Risk management in an international environment
Your clients are located around the world? This makes your business even more interesting...and complex. Here a few key points to consider.
Intermediaries, whether based in Switzerland or elsewhere, should always carefully consider the potential risks prior to entering into any new business relationships with end-clients located outside their home turf.
Besides the usual risks inherent in any new business case, the three key risks in an international context relate to
- service restrictions,
- potential licensing requirements for the intermediary,
- and KYC/AML (Know Your Client/Anti Money Laundering) provisions.
While the two former risks are more likely to apply the more developed a financial system is, the latter is a typical risk when doing business outside your own backyard without the respective market intelligence and subject matter expertise at hand.
Watch out for service restrictions
A rule that often leads to service restrictions is that financial services, such as asset management or investment advice, can only be provided to the client on a so-called ‘reverse solicitation’ basis (i.e. at the exclusive initiative of the end-client/investor). In mature financial markets, the term ‘reverse solicitation’ is often interpreted in a rather restrictive way and contractual clauses trying to establish a permanent state of reverse solicitation may be deemed irrelevant. An investment made or a financial service provided based on an invalidly claimed reverse solicitation scenario will potentially allow your client to treat a contract as void (with the possibility to walk away from a loss-making transaction).
Place potential licensing requirements high on the agenda
Cross-border market access has become quite restrictive in recent years and, consequently, potential licensing requirements abroad should be on the agenda of every intermediary operating in an international environment. While home regulators primarily remind their licence holders to respect the laws and regulations of their home jurisdictions, they often also require their licence holders to not circumvent such rules (or the rationale of such rules) when doing business abroad. As a consequence, an intermediary doing business cross-border must know and comply with the laws of two (or more) jurisdictions, which adds complexity and increases risks.
Today, financial regulators across the globe tend to collaborate closely and exchange information about misbehaving market participants swiftly, which leads to a more globalised regulatory enforcement system. Regulators show a strong enforcement appetite and more frequently impose severe sanctions, also against individuals. Under the new regulatory regime in Switzerland, intermediaries will have to be licensed by FINMA as of 2020. Such licence will not only impose new regulatory obligations but also activate a sanction system which foresees the possibility of a professional ban of up to five years in case an individual with management capacity is seriously violating supervisory provisions. This may also be the case if the incriminating behaviour occurred or had an impact abroad.
Choose your partners wisely
With regard to KYC and AML, an intermediary should exercise caution when assessing the risks of doing business with a client based abroad. Naturally, the application of a diligent risk-based approach e.g. when onboarding a new client becomes more difficult the farther away from home the business is done. While intermediaries may rely on third parties to help them to perform the required due diligence, it is important to choose such partners wisely because the ultimate responsibility always remains with the intermediary.
Doing international business requires attention to detail
Doing international business requires a deep understanding of applicable rules and the ability to manage the nuances of cross-jurisdictional differences. The inherent risks of providing financial services cross-border should be assessed carefully – and on an ongoing basis. Not having the necessary know-how at hand and a proper risk and control framework in place may come at a hefty price, be it in the form of regulatory, civil, or even criminal consequences as well as reputational damages.
The good news
There is enormous growth potential for professionally organised intermediaries with a clear business model, a focus on strategic key markets, and corporate governance. Intermediaries with the respective market expertise at hand, a professional risk and control framework, and risk culture in place will certainly benefit from the ongoing consolidation pressure in the market, especially in an international context.
About the author
Tobias Kamber is Head of Legal International & Deputy CRO Intermediaries & Global Custody at Julius Baer