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15 August 2019

FinSA / FinIA – Our blog series with the most important findings for the business world

According to the Federal Council's timetable, the Financial Services Act (FinSA - German only) and the Financial Institutions Act (FinIA - German only) are to enter into force on 1 January 2020. The results of the consultation (German only) on the corresponding Federal Council ordinances (FinSO and FinIO - both German only) are available. We expect the Federal Council to publish the definitive texts of the ordinances in October 2019. Only a few months remain until the new laws come into force. Even if generous transition periods are granted in some cases, financial service providers should adapt to the new circumstances in good time and take the necessary measures.

VISCHER will therefore be publishing a series of blogs on topics related to FinSA/FinIA over the next few weeks. To get you in the mood, here is a first overview of selected points:

Collective investment schemes: offer replaces distribution

The Collective Investment Schemes Act linked important legal consequences to the distribution of collective investment schemes (funds), in particular the obligation to obtain approval for domestic and foreign funds. FinSA now replaces distribution with the term offer: an offer in the sense of FinSA requires, in particular, that the recipient receives sufficient information about the offer conditions and the fund product. FinSA thus puts funds on an equal footing with other financial instruments in terms of marketing and grants certain simplifications compared with the currently applicable law: General advertising activities, for example, no longer represent regulated activities. Likewise, the obligation of foreign funds to appoint representatives and paying agents in Switzerland and the need for distributors' licences no longer apply.

In the consultation process it was criticised, in part severely, that FinSO also qualified pure fund distribution (i.e. services to end investors outside the asset management and investment advisory business) as a financial service and thus made it subject to FinSA's duties of conduct at the so-called point of sale. It will be interesting to see how the Federal Council ultimately decides. There is also a need for clarification on the transitional provisions. FinSA/FinIA grant certain transitional periods, while the corresponding provisions in the CISA will be repealed immediately with the entry into force of the new laws.

New rules on prospectus requirements for securities issues

FinSA and FinSO respectively introduce new rules on prospectus requirements in connection with the issue of securities on the primary market. These apply not only to traditional financial service providers and listed companies, but also to "normal", privately held companies that want to increase their capital and offer shares to an undetermined group of investors. The new rules apply uniformly to all types of securities, such as the issue of shares and bonds (previously governed by the Swiss Code of Obligations) as well as the issue of collective investment schemes and structured products. Especially in comparison to the CO, the new rules are much stricter in terms of content. In every case, the prospectus must now also contain information on the issuer's business situation, perspectives, risks and litigations. In addition, the prospectus must be submitted to a review agency for approval before publication.

On the other hand, the new law removes existing uncertainties as to when a prospectus obligation exists at all and creates numerous exceptions, e.g. for offers directed exclusively at professional clients or less than 500 investors. For SMEs, the new law also provides for simplifications in terms of content.

The new provisions on the obligation to publish a prospectus will come into force six months after the approval of a review agency by FINMA. Until then, the provisions of the Code of Obligations will continue to apply.

New duty of conduct for financial service providers

FinSA and FinSO lay down numerous conduct obligations for financial service providers in their dealings with their customers. These include information, documentation and accountability obligations, the obligation to be transparent and diligent in the execution of customer orders, and the obligation to carry out so-called appropriateness and suitability tests. In principle, the new rules of conduct already comply with current legislation and the relevant industry standards. However, they are much more detailed and in some cases stricter. Overall, financial service providers will have to inform their customers more extensively about their services and products than before and ensure it is documented.

Mandatory customer segmentation

The scope and depth of the new duties of conduct depend to a large extent on the customers' need for protection. Financial service providers must therefore reassign their clients to the following segments with increasing levels of protection: 1. institutional clients (supervised financial intermediaries such as banks, insurance companies, etc.); 2. other professional clients (in particular companies and pension funds with professional treasury operations and large corporations as well as wealthy private individuals with opting out); and 3. private clients.

The new segmentation is similar, but not congruent with the previous categories under the Collective Investment Schemes Act (keyword: qualified investors). In particular, clients with a long-term asset management or investment advisory agreement are not automatically deemed to be professional clients under FinSA. Large companies without professional treasury departments and private investment structures with professional treasury departments now qualify as professional customers. In addition, the threshold for high net worth individuals was lowered from CHF 5 million to CHF 2 million. Financial service providers are well advised to segment their customer base well in advance and derive the necessary measures on that basis.

There are transitional periods until 1 January 2021 for client segmentation, information requirements and the requirement to carry out appropriateness and suitability tests. The other conduct requirements, on the other hand, apply from day one of FinSA's entry into force.

Authorisation requirement for asset managers of individual client assets

Asset managers of collective investment schemes are already subject to licensing and supervision. This will now also apply to asset managers of individual client assets (so-called external or independent asset managers). An asset manager is a person who manages assets professionally in the name and for the account of clients or who may otherwise dispose of client assets. Pure investment advice is still not subject to authorisation. The licence is granted by FINMA. Ongoing supervision, on the other hand, is carried out by a so-called supervisory organisation within the framework of a self-regulating organisation of the industry.

In order to obtain a licence, asset managers must, among other things, meet certain minimum capital and equity requirements, guarantee sound management and have a good reputation and appropriate organisation. The latter means in particular that the management consists of at least two members (exceptions possible), the front and back office are separate and appropriate risk management and compliance functions are established. According to FinIO, FINMA may require asset managers with a gross income of more than CHF 5 million to have their supervisory bodies (e.g. board of directors) and management bodies separate if the nature and scope of their activities so require.

The concrete requirements for the organization are based on the scope and complexity of the business activity. However, it is precisely the smaller asset managers, who are still less structured that have to reckon with a considerable need for adjustment and effort in order to meet the new licensing requirements. Despite the generally generous transition periods, asset managers should not wait too long and adjust their operations to the new requirements in good time. As a reminder, the so-called grandfathering originally envisaged for asset managers who have been in business for more than 15 years has been abandoned by Parliament.

Existing asset managers must report to FINMA within six months of the FinIA coming into force. They will then have three years after the entry into force to meet the licensing requirements and submit a corresponding application to FINMA.

Registration in the Client advisor register

Even under FinSA / FinIA, mere investment advice remains possible without a licence in principle. However, certain client advisors must now be entered in an advisor register and are subject to all the duties of conduct set out in FinSA/FinSo, including their penal provisions. This applies to client advisors of unregulated domestic financial service providers (namely pure investment advisors) and of foreign financial service providers. The obligation to register applies only to the client advisors themselves, but not to their employers. In particular, client advisors / employees of supervised domestic financial service providers such as banks, insurance companies and proven asset managers are exempt from the registration obligation.

In order to be entered in the register, the client advisor must in particular provide evidence of the following: 1. professional expertise and knowledge of the FinSA rules of conduct; 2. professional liability insurance or equivalent financial security; 3. affiliation to an ombudsman; and 4. no criminal record entry for offences against the assets and no prohibition on activity or profession imposed by FINMA due to breach of supervisory regulations. The registration offices may remove an adviser from the register if they no longer fulfil the conditions.

Client advisors must report to a registration office for entry in the register within six months of the law coming into force. FinSO grants a transitional period of one year after entry into force for the fulfilment of the required knowledge. It is expected that there will be several registration offices for client advisors. They will probably not be approved by FINMA until around end of 2019 or 2020.

Our Banking & Finance team will be happy to answer any further questions you may have.

Author: Stefan Grieder


Topics: Capital MarketsFinSAFinIAProspectus requirementsAsset ManagersClient advisors

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