The New Rules of Conduct for Financial Services Providers under the Proposed Swiss Financial Services Act (FinSA)

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The New Rules of Conduct for Financial Services Providers under the Proposed Swiss Financial Services Act (FinSA)

By Alexander Troller and Simon P. Quedens*

Background

 

          On 4 November 2015, the Swiss Government published, together with its official message, the revised Bills of the proposed Financial Services Act and the proposed Financial Institutions Act and submitted them to the Swiss Parliament for consideration. These two pieces of legislation are not expected to come into force before 2018. While strengthening investor protection and aligning Swiss financial market law with EU standards, the proposed Financial Services Act (FinSA) seeks to create a level playing field by introducing cross-sectorial rules of conduct for all financial service providers.1 Whereas the current rules of conduct are based on sector-specific regulations, all financial service providers will be subject to the same rules of conduct under the new Act, which will be harmonised, comparable and more transparent for clients.2 These new rules of conduct are expected to have a significant impact on the provision of financial services in Switzerland and will require financial services providers subject to FinSA to adjust their day-to-day operations. 

 

This article seeks to provide a short overview of the upcoming rules of conduct set out in the FinSA. It does not cover envisaged prospectus and/or organisational requirements under the new Act. 

 

Scope of the FinSA

 

          The FinSA will govern the relationship between financial services providers and their clients in relation to all financial instruments. More specifically, the FinSA, as currently drafted, applies to (i) anyone providing financial services (within the meaning of the new Act) on a professional basis in Switzerland or for clients in Switzerland as well as (ii) client advisers and (iii) providers of financial instruments.3 In other words, the FinSA regulates the provision of financial services to clients in Switzerland by banks, securities firms, fund management companies, asset managers or investment advisors, regardless of whether they are performed domestically or on a cross-border basis. Therefore, both foreign financial services providers acting in Switzerland and Swiss financial services providers will be subject to the new rules of conduct. 

 

Client segmentation

 

          Based on the EU’s MiFID rules, the proposed FinSA introduces a new client classification regime and divides clients into two main categories, i.e. retail clients and professional clients, with opt-in and opt-out options to switch between segments. A subgroup of professional clients include institutional clients, such as financial intermediaries or insurance companies that are subject to prudential supervision in Switzerland, foreign clients subject to an equivalent form of prudential supervision or central banks.4 The new rules of conduct will be adapted to the risk associated with the corresponding activities and differ depending on the respective category of clients.5 Whereas retail clients are afforded the highest level of protection, professional and institutional clients are less protected.

 

The new Code of Conduct Rules

 

          Currently, Swiss financial services providers are subject to sector-specific rules of conduct based on Swiss civil and financial market laws as well as self-regulation by industry associations. While financial institutions are already subject to similar rules, FinSA’s main innovation is the codified cross-sectoral rules of conduct, the compliance with which will be supervised by the Swiss Financial Market Supervisory Authority (FINMA).6

 

              I.       General duty of care

 

Financial services providers will, as hitherto, be under a general obligation to act in the best interests of their clients and apply the required levels of skill, care and diligence.7

 

              II.       Information Duties

 

Since clients are deemed to need essential information regarding financial services offered prior to making investment decisions, financial services providers will be subject to various information duties. According to the legislative proposal, financial services providers will have to inform their clients, in particular, of their supervisory status and sphere of activity, the financial services and financial instruments offered, the risks and costs associated with the selected financial services and their business interactions or relations with third parties in relation to the offered financial service. This information, which must be easily understandable, may be provided to customers in a standardised form and electronically.8 Pursuant to the draft legislation, the general duty of care and the subsequent information duties will also apply to institutional clients. 9

 

              III.       Duties to assess appropriateness or suitability

 

The FinSA also introduces the duty to assess suitability or appropriateness of the proposed financial instruments or services when rendering investment advisory or asset management services.10 When financial service providers advise clients on certain transactions without evaluating the entire portfolio (transaction-related investment advice), they will have a duty to enquire (i) the client’s knowledge and (ii) the client’s experience, and assess whether the proposed financial instruments or services are appropriate for the client, prior to performing the corresponding transaction (appropriateness test).11

 

When providing investment advice taking into account the entire client portfolio (portfolio-related investment advice) and/or asset management services, financial institutions will be required to perform a suitability assessment (suitability test). In these cases, they will have to enquire client’s (i) knowledge, (ii) experience, (iii) financial situation and (iii) investment objectives, and perform a suitability test based on the information provided.

 

An exception to the duty to assess the suitability or appropriateness of the envisaged financial services applies under execution-only transactions or if such services have been requested at the initiative of the client (reverse solicitation transactions).12

 

Absent indications to the contrary, financial services providers may assume that professional clients (such as public entities or retirement benefit schemes with professional treasury operations and companies with professional treasury operations, as well as HNWIs who have opted out) have the required level of knowledge and experience with respect to the proposed financial services and that they can financially bear the investment risks associated with the financial service.13 In other words, they will not be required to perform an appropriateness test or assess the financial situation of the respective professional client but will nonetheless have to give due consideration to their investment objectives. With regard to institutional clients as set out above, neither appropriateness nor suitability tests will be required. 14

 

              IV.       Documentation and Reporting Duties

 

Financial services providers will have to keep a written record of the gathered information, the agreed services and the information or warning given to clients and remit a copy of the required documentation.15 When providing investment advisory and/or asset management services, they will in addition be required to document the client’s needs and the reasons for each recommendation leading to the purchase, holding or sale a financial instrument.16

 

              V.       Best execution of clients orders

 

Based on the EU’s MiFID provisions, the FinSA also provides for best execution requirements. When executing clients’ orders, financial services providers will have to ensure the best possible result in terms of cost, timing and quality. The costs associated with the selected financial instruments must be considered not only as to the price of the financial instruments but also as to the expenses incurred in the execution of the order and potential inducements. Furthermore, financial services providers will be obliged to issue internal directives or guidelines on the execution of client orders.17

 

Violation of the rules of conduct

 

The violation of the upcoming rules of conduct can lead to criminal sanctions. The proposed FinSA, as currently drafted, provides for fines of up to CHF 100,000 for seriously violating the aforementioned duties to assess appropriateness and suitability or for providing false information or withholding material facts (i.e. any information essential to making an investment decision) when complying with information duties.18

 

Conclusion

 

The rules of conduct set out in FinSA should contribute to improve client protection in the Swiss financial sector. In the event of subsequent disputes related to an investment, it is likely that Swiss courts will assess alleged breaches of contractual obligations in light of these rules of conduct, even though such rules are public law by nature and do not therefore directly interfere with the private law relationship between financial institutions and their clients.19 As a result, these cross-sectoral rules of conduct should make it easier for claimants to demonstrate a violation of contractual obligations and facilitate the allocation of responsibilities between the parties.

 

For financial services providers and since substantial preparatory work will be required to implement these new rules of conduct, a “laissez-faire” strategy will not be the right approach. In particular, asset managers and/or investment advisors subject to the FinSA should already start analysing the legal implications of the upcoming conduct rules, especially the duty to assess the appropriateness or suitability of investments for each specific client. In practice, they will have to introduce adequate organisational processes, implement client segmentation strategies or amend their contractual terms and adjust them to the new rules of conduct. These adjustments are necessary both for regulatory and litigation risk reasons. In light of the above, financial services providers operating in Switzerland and/or acting on a cross-border basis in Switzerland must bear in mind that both clients and lawyers will be well informed regarding upcoming supervisory rules of conduct.

 

1 Swiss Federal Council, Dispatch on Financial Services Act (FinSA) and Financial Institutions Act (FinIA), 4 November 2015 version, p. 2, 14 and 34, free translation.

 

2 Swiss Federal Council, Basic information, 4 November 2015, p. 1, English version.

 

3 Article 2 of the draft FinSA.

 

4 Swiss Federal Council, Dispatch on Financial Services Act (FinSA) and Financial Institutions Act (FinIA), 4 November 2015 version, p. 44, free translation.

 

5 Swiss Federal Council, Basic information, 4 November 2015, p. 1, English version.

 

6 Article 90 of the draft FinSA.

 

7 Article 8 para 2 of the draft FinSA.

 

8 Articles 9 para. 1-3  of the draft FinSA.

 

9 Article 22 of the draft FinSA.

 

10 Articles 11-16 of the draft FinSA.

 

11 Swiss Federal Council, Basic information, 4 November 2015, p. 3, English version.

 

12 Article 14 of the draft FinSA.

 

13 Article 15 of the draft FinSA.

 

14 Article 22 of the draft FinSA.

 

15 Articles 17-18 of the draft FinSA

 

16 Article 17 para. 2 of the draft FinSA.

 

17 Article 20 para. 1 to 3 of the draft FinSA.

 

18 Swiss Federal Council, Dispatch on Financial Services Act (FinSA) and Financial Institutions Act (FinIA), 4 November 2015 version, p. 96, free translation ; Article 92 of the draft FinSA.

 

19 Swiss Federal Council, Dispatch on Financial Services Act (FinSA) and Financial Institutions Act (FinIA), 4 November 2015 version, p. 17, free translation.

 

*Alexander Troller joined LALIVE in 1997.  He specialises in corporate, commercial and finance law advisory services and litigation, with particular emphasis on banking, employment, white collar crime, judicial assistance in civil and criminal matters, and more generally, asset recovery in civil and criminal proceedings. His practice extends over a range of industry sectors including natural resources, utilities and infrastructure projects.  He advises corporations and individuals in the structuring and financing of transactions, the establishing, purchase and sale of businesses and the negotiation of joint ventures and partnerships.  Alexander Troller also routinely represents parties in civil, administrative and criminal proceedings.  His broad practice gives him a strong understanding of the full business cycle and the needs of his clients in both transactional and contentious matters.

 

Simon P. Quedens joined LALIVE in 2015. His main areas of practice are banking and finance, corporate and commercial law, domestic and international litigation. and white-collar crime

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Geneva,
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Geneva,
Tuesday, April 19, 2016
Finance & Banking