The new rules of the game in a nutshell
The new Swiss Financial Services Act (FinSA) and the implementing ordinance FinSO (Financial Services Ordinance) are expected to enter into force on January 1, 2020 and will affect for the first time international financial-services providers that furnish financial services on a cross-border basis from outside of Switzerland to Swiss retail, professional and institutional clients. For the first time, the production of financial instruments for the Swiss market by international producers will also be comprehensively regulated. The FinSA aims to create uniform competitive conditions for financial intermediaries, improve client protection and harmonise the authorisation rules for financial-services providers.
The new provisions will introduce certain information, documentation and behavioural regulations as well as organisational requirements, such as rules on how to prevent conflicts of interest and handle commissions paid by third parties. These obligations are at their core similar to the ones imposed by the Markets in Financial Instruments Directive II (MiFID II). However, they vary, often considerably, when all of the details are considered. The new obligations will also affect client advisors 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 also apply to international producers of financial instruments for distribution in the Swiss market. The public offering of securities requires the publication of a prospectus that must be reviewed or approved by the newly established prospectus-reviewing body, as is currently customary in the European Union (EU). The obligation to produce a key investor information document (KIID) applies if financial instruments are distributed to retail clients. It is possible to make use of the PRIIPS (packaged retail and insurance-based investment products) KIID to fulfil 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 January 1, 2020, transition periods will be applicable to most new obligations. As the obligations under the FinSA are regulatory requirements, it is important to note that they cannot be changed by means of contractual agreements.
The new rules and regulations applicable to the cross-border provision of financial services in more detail
The cross-border rules set forth under the FinSA apply to the provision of cross-border financial services by international banks from abroad to clients in Switzerland—in particular by phone, writing or e-mail. A safe harbour applies,however, if the clients in Switzerland explicitly ask the international bank to provide financial services. On the flip side, any provision of financial services on Swiss territory, even if such provision is made on only a temporary basis (e.g., during a client’s visit on his/her 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 financial transactions with financial instruments.
Not all clients are treated equally under the FinSA. That is why financial-services providers must segment their clients into private, professional or institutional clients. The latter enjoy the lowest level of protection. It is important to note that an international financial-services provider already falls within the scope of application of these obligations from the very moment a financial service is offered, even if at that time a contractual relationship between the financial-services provider and the client does not yet exist. Relationships with prospects are thus sufficient for the establishment of a client relationship.
International financial-services providers can get caught by the rules in different ways. The most obvious is the direct relationship with a client. International banks that act as outsourcing providers based on outsourcing agreements qualifying as financial services are, however, also affected. A third not so obvious situation is the provision of financial services through a chain of providers—meaning that the Swiss financial-services provider mandates other service providers to offer financial services. Not all is lost, however, for international providers. The obligation to comply with the rules is in these situations imposed on the financial-services provider who leads the client relationship, unless there are clear indications of false information or breach of duty.
The additional obligations with which the international bankers must comply are aligned with the ones imposed under the European regulation MiFID II. There is an obligation to conduct an appropriateness and suitability test, to provide information (about the financial-services providers’ general and specific activities), to document and render an account (such as related to the financial services agreed upon and provided to clients), and to treat all equally, unless waived by the clients entitled to do so.
The new rules do not affect only the financial-services providers but also their employees. They must be entered into a public client-advisor register, which checks the financial capabilities of the client advisor and its knowledge of the applicable behavioural rules. There will be a proctored online test available 24/7, which client advisors can take at their convenience and at their locations of choice. Additional requirements are professional liability insurance (or equivalent security), the affiliation of the financial-services provider for which the client advisor is working with an ombudsman, no entry in the criminal register regarding property, and no industry ban or prohibition issued by FINMA (Swiss Financial Market Supervisory Authority). Both the client-advisor register and the ombudsman are intended to be operated by Regulatory Service Ltd., a group company of BX Swiss Exchange (see www.regservices.ch). The company is at the time of writing still in the authorisation process with the Swiss Financial Market Supervisory Authority and in the recognition process with the Swiss Federal Department of Finance.
Wilful non-compliance with these new requirements can lead to imprisonment of up to three years and non-diligent compliance to a fine of up to CHF 250,000. It is very likely that FINMA will initiate an enforcement procedure in cases of non-compliance.
The new provisions regarding the documentation of financial instruments
The admission to trading and the public offering of financial instruments now generally require a prospectus to be created in line with clearly defined content requirements similar to the ones applicable in the EU, unless an exemption applies. Any prospectus must be reviewed, or in the case of a non-Swiss prospectus be recognized, by a newly established institution called the prospectus-reviewing body. The distribution of financial instruments to private clients requires a KIID, for which purpose the PRIIPS KIID as used in the EU can be employed. Although transition periods are applicable, there is also a backloading obligation for all securities stemming from an ongoing public offering pending on or beyond January 1, 2022.