Federal Service Act - New draft provides banks and clients with more flexibility - overall a liberal approach
On November 4, the Federal Council published the dispatch on the Financial Service Act (“FinSA”) and the Financial Institutions Act (“FinIA”). The FinSA is based on existing Swiss rules and self-regulatory requirements and has been drafted in accordance with international requirements (e.g. Markets in Financial Instruments Directive). However, it is less formal than all previous propositions and leaves to the financial institutions more discretion and to the customers more personal responsibility. The draft is reasonable and takes into consideration the divergent interests.
After several months of uncertainty, Swiss financial institutions can be relieved after having read the dispatch of the Financial Service Act (“FinSa”) and the Financial Institutions Act (“FinIA”). The new provisions respect international standards, and therefore keep the door open for bi- and multilateral agreements with EU member states to secure cross-border market access for investment services and activities (“principle of equivalence”). At the same time, the new requirements respect the interests of the Swiss financial industry for a reasonable regulatory framework and efficient supervision. Controversial Swiss specific consumer protection requirements (e.g. the change of burden of proof, the procedural costs fund and an arbitration court etc.) have therefore been removed. Furthermore, the scope of the new act has been reduced (e.g. keeping accounts and custody of assets on behalf of clients are not considered financial services and are therefore out of scope) and banks accepting only retail clients profit from certain exceptions (e.g. no client classification required).
According to the draft FinSa, consumer protection is secured through transparency and well trained and educated relationship managers rather than by prohibiting advisory and portfolio management services. Thus, the suitability and appropriateness requirements have been amended. Financial institutions providing investment advice limited to a specific transaction must obtain information on the customer’s knowledge and expertise and assess whether the advice is appropriate. In case the advice is based on the customer’s entire portfolio or in case of portfolio management services, the financial institution must inquire - in addition to the customer’s knowledge and expertise - about the customer’s financial situation and his investment objectives. If the product or advice is not suitable or appropriate, the financial institution must inform the customer and advise him against the provision of the service. Unlike preliminary drafts of the FinSA and the EU regulations, the bank is not prohibited from providing non-suitable services if the client is fully aware of the situation. Services that are limited to the execution or transmission of customer orders do not require a suitability or appropriateness test.
According to the draft FinSA, a registration in the client register is only recommended for client advisors of Swiss and foreign financial institutions which are not supervised according to the Financial Market Supervisory Act. Foreign financial institutions with a permanent presence in Switzerland and supervised by FINMA are not required to register.
Retrocessions remain possible with a duty to inform clients under supervisory law for all remuneration the financial institution receives and keeps. The information must include the nature and amount of the compensation, or if this information is not available, the parameters of the calculation of the range. Unlike in the pre-draft, the question whether or not a financial institution is considered independent does not depend any more on its acceptance of any benefits from third parties.
If a financial instrument is offered to private clients, a client information document must be provided afore-hand if the instrument is not a share, a participation right, a preferred share etc. Documents according to foreign law can be used if they are equivalent to the Swiss information document. Furthermore, the Federal Council may designate qualified third parties to whom the drafting (but not the responsibility thereof) of the information document can be outsourced.
The draft FinIA establishes a new supervisory authority for asset managers of individual client portfolios as well as trusts. Asset managers of collective investment schemes, fund managers and broker dealers continue to be supervised by FINMA. Based on the financial institution’s business case, the supervisory authorities may schedule a multiannual testing periodicity.
In 2016, the Swiss Parliament will decide on the enactment and implementation of the final FinSa and FinIA. Implementing ordinances will need to be drafted as well.
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