Switzerland’s new financial regulatory framework, including the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA), will be effective from 1 January 2020. The new regulations will affect both domestic financial service providers and those international providers with clients in Switzerland.
The new Swiss regulatory framework marks a shift from the current liberal regulation, under which inbound cross-border financial services were largely out of scope, to a more restrictive regime which extends its scope for the first time to financial services provided to clients in Switzerland on a cross-border basis. Consequently, the new regulation will impact Swiss and foreign financial service providers amongst other things with MiFID-type rules of conduct, organizational measures and registration (or even licensing) requirements.
Territorial scope under FinSA
FinSA applies, in principle, to anyone who provides financial services on a commercial basis in Switzerland or for clients in Switzerland. This includes financial advisers and asset managers that provide their services on a professional basis (together ‘intermediaries’). Intermediaries domiciled or incorporated in Switzerland as well as foreign intermediaries with a physical presence (i.e. branch, office or employees) in Switzerland must comply with FinSA regardless of whether they provide services for clients in Switzerland or abroad.
Foreign intermediaries without a physical presence in Switzerland, i.e. acting on a pure cross-border basis, will be subject to FinSA when they provide financial services to clients domiciled or resident in Switzerland. The territorial scope, thus, also includes ‘fly in, fly out’ services or ‘road shows’.
Similar to MiFID II, unsolicited inbound cross-border financial services, i.e. at the specific initiative of the Swiss client (so-called reverse solicitation), do not inadvertently trigger the application of FinSA. Foreign intermediaries providing cross-border inbound financial services into Switzerland on a reverse solicitation basis only are, hence, exempted from FinSA.
Consequences of FinSA’s application
Foreign intermediaries subject to FinSA will be required to comply with FinSA rules in parallel with any other set of rules applicable to them, e.g. in their home jurisdiction. FinSA’s regulatory duties applicable to foreign intermediaries include:
- Duty to classify clients as private clients, professional clients and institutional clients;
- Duty to comply with rules of conduct, including the performance of a suitability and/or appropriateness check, making available a key investor document or providing information e.g. on costs, risks and economic ties with third parties;
- Duty to comply with organizational requirements, including the disclosure of inducements received from third parties or the selection of staff with the necessary skills, expertise and experience; and
- Duty to register relationship managers servicing clients in Switzerland in a new register of client advisors regardless of their place of work or domicile.
It is worth noting that a transition period of two years, i.e. until 31 December 2021, has been introduced until the end of which compliance with the rules of conduct and organizational measures under FinSA must be established.
The rules of conduct and organization under FinSA slightly differ from foreign sets of rules such as MiFID II and, thus, foreign intermediaries will need to thoroughly assess whether and to what extent they need to adjust their policies and processes in order to comply with FinSA.
Licensing requirement in case of physical presence
FinIA introduces a new licensing requirement for asset managers and trustees. Foreign asset managers and/or trustees with a physical presence in Switzerland will have to apply for a license in Switzerland. Physical presence includes the establishment of a branch or an office or engaging persons in Switzerland on a permanent basis.
In contrast, foreign intermediaries providing financial advisory services in, into or out of Switzerland, i.e. regardless of a physical presence, are not subject to a licensing requirement in Switzerland.
Course of action
Foreign intermediaries should assess whether the new Swiss regulatory framework applies to them and what impact the new regulation will have on their processes, policies and (required) tools. Based on the situation evaluation, the most suitable course of action should be selected.
Operationally, the client book should be mapped in order to identify relationships with Swiss clients. As, in general, reverse solicitation is a rather risky business model, it may be sensible to create a dedicated front unit for Swiss clients with relationship managers who are registered as client advisors and who have the necessary expertise to provide asset management or financial advisory services to clients in Switzerland in compliance with Swiss laws and regulations.
Strategically, it should be assessed whether an exit or transfer of the relevant client population, a solo attempt or a cooperation, e.g. with another intermediary, an outsourcing provider or a platform, would be more advantageous. Even the establishment of a duly licensed physical presence could offer in some cases a viable and efficient alternative to mitigate compliance and enforcement risks. Violation of the new Swiss regulation, however, should not be an option from a risk tolerance perspective as the new laws are enforced with criminal law sanctions and potential contract law liability.
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