The Swiss Financial Services and Institutions Acts - are you prepared?
On 15th June 2018, the Swiss Parliament approved the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). The final versions of the Financial Services Ordinance (FinSO) and Financial Institutions Ordinance (FinIO) are expected to enter into force on 1 January 2020. Their aim is to make the Swiss financial markets law equivalent to MiFID II, which requires EAMs to be supervised. How will this affect you?
Whereas the Financial Services Act (FinSA) regulates the provisions of financial services and in particular the rules of conduct, the Financial Institutions Act (FinIA) regulates the organisation of the financial institutions. The impacts of these two new acts on EAMs can be subdivided into three areas:
1) Authorisation and supervision of EAMs
Under FinSA and FinIA, EAMs need to be authorised and supervised. This goes further than the currently required affiliation with a self-regulatory organisation (SRO) for AML purposes. Authorisation and supervision are separated and carried out by two different bodies: Whereas the authorisation is granted by FINMA, the supervision is carried out by so-called supervisory organisations – which in turn are authorised and supervised by FINMA. FINMA, thus, authorizes the EAMs but delegates the supervision.
In order to be authorised by FINMA, an EAM needs to satisfy various requirements. Among others, they need to (i) be accepted by a supervisory organisation, (ii) affiliate with an ombudsman for civil litigation, (iii) be properly organised as described below and (iv) meet financial requirements – in short, they need to be fit and proper.
2) Organisational requirements to be met by EAMs
The organisational requirements follow the pattern applicable to asset managers of collective investment schemes (CIS; or funds).
- Legal form and participants of the EAM: Both acts remain silent on the legal form of an EAM but rather grant the broad range of legal forms offered by Swiss law. In practice, the form of the stock corporation (Aktiengesellschaft) and to a smaller extent of the limited liability company (GmbH) will be most suitable. The sole proprietorship is theoretically still possible but will be difficult in practice.
- Two executive managers in commuting distance: An EAM needs to have at least two managers who live in commuting distance to the head office, which by the way needs to be in Switzerland. This makes sure that the EAM is indeed managed out of Switzerland. Otherwise, the supervision by the supervisory body would go idle if the head office were in another jurisdiction. It goes without saying that these managers must provide guarantees of irreproachable business activities, enjoy a good reputation and have the necessary qualifications to perform their duties. It is not clear yet whether the executive management team needs to be different from the board of directors (as it is required for asset managers of CIS) or whether the board of directors can also be entrusted with the daily management. This will be decided in the ordinances.
- Risk management, compliance and internal control – the end of the “one man show“: Each EAM needs to have a team entrusted with risk management, compliance and internal control tasks – as it is known to all supervised financial institutions. This team may not be involved in the activities that it supervises. Otherwise, it cannot “control“ these functions. However, the draft ordinance to the FinIA stipulates an exemption for smaller companies, i.e. for EAMs (i) which employ 5 or less persons or achieve gross profits of less than CHF 1.5 mio and (ii) pursue a business without any increased risk. It is to be seen whether this provision which is in direct contradiction to the act will also be in the final ordinance.This actually means the end of the EAM as a “one man show“. However, an EAM does not necessarily need to employ full time risk managers and compliance officers. These services can also be outsourced to a competent third party. Still, the EAM needs to have at least a part time employee supervising the outsourcing partner. Based on previous experience with licensed financial services provides, it is expected that FINMA will require that the risk management, compliance and internal control team has proven experience in these areas and in the asset classes invested by the EAM. This will most likely be the biggest challenge.
- Full set of internal guidelines: Just as all other financial services providers, Swiss EAMs will need to implement a full set of internal guidelines. It is expected that these guidelines will cover (i) the internal organisation, (ii) duties of care, (iii) the investment process, (iv) the offer of collective investment schemes, (v) AML and (vi) risk management, compliance and internal control. In short, it is the objective of these guidelines to implement a proper organisation, allocate the various duties and make sure that these duties are properly performed. Kellerhals Carrard is to provide a service with which these guidelines can be purchased online under www.fidlegsolution.ch.
3) Duties of care
That EAMs need to satisfy duties of care is not new and actually results out of the mandate agreement based on which they act for their clients. Nevertheless, FinSA regulates these duties in more detail:
- Client classification: An EAM needs to classify all its clients as (i) retail client, (ii) professional client or (ii) institutional clients. All duties of care need to be satisfied vis-à-vis retail clients, professional clients can waive some of them but none of them needs to be respected vis-à-vis institutional clients.
- Duty to inform: Each EAM informs its clients about itself and its organisation as well as the risks associated with its services, any ties to third parties (which is particularly important for retrocessions, see below) and the market offer taken into consideration.
- Suitability test on the clients: Each asset manager needs to make sure that his services are suitable for its clients. For this purpose, information needs to be obtained about the financial circumstances, investment objectives, knowledge and experience of the client. The suitability test run by an EAM has to cover the asset management activity as a whole but not every single transaction.
- Duty of transparency and due diligence: EAMs always have to act in the best interest of the client. FinSA specifies this, but also makes clear that “in the best interest” is not always the cheapest option, but that in addition to price, time and quality have to be considered.
- Duty of loyalty: This duty requires that EAMs avoid all conflicts of interest or if they cannot be avoided, that they disclose them. Under this topic do also fall the retrocessions – where Swiss law applies a different concept than MiFID II does. FinSA follows the current Swiss case-law: Retrocessions are permissible but may only be retained if they have been disclosed to the client and the client has waived them in full knowledge of their amount.
The timeline – when do EAMs have to do what?
Under the assumption that FinSA and FinIA enter into force on 1 January 2020, existing EAMs need to respect the following deadlines:
- Within six months (i.e. by 30 June 2020): registration with FINMA
- Within three years (i.e. by 31 December 2022): filing of complete request for authorization with FINMA
- FinSA remains silent on the date by when the duties of care need to be respected. This implies that this has to be done as of the entry into force, i.e. 1 January 2020. However, it can well be that the ordinances grant a transition period.
A special timeline applies to newly established EAMs.
- What happens to the SRO affiliation? Notwithstanding the entry into force of FinSA and the FinIA, EAMs will still fall under the AML Act and comply with the duties of care set forth therein. The supervisory bodies under FinIA will, assume the duties of a self-regulatory organisation so that no separate affiliation with an SRO will be required.
- How do FinSA and FinIA affect Non-Swiss EAMs? Non-Swiss EAMs do not directly fall under FinIA as they cannot be supervised – unless they establish a branch or a representative office in Switzerland. FinSA, however, is applicable if such Non-Swiss EAM provides financial services in Switzerland. It stipulates that the employees of Non-Swiss financial services providers need to be registered in the Register of Advisers. The ordinances, however, may waive this obligation to register if (i) the foreign financial services provider is fully supervised and (ii) the services are solely offered to professional or institutional clients. In addition, it cannot be excluded that the waiver is granted only of the jurisdiction of origin of the financial services provider grants reciprocal right.
About the author
Dr. Dominik Oberholzer is LL.M / Attorney at law / Partner at Kellerhals Carrard Zürich KlG.