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The beginning of 2020 marked a new era for Switzerland’s financial industry as a whole and intermediaries in particular. For the first time, providers of portfolio management services must be registered, in line with the international norm. But this new regime has implications that go beyond regulatory compliance, raising the bar in terms of both capital and technology.

Introduced on 1 January 2020, the Financial Services Act (FinSA) and Financial Institutions Act (FinIA) are set to change the nature of the Swiss financial advice and portfolio management industry. While they are being phased in for existing firms over the next few years, the time to start planning for them is now.

It’s natural to view the far-reaching legislation apprehensively, as a catalyst for consolidation among the country’s 3,000 or so intermediaries. The new point-of-sale obligations involve burdensome extra administration that will be hard to carry out manually. At the same time, asset managers must apply for a license to the Swiss Financial Market Supervisory Authority, which means having capital of CHF 100,000 as a starting point. That’s before the cost of IT systems, salaries and so on.

But a more far-sighted way to regard FinSA and FinIA is as an opportunity for intermediaries to gain competitive advantage and set a strategy for growth. For asset managers, being authorised differentiates them from financial advisors, which do not need to be licensed but will only be able to carry out advisory business. At the same time, all intermediaries may find that investing in IT tools not only facilitates compliance but also equips them for business growth.

Impact of FinSA and FinIA
Working in tandem, FinSA and FinIA have introduced a comprehensive new regulatory environment. A lighter version of the EU’s Markets in Financial Instruments Directive (MiFID II), FinSA sets the rules for conduct at point of sale, organizational duties and requires that financial advisers register their relationship managers. Its rules of conduct include classification of clients, suitability and appropriateness checks, providing key investor documents to clients and the disclosure of inducements. All of this slows down day-to-day processes, introducing a lot of checks. 

For its part, FinIA defines the types of financial services firms that need a license; for example, asset and portfolio managers, trustees and broker-dealers. Licensing will alter the economics of asset managers’ businesses. We estimate the initial cost of licensing and implementation alone to be up to CHF 130,000 and the running costs to be up to CHF 60,000 a year. That is in addition to the expense of complying with FinSA’s code of conduct. Some smaller asset managers might decide that it is no longer viable to remain independent, instead tying up in some way with a larger asset manager. Similarly, some foreign organisations offering portfolio management services to Swiss clients might conclude that it is no longer worthwhile.

Strategic options
Smaller asset managers struggling to afford the costs of authorisation and implementation have a range of options. They can link up with large asset managers, or platforms, and effectively outsource the cost of compliance. Alternatively, they can sell to another asset manager or merge with one. Correspondingly, some larger asset managers are looking to acquire or merge with others. Julius Baer is using its extensive network to link up asset managers and financial advisers seeking some form of collaboration.

Additionally, we are continually assessing the technology tools such as portfolio management systems that help asset managers and financial advisers to comply with FinSA’s code of conduct rules. In line with our “Business Navigator” approach, our IT specialists recommend the most suitable tools for individual asset manager and financial adviser firms, in terms of cost savings and efficiency.

Will this wave of regulation ever end? Not yet. By our reckoning, there are about 145 global regulatory changes each day. Mirroring changes in EU regulation, the Swiss authorities are likely to introduce an equivalent of the updated EU Anti-Money Laundering Directive and of the proposed taxonomy rules defining sustainable investing. There is also a requirement to comply with the EU’s DAC6 tax disclosure directive by 1 July 2020. Finally, the Swiss government plans to introduce a limited qualified investor fund in the next two years in order to boost Switzerland’s competitiveness as a fund centre. 

But it is the combination of FinIA and FinSA that look likely to change the face of the intermediary business in Switzerland. Existing firms have transition periods before they must comply with FinIA and FinSA respectively of three years and two years. That period gives them time to plan how to approach this new era. But it’s clear that they will operate in a more closely supervised environment in which IT tools will play a greater part. Indeed, the successful asset managers of tomorrow might be as much tech businesses as financial businesses.

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> Please contact us if you want to learn more about our services for intermediaries.