Union, to fulfill the Swiss rules and regulations. The creation of structured products is subject to extensive regulations as well.
Although the new provisions will enter into force on Jan. 1, 2020, there will be transition periods applicable to most new obligations. As the obligations under the FinSA are regulatory requirements, it’s important to note that they can’t be changed by means of contractual agreements.
Effect of New Rules on Cross-border Providers of Financial Services
The cross-border rules set forth under FinSA apply to the provision of cross-border financial services by U.S. banks from abroad to clients in Switzerland in particular by phone, in writing or by e-mail. A safe harbor applies, however, if the clients in Switzerland explicitly request the U.S. bank to provide financial services. On the flip side, any provision of financial services on Swiss territory, even if such provision is made only on a temporary basis (for example, visit of the client during his ski holiday in a Swiss ski resort), falls within the scope of the FinSA. The affected financial services are the purchase or sale of financial instruments (equity and debt securities, structured products, funds, derivatives, bonds and structured deposits), the receipt and transmission of orders related to financial instruments, the management of assets (the administration of financial instruments), investment advice (the provision of personal recommendations on transactions with financial instruments) and the granting of loans to finance transactions with financial instruments.
Not all clients are treated equally under the FinSA. That’s why financial service providers must segment their clients into private clients, professional clients or institutional clients. The latter enjoy the lowest level of protection. It’s important to note that a U.S. financial service provider falls already within the scope of application of these obligations from the very moment a financial service is offered, even if at this time a contractual relationship between the financial service provider and the client doesn’t yet exist. Relationships with prospects are thus sufficient for the establishment of a client relationship.
The additional obligations with which the U.S. financial service providers must comply with are aligned with the ones imposed under the European regulation MiFID II. There’s an obligation to conduct an appropriateness and suitability test, to provide information (about the financial service providers general and specific activities), to document and render account (such as related to the financial services agreed with and provided to clients), and to treat equally, unless they are waived by the clients entitled to do so.
The new rules don’t just affect the financial service providers, but also the employees of such financial service providers. They must be entered into a public client advisor register, which has to check the finance capabilities of the client advisor and its knowledge of the applicable behavioral rules. There will be a proctored online test available 24/7 which client advisors can take at their convenience at their location of choice. Additional requirements are professional liability insurance (or equivalent security), the affiliation of the financial service providers for which the client advisor is working for to an ombudsman, no entry in the criminal register regarding property and no industry ban or prohibition issued by the Swiss Financial Market Supervisory Authority (FINMA). Both the client advisor register and the ombudsman are intended to be operated by Regulatory Service Ltd., a group company of BX Swiss Exchange. The company is still, at the time of writing, in the authorization process with FINMA and in the recognition process with the Swiss Federal Department of Finance.
Willful non-compliance with these new requirements can lead to imprisonment of up to 3 years and even non-diligent compliance results in a fine of up to CHF 250’000. It’s very likely that the FINMA will initiate an enforcement procedure in case of non-compliance.
New Provisions Regarding Documentation of Financial Instruments
The admission to trading and the public offering of financial instruments require now generally a prospectus created in line with clearly defined content requirements similar to the ones applicable in the European Union, unless an exemption applies. Any prospectus must be reviewed, or in case of a non-Swiss prospectus, be recognized by a newly established prospectus reviewing body. The distribution of financial instruments to private clients require a KIID, for which purposes the PRIIPS KIID, as used in the European Union, can be used. Although there are transition periods applicable, there’s also a backloading obligation for all securities stemming from an ongoing public offer pending on or beyond Jan. 2, 2022.
Martin Liebi is an attorney-at-large at PricewaterhouseCoopers in Zurich