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FinSA / FinIA : A New Financial Services Regime for Switzerland - what will change?

Posted by on 29 August 2017

In this first blog of a series of several briefings to be posted on the new Financial Services Act and Financial Institutions Act we will look at some of the proposals and their effect in particular for the foreign fund and investment management industry.

businessman hand working with modern technology and digital layer effect as business strategy concept-993704-edited.jpegFollowing the approval by the Swiss government in December 2015 of the draft Financial Services Act (FinSA, FIDLEG (German) and LSFin (French)) and Financial Institutions Act (FinIA, FINIG (German) and LEFin (French)), the two bills are currently being discussed in Parliament with a vote scheduled for this Autumn. The FinSA and FinIA are both part of a set of new laws aiming at improving the Swiss financial market architecture and are based on EU directives such as MiFID, the Prospectus Directive and the PRIIPs project to a great extent.

1. A New Client Categorisation Regime

Similar to MiFID, the FinSA introduces a new client categorisation regime and distinguishes between:

  1. retail clients,
  2. professional clients and
  3. institutional clients.
The requirements of the FinSA vary depending on the category of clients to which the financial services are provided.

Professional clients are:

  1. Swiss regulated financial intermediaries,
  2. Swiss regulated insurance institutions,
  3. foreign financial intermediaries and insurance institutions subject to a prudential supervision,
  4. central banks,
  5. national and supranational public entities with professional treasury operations,
  6. public entities with professional treasury operations,
  7. pension funds with professional treasury operations,
  8. companies with professional treasury operations,
  9. companies that reach at least two of the following thresholds (balance sheet of CHF 20 million or more, turnover of CHF 40 million or more and 250 full time employees or more on a yearly basis),
  10. private investment structures with professional treasury operations set up for high net worth individuals and
  11. certain high net worth individuals who may "opt out" to be treated as professional clients.

Institutional clients are a subset of professional clients and include the categories (i) to (v) listed above.

Retail clients combine all the clients that do not qualify as professional clients.

Certain retail clients (high net worth individuals and their private investment structures) have the possibility to request to be treated as professional clients (opting out, under the FinSA,to be called opting up). On the other hand, professional and institutional clients may declare that they wish to be treated as retail clients (opting in).

2. Code of Conduct

The FinSA sets-out code of conduct that financial service providers must discharge to all their clients other than institutional clients. These rules include among others suitability checks, information duties, documentation and reporting duties as well as transparency and due care (best execution) rules.

3. Requirements concerning the Offering of Financial Instruments

The FinSA also provides for a set of new obligations which apply to all financial service providers targeting clients in Switzerland. Those rules are mainly based on the EU directives (MiFID, Prospectus Directive 2003/71/CE, PRIIPs project). Some main requirements that must be satisfied when offering financial instruments include

  1. A prospectus containing all the material information for the investments decision of the investor will have to be published. This prospectus requirement will apply to all public offerings (primary and secondary) in Switzerland and to all securities that are to be admitted to be traded on a trading venue, including derivatives. The prospectus will have to be approved by a new regulatory body that will be licensed by the Swiss Financial Supervisory Authority FINMA. Some exceptions and a simplification for SME are envisaged.

  2. In addition to the prospectus requirement, those offering financial instruments to retail clients must provide a key information document that should enable investors to be correctly informed when making investment decisions as well as help them compare various financial instruments in a simple and understandable way.

  3. Persons that are in direct contact with clients offering financial services are defined as "client advisors" and will have to apply for entry into a national public register. Minimum requirements regarding the education of client advisors are also expected.

Under the new FinSA, the private placement regime applicable to the offer of securities will expressly be codified and provide that an offer to a maximum of 150 retail clients will not have to satisfy the prospectus requirement.

4. Licence Requirement for Independent Asset Managers

Until now, independent portfolio managers and trustees were not under the supervision of the FINMA. A key change introduced by the FinIA is that independent portfolio managers and trustees will in future be regulated and require an authorisation in order to offer their services in Switzerland.

The authorisation will be granted by the FINMA. The prudential supervision itself is however managed by a specific supervisory body which would act upon the directives of the FINMA.

A grandfathering clause is provided in the current draft according to which independent asset managers will not be subject to the licence requirement if they have at least 15 years of experience and do not accept new clients.

5. Consequences for Swiss Distributors

The FinIA does not list distributors of collective investments schemes as regulated entities. It is therefore to be expected that distributors of collective investments schemes will no longer be required to obtain a license from the FINMA, as long as they do not carry out another regulated activity. This amendment affects Swiss distributors, since foreign distributors operating on a cross-border basis are not required to have a license from the FINMA, but need to be subject to an adequate supervision in their home jurisdiction.

The need to obtain a license for the distribution of collective investment schemes will be replaced by the obligation for client advisors of entities which are not supervised by the FINMA to be registered in a national register.

The fact that Swiss distributors will no longer need a license to offer foreign funds may affect the market in different ways. On the one hand, this may create more competition in the market and, on the other hand, investors may prefer dealing with entities supervised by the FINMA, such as representatives of collective investment schemes, instead of any unregulated providers of financial services.

6. Consequences for Swiss Representatives of Foreign Funds

Under the current Collective Investment Schemes Act (CISA), the distribution of foreign funds to qualified investors in Switzerland requires the appointment of a Swiss representative.

The FinSA introduces the concept of "offer" defined as any proposal to acquire financial instruments (including interests/units/shares in collective investment schemes) which contains sufficient information on the terms of the offer and the relevant financial instruments. This new concept should replace the broad concept of "distribution" of the CISA.

The new amended CISA will keep the concept of "qualified investors" and provide that all professional clients pursuant to the FinSA are considered qualified investors. There is no longer a distinction in the amended CISA between regulated qualified investors and unregulated qualified investors.

The obligation to appoint a Swiss representative for foreign funds will be amended too. The appointment of a Swiss representative is now no longer necessary to offer foreign funds to qualified investors i.e. profession clients under the FinSA. However, a Swiss representative must be appointed if the foreign fund is offered to high net worth individuals who are deemed qualified investors (opting out).

It is expected that both the FinSA and the FinIA should enter into force in 2019.

In our next briefing on the new FinSA and FinIA we will expand on the topic of the code of conduct and in particular the new regime affecting the duty of information, appropriateness and suitability.

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If you liked this article you may also be interested in reading about

Swiss Regulation of FinTech - New FinTech Rules will enter into force on 1 August 2017, written by Dr. Mark Montanari, Dr. Catrina Luchsinger Gähwiler, Dunja Koch, Benjamin Dürig, Laetitia Meier Droz

CISA 2 years on... the Distribution of Foreign Funds in Switzerland, written by Dunja Koch and Jérôme Pidoux

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Topics: Capital Markets

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Dunja Koch

Dunja Koch has expertise in all aspects of corporate and finance law, advising mainly UK and US clients with regard to Switzerland. She is the managing partner of the London office. She joined the firm in 1998 and became a partner in 2003. She regularly works on corporate and M&A deals, as well as leveraged and acquisition finance transactions, but also project, commodity and asset finance matters, including aircraft finance. Here, she acts on behalf of aircraft manufacturers, banks and leasing companies in relation to the Swiss aspects of acquisition of aircraft and engines. Her practice further covers regulatory matters, where she advises asset managers, funds, securities dealers and other financial institutions in relation to their cross-border activities in Switzerland. The Legal 500 United Kingdom 2019 recommended her as a top foreign lawyer in London. Chambers Global (2020) ranked her as leader in the fields of Banking & Finance and Investment Funds. She was also specifically recommended in the 2019 edition of the Legal 500 EMEA for Banking & Finance as well as Transport Law matters and named one of IFLR1000’s Women Leaders- an elite cohort of the 300 leading female transactional experts in local markets globally. She is the only practitioner from Switzerland to be featured in the guide. Dunja Koch holds a law degree from the University of Zurich and a LL.M. from Queen Mary, University of London. She qualified in Geneva in 1997 and in England and Wales in 1999. She speaks German, French, English and Italian. She is registered on the roll of attorneys in Zurich and a member of the International Bar Association (IBA), Association Suisse de Droit Aérien et Spatial and the Aviation Club of the UK.

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Laetitia Meier Droz

Laetitia is a partner in the Banking and Finance group in our Geneva office and specialised in all aspects of commercial, corporate and banking law. Her practice focuses on investment products and services with an emphasis on collective investment schemes, capital markets and regulatory matters. Laetitia is also active in banking litigation and white-collar matters, advising individual and corporate clients on various criminal law matters, including mutual legal assistance. She is a Deputy Judge with the Geneva Criminal Court. Her two-year tenure as Head of Legal of an international leading investment company, specialised in emerging, sustainable and inclusive finance, provided her with in-depth knowledge of the legal and business needs of an asset manager and distribution agent active worldwide, as well as a significant expertise in social impact finance. Her working languages are French, English and Spanish. Laetitia is member of the Geneva Bar Association, the Swiss Bar Association (SAV/FSA), as well as the Legal Team of Sustainable Finance Geneva. She is a member of the Geneva Bar Exam Commission.

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