Financial Services Act (FinSA) and Financial Institutions Act (FinIA): Main Implications of the newly adopted Laws on the Fund Industry
Recently, the Swiss parliament has adopted two new laws – the Financial Services Act and the Financial Institutions Act – which will have significant implications for the Swiss financial market and, in particular, the funds and asset management industry. Both laws, together with the implementing ordinances, are expected to enter into force on 1 January 2020.
On June 15, 2018, after lengthy and arduous consultations, the Swiss National Council (Nationalrat) and the Council of States (Ständerat) reached an agreement on two important new pieces of financial market legislation: the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA).
The legislative procedure was initiated by the Federal Council back in 2014 with the common aim of strengthening consumer protection, creating a level playing field for financial institutions and, not least, aligning Swiss laws with the corresponding European framework – notably MiFID II and the EU Prospectus Directive (Directive 2010/73/EU). Striving towards EU-compatible regulation is key for Switzerland’s access to the European Market.
The FinSA regulates the provision of financial services and offering of financial instruments, while the FinIA sets out the licensing requirements for regulated financial institutions, with the exception of banks, which continue to be regulated by the Banking Act. Both laws, once enacted, will have significant implications for the Swiss fund and asset management industry, vastly reshaping the regulatory landscape. Entire sections of the Collective Investment Schemes Act (CISA) will pass over to the FinIA, while others will interplay with the new FinSA.
Financial service providers across the board will be affected, notably also those, who have implemented MiFID II already.
Key Elements of the New Laws (Selection)
FinIA will regulate the licensing of several financial institutions including portfolio managers (Vermögensverwalter), trustees, managers of collective assets (Vermögensverwalter von Kollektivvermögen), fund management companies (Fondsleitungen) and securities firms (Wertpapierhäuser; former securities dealers or Effektenhändler). Newly without a license requirement will be the fund distributors (Vertriebsträger), who currently require authorization by the Swiss Financial Market Supervisory Authority FINMA. Fund distributors will nevertheless continue to be subject to certain regulatory requirements that will be newly introduced for client advisers by the FinSA (for more details see below section on the advisor registry).
While fund distributors will no longer require a license, portfolio managers, i.e. the – currently unregulated – independent asset managers, will newly be subject to FINMA authorization. Under the FinSA, Portfolio managers are defined as persons mandated to manage assets within the meaning of Art. 3 lit. c (1)-(4) FinSA on a commercial basis and in the name of and on behalf of clients. The grandfathering clause, which intended to exclude independent asset managers with at least fifteen years of work experience from the scope of the licensing requirement and was originally foreseen in the 2015 dispatch of the Federal Council, did ultimately not survive parliamentary debate. The new law notably requires such managers of individual assets to have at least two qualified managers. One-man companies are still allowed as long as proper business operations may be demonstrated. Furthermore, portfolio managers will have to ensure appropriate risk management and internal controls as well as to have a minimum capital of CHF 100,000.
On a related note, managers of collective assets (terminology under the current CISA: “asset managers of collective investment schemes”) will no longer benefit from a de minimis licensing exception. The current thresholds (maximum CHF 100 million leveraged or CHF 500 million un-leveraged assets under management according to Art. 2 para. 2 lit. h CISA) will, however, generally allow managers of collective assets to apply for a license as portfolio manager instead (see Art. 24 para. 2 FinIA).
The FinSA introduces a new client classification regime, while the segmentation of the CISA (qualified versus non-qualified investors; Art. 10 CISA) remains in place. According to the FinSA, there are professional clients (Art. 4 para. 3), of which a smaller group, including among others financial intermediaries according to the Banking Act, the FinIA and the CISA, are also classed as institutional clients (Art. 4 para. 4). In line with MiFID II, “large undertakings” are introduced as a new group of professional clients (Art. 4 para. 3 lit. h FinSA).
While the FinSA was originally conceptionalized to bring Swiss law in line with EU regulations, the client categories of FinSA and MiFID II don’t match up identically. In both jurisdictions, high-net-worth retail clients will be able to opt out of the scope of protection provided by that status and choose to be treated as professional clients, provided that they have the required knowledge to understand the risks of the investment and have assets of at least EUR/CHF 500,000. The FinSA goes further, however, by allowing such an opting-out, according to Art. 5 para. 2 lit. b FinSA, if the client has assets of at least CHF 2 million (regardless of knowledge and experience). This is a lowering of the current minimum threshold of CHF 5 million for the opting out of high-net-worth individuals as qualified investors (Art. 6 para. 1 CISO). The relevant provision in CISA and CISO will be replaced by the corresponding FinSA provision above. A client categorization scheme solely according to the FinSA would, therefore, in this respect, not be fully compliant with MiFID II. On the reverse side, professional clients who are not institutional clients can declare that they wish to be treated as retail clients (so-called “opting-in”; Art. 5 para. 5 FinSA).
These FinSA categories link up with the established ones in the CISA, as according to the revised CISA, professional clients according to the FinSA are considered “qualified investors” (new Art. 10 para. 3 CISA).
Based on the client categories described above, financial service providers are subject to different conduct rules they have to comply with vis-à-vis their clients, i.e. duties regarding information to be provided, suitability of financial services, documentation and accountability, transparency as well as due diligence. These duties do not apply for interactions with institutional clients and may, in part, be expressly waived by professional clients (Art. 20 FinSA).
The CISA will continue to lay down a duty of loyalty, due diligence as well as a duty to provide information (Art. 20), however, the FinSA will have a significant impact by removing the binding force of codes of conduct by industry bodies. This will, in particular, affect the industry regulation by the Swiss Funds and Asset Management Association (SFAMA), notably its Code of Conduct as specification of the CISA conduct rules. It remains to be seen, whether current practice will continue to play at least a factual role in the industry. In the meantime, the ordinance to the FinSA, which may further specify these obligations, is to be expected to be discussed this fall.
The CISA will experience further changes with regard to product documentation rules. The duty to issue a prospectus will no longer be regulated in the CISA, but in Art. 35 et seq. FinSA. The general rule states that a prospectus must be published in advance by any person in Switzerland who makes a public offering of securities or any person who seeks the admission of securities to trading on a trading venue in accordance with Art. 26 of the Financial Market Infrastructure Act (Art. 35 para. 1 FinSA). Art. 64 et seq. FinSA contain publication rules, including a specific provision for prospectuses of collective investment schemes (Art. 65 FinSA).
While Art. 10 para. 5 lit. b CISA currently allows the Swiss regulator FINMA to exempt collective investment schemes from the duty to issue a prospectus, exceptions to the prospectus requirement will newly be subject to the conditions set out in the FinSA. For example, public offerings that are directed exclusively at professional investors or less than 500 investors are exempt from the prospectus requirement (Art. 36 para. 1 lit. a and b FinSA).
New under the FinSA is the duty to have the prospectus reviewed by a reviewing body – this duty, however, does not apply to prospectuses for Swiss collective investment schemes (Art. 51 para. 3 FinSA).
Another key change brought about by the FinSA is the introduction of the basic information sheet (Basisinformationsblatt, BIB) for all financial instruments offered to retail clients (Art. 58 et seq. FinSA), while the provisions relating the key investor information document (KIID) will be removed from the CISA. In general, the basic information sheet must contain the necessary information for investors to be able to make well-founded investment decisions and compare various financial instruments with each other.
A further new element introduced by the FinSA is the registry of client advisors (Beraterregister). Client advisors of Swiss financial service providers who are not subject to FINMA supervision, as well as client advisors of foreign financial service providers are generally not allowed to conduct business in Switzerland prior to their registration. A FINMA-authorized registration body will be in charge of this register, which will include the particulars of the registered individuals, their fields of activity and their completed training and professional development (see Art. 30 et seq. FinSA). Such registration duty applies, among others, to the distributors of collective investment schemes which will no longer require FINMA authorization under the FinSA.
Requirements for obtaining such a registration include: sufficient knowledge of the FinSA’s conduct rules and the required professional expertise, a professional liability insurance or equivalent financial security and an affiliation with an ombudsman’s office, either directly or through the financial service provider for whom the advisors work (Art. 29 FinSA).
For legal disputes between clients and financial service providers the FinSA provides for a conciliation procedure before an ombudsman (Art. 74 et seq. FinSA). Accordingly, all regulated financial service providers are obligated to affiliate themselves with an ombudsman’s office (Art. 77 FinSA) and are subject to certain duties of cooperation (see Art. 78 et seq. FinSA).
The FinSA and FinIA are expected to enter into force on January 1, 2020 (currently they are still within the optional referendum period) and will only enter into force in parallel. Of particular importance will be the respective ordinances, the consultation drafts of which are expected in autumn 2018.
With the entry into force of the laws, certain transitional provisions will apply. With regard to the FinIA:
- Financial institutions already in possession of respective licenses need not apply for a new one, but will have a year to ensure compliance with the new law (Art. 74 para. 1 FinIA).
- Those institutions without a required license shall have six months to reach out to FINMA and three years to apply for a license (Art. 74 para. 2 FinIA).
- Portfolio managers and trustees, who wish to take up business within a year after entry into force of the FinIA will have to reach out to the FINMA without delay und fulfill the legal requirements at the start of business (Art. 74 para. 3 FinIA).
Important in the context of the FinSA:
- Client advisors (including among others the distributors of collective investment schemes) will have six months to apply for the advisor registry, while all financial service providers will have six months to affiliate themselves with an ombudsman’s office (Art. 95 FinSA).
With the final legislative text of FinSA and FinIA we do have more clarity with respect to the regulatory changes that the different players in the asset management and fund industry have to expect. With respect to many rules and obligations, however, we will have to wait for the ordinances to the FinSA and the FinIA which will further specify them. The draft ordinances are expected to be discussed this fall.