With both FIDLEG and FINIG expected to come into force on 1 January 2020, the ancestral business of Fund Managers and Asset Managers in Switzerland will face minor material changes, while the impact of FINIG is predicted to be more significant especially for Independent Asset Managers (IAMs). A substantial reorganisation will be required in order to meet the new licensing requirements. Despite the potential benefits afforded by a long transitional period, existing IAMs are advised to consider their transformation efforts early.
This blog post in our FIDLEG series illustrates the fields of action for collective Asset Managers and sheds light on new challenges and solutions for their Independent peers.
Defining an adequate governance framework is essential for licensing – and efficiency
Our previous blog posts focused on leveraging MiFID II experiences, standalone FIDLEG requirements and the key design decisions along the advisory value chain. In this blog we illustrate the impacts of FIDLEG on Fund and Asset Managers and explore 4 key factors for a successful and on-time FINIG transformation for Independent Asset Managers.
Due to strong interdependencies between organisational measures, services and internal control systems, timing is key. An early start is recommended with a detailed gap analysis – this will facilitate a considered implementation effort with a robust governance framework.
FIDLEG and FINIG ensure equal treatment of Asset Management vehicles
With regard to approval and supervision, institutions already supervised and familiar with the rules of the CISA will not experience any major changes. However, more material changes will be faced by newly submitted Independent Asset Managers and Asset Managers acting below the de minimis threshold.
Figure 1: Overview on new regulatory requirements
(Source: Deloitte 2018)
Main material FIDLEG and FINIG impacts for Asset Managers
FIDLEG imposes a number of rules of conduct for providing financial services, key requirements include:
- Provision of information
- Assessment and adequacy tests
- Strict documentation requirements
- General accountability, transparency and due diligence
The pre-existing Collective Investment Schemes Act (CISA) already imposed similar rules of conduct. The FIDLEG rules appear more comprehensive, yet the applicable basic concepts – such as duties of loyalty, care and duties to inform – were already present in CISA and remain applicable.
While the new FIDLEG rules aim for customer protection when acquiring securities or financial instruments, the CISA Code of Conduct aims to continuously protect investors by ensuring an asset management activity carefully conducted and preserving the interest of the collective investment schemes.
FIDLEG also introduces a new duty to issue a prospect for new products. This is different from the earlier requirement which was dependent on the distribution of Funds. In contrast, the new prospect duty is triggered by offering a product. Asset Managers offering a new product should note that strict liability rules apply.
Generally the impacts are lower when exclusively serving professional and institutional clients, in relation to whom the will achieve a central role in customer information. The new concept relating to product offering introduced by FIDLEG means that Distributor’s licences will no longer be required. The Asset Manager’s client segmentation is also affected by this change.
The FIDLEG client segmentation generally follows the concept introduced by MiFID II and distinguishes professional clients from institutional and retail clients. Additionally, CISA continues to distinguish qualified from non-qualified investors. FIDLEG lists exactly which customers are considered professional clients, based on MiFID II and the CISA list of qualified investors. Yet, complete congruence of the two definitions has not been achieved.
A new FINIG rule finally clarifies an important aspect of the allowed range of the asset management activity and its supervision for all financial institutes: the allowance to manage funds of occupational pension schemes, no longer need to be additionally approved by a separate authority.
FINIG: Substantial change for Independent Asset Managers in four dimensions
One of the foremost reasons to start legislation of FINIG in 2014 was to subject the sector of Independent Asset Managers (IAMs) to the same (prudential) supervisory standards as the rest of the industry (level playing field). In terms of organisation and until introduction of FINIG, IAMs could choose from the entire spectrum of possibility the Swiss Civil Code provides for, from single company to capital company. In terms of regulation and supervision, IAMs had (only) to implement the due diligence duties of the AMLA and were thereby supervised in their vast majority by 11 so called Self-regulatory Organizations (SRO), approved and supervised by FINMA, to which IAMs had to adhere to.
With FINIG, Swiss IAMs for the first time become subject to FINMA licensing. The material licensing requirements can be grouped into four substantial challenges:
Figure 2: Regulatory challenges for IAM
(Source: Deloitte 2018)
1. Experienced Directorship
FINIG requires a minimum size of directorship by 2 qualified individuals. Qualification is assumed if the person has adequate training in the activity of the asset manager and, at the time of the acquisition of senior management, has sufficient professional experience in asset management for third parties or trusts. For many pre-existing one-man-companies already this requirement can become vital for business continuity. However, the management may consist of only one qualified person if it can be demonstrated that the continuation of the business is guaranteed, e.g. by outsourcing the compliance function. IAMs considering this option, should be aware that in this core licensing requirement and in the eyes of FINMA not every third party might be considered eligible, qualified and trustworthy. The tailored service packages of the Deloitte Assetbox are tried and tested on FINMA licensed CISA asset managers.
2. Professionalising the 2nd line of defence
FINIG requires establishment of a compliance function, an appropriate risk management and an internal control system, that ensures existence, independence and adequacy of internal controls. Success on this task will also ensure successful adaption of FIDLEG requirements. The Deloitte Assetbox solutions follow a process based approach from a functional perspective and especially suit the needs of smaller and highly cost sensitive legal entities.
3. Minimum capital and solvency requirements
FINIG requires that the minimum capital of Independent Asset Managers is 100,000 Swiss francs paid in cash. The Independent Asset Managers must also have adequate collateral. Additionally, IAMs should consider the tax aspects of capital management measures. The requirement for additional collateral may be eased by taking out a professional liability insurance.
4. FINMA-licensing and prudential supervision
Introducing a prudential supervision means a significant cultural change for the entire sector of the Independent Asset Management. In order to succeed under the new regime, timely transformation of governance frameworks is paramount for IAMs. Deloitte Assetbox can significantly support these efforts.
The new FINIG regime requires IAMs to fundamentally challenge and adapt their business and operating models, and their governance framework. There certainly is a need for increased systematization, potential automation of customer relations and outsourcing of certain functions. Even well-established Collective Asset Managers should seize this opportunity to adapt to the new FIDLEG requirements while improving on their existing processes and procedures.