By Dr. Martin Liebi, Head of Capital Markets Legal, PricewaterhouseCoopers Switzerland
The new rules for international banks in a nutshell
The provision of (cross-border) financial services of international banks in the Swiss market, as well as the creation of financial instruments for the Swiss market, have undergone a material change with the entry into force of the new Swiss Financial Services Act (FinSA) on January 1, 2020. The new duties include, for example, those of informing and documenting aspects of the provision of financial services and the obligation to avoid conflicts of interests and other organisational obligations, most of which must be implemented after the lapse of the transition period ending on December 31, 2021. The key new obligation for international banks providing financial services is to enter client advisors who provide financial services into a newly established client advisor register and to affiliate with a Swiss ombudsman for financial services.
The affected financial services, instruments and clients in Switzerland
The FinSA also introduces significant changes for financial-services providers and producers of financial instruments at the point of sale in regard to Swiss clients that must be segmented into institutional clients, professional clients and private clients. In principle, this affects all financial-services providers who (i) purchase for, sell or distribute financial instruments to Swiss clients, (ii) receive or transmit orders related to financial instruments, (iii) provide asset-management or investment advice and (iv) grant loans to finance transactions with financial instruments. Traditional banking activities, such as other credit transactions, are, however, not in the scope of the new rules. Advisory services related to (i) the capital structure of companies, (ii) the sector-specific strategy and related matters, (iii) advice and services relating to mergers and acquisitions of companies and (iv) related finance activities are also not affected. The universe of affected financial instruments, to which the financial services relate, covers securities, debt instruments, funds, derivatives, structured products, bonds and structured deposits.
Obligations applicable to international banks providing financial services
The duties under FinSA include the obligations to segment clients; to inform about the bank, financial services, financial instruments, costs and risks; the documentation of the activities and the rendering of accounts. In regard to the appropriateness test, a distinction is made in Switzerland between investment advice, which takes the entire portfolio into account, and investment advice, which takes into account only part of the portfolio. The latter portfolio management requires only a suitability test. Execution-only services are not subject to an appropriateness or suitability test, even when relating to complex products. A Swiss peculiarity is found in the regulation of compensation from third parties (retrocessions/commissions). Unlike in other jurisdictions, compensation from third parties is still allowed in Switzerland. Compensation from third parties generally belongs to the client insofar as it is connected to the provision of the financial service. However, the client may waive his right to commissions, even if they are not exactly determinable in advance. Furthermore, obligations with respect to the organisations of financial-services providers apply even if they are not located in Switzerland. Financial-services providers must have appropriate organisations and, particularly, they must properly monitor employee transactions as well as appropriately address conflicts of interest. There are also requirements regarding the outsourcing of activities to third parties and an ongoing training requirement for employees providing financial services. The international banks providing financial services must also affiliate with a Swiss ombudsman for financial services. The Swiss ombudsman function for financial services is currently in the final stages of the licensing procedure.
Obligations applicable to client advisors
Client advisors, meaning natural persons who provide financial services directly at the point of sale to clients, must be entered into the Swiss client advisor register (see www.regservices.ch). The Swiss advisor register is currently also in the final stages of the licensing procedure with the Swiss Financial Market Supervisory Authority (FINMA). One of the key requirements for such an entry is the proof of sufficient knowledge of financial services and know-how of the behavioral rules under FinSA. This proof can be made by means of a certificate, such as the FinSA client advisor test (see www.webassessor.com/finsaclientadvisortest), or at least for the financial services part by means of commonly accepted international certificates, such as the CFA (Chartered Financial Analyst). Other key requirements are professional liability-insurance policies with varying coverage depending upon the number of client advisors that are working for the international bank in the Swiss market and no convictions for criminal acts, no crimes against properties or convictions issued by FINMA. Non-compliance with the requirement to be entered into the advisor register can be draconian. Non-diligent non-entry can be sanctioned with a fine of up to CHF 500,000 and deliberate non-entry with imprisonment of up to three years.
Changes in the area of the offering of securities and other financial instruments in the Swiss market
There are also material changes with regard to the offering of securities and financial instruments in the Swiss market. Public distributions of securities in Switzerland are subject to more extensive prospectus requirements. The requirements of the prospectus and the possible exceptions are generally based on the European Prospectus Regulation. However, there are also some deviations in this regard as part of a “Swiss finish”, such as the lack of a prospectus obligation in a public offering to 500 private investors. Prospectuses for public distribution must be checked by a reviewing body. Both the Swiss stock exchanges SIX Swiss Exchange AG and BX Swiss, which is part of the stock exchange Börse Stuttgart Group, will have a reviewing body. Prospectuses that have been prepared in accordance with the EU Prospectus Regulation and that have already been reviewed by an authority (such as the BaFin- Federal Financial Supervisory Authority) have to be recognized only in a simplified procedure and deposited with the reviewing body. However, the approval or recognition must be renewed after 12 months. The new rules on public offerings will apply six months after the first prospectus-reviewing body has been approved by FINMA.
As in the European Union (EU), financial instruments may be offered only to private investors if a so-called key information document (KID) is created and provided before the offer. Excluded is the offering of financial instruments exclusively in the context of an asset-management contract or if shares or debt securities are offered. However, KIDs issued in accordance with the EU’s PRIIPs (Packaged Retail and Insurance-based Investment Products) Regulation are equivalent to the Swiss KID and may be used instead.
As before, international banks that provide financial services or creators in Switzerland may only offer structured products to private investors if the structured products are issued, guaranteed or secured in an equivalent manner by a Swiss bank, insurance company, securities firm or corresponding foreign institution. However, a written and permanent portfolio-management or investment-advisory contract remains reserved. It is important that affected international banks providing financial services and producers of financial instruments comply with the new obligations. There are fines set forth in the FinSA of up to CHF 500,000 for non-compliance with the obligations or the unlawful distribution of financial instruments.
As of January 1, 2020, the new Swiss Financial Services Act has had a profound effect on the business activities of international banks providing financial services and their client advisors with clients in Switzerland, as well as on the international banks that are producers of financial instruments for the Swiss market. Many of the obligations essentially correspond to the requirements under the European regulation MiFID II (Markets in Financial Instruments Directive II); however, some changes go beyond the scope of application of MiFID II, such as the obligations to be entered into the advisor register and to affiliate with an ombudsman. The public distribution of financial instruments is subject to more extensive prospectus requirements. In general, prospectuses must be checked by the reviewing body. However, if a foreign-reviewing body or authority has already carried out a check, a recognition of this or a deposit is sufficient.