Switzerland: new rules for asset managers under the Financial Services Act

François Rayroux

Lenz & Staehelin, Geneva

francois.rayroux@lenzstaehelin.com

Laurence Vogt Scholler

Lenz & Staehelin, Geneva

laurence.vogt@lenzstaehelin.com

Introduction

The purpose of this article is to outline the main obligations of a provider of financial services under new financial legislation that entered into force in Switzerland on 1 January 2020, with key transitional periods expiring on 31 December 2021.

On 1 January 2020, new legislation entered into force in Switzerland, bringing significant changes applicable to financial intermediaries. In particular, (1) the Federal Financial Services Act ('FinSA') and its implementing ordinance ('FinSO') impose new obligations on those marketing financial products and services in Switzerland; (2) FinSA also introduces the obligation for client advisers of both Swiss and foreign financial service providers to register in a client advisers' register; (3) FinSA further requires financial service providers to join an ombudsman's office; and (4) the newly enacted Federal Financial Institutions Act ('FinIA') subjects independent financial advisers (IFAs) and trustees to ongoing supervision by a supervisory organisation (SO), with ultimate prudential supervision by the Swiss Financial Market Supervisory Authority ('FINMA').

The new FinSA

FinSA applies to financial services and the offer of financial instruments on a professional basis, either from Switzerland or on a cross-border basis to clients in Switzerland (Article 2 of FinSA and Article 2 of FinSO).

As an exception, the law does not apply to financial services provided by a foreign provider on a cross-border basis upon express request from the client (reverse solicitation – see Article 2 paragraph 2 of FinSA). This reverse solicitation exemption is, however, narrowly construed. Similarly, the rules governing the offering of financial instruments do not apply in the case of specific requests from an investor without prior intervention of the relevant financial intermediary.

Understanding the impact of FinSA first requires analysing whether the activity carried out on behalf of Swiss clients qualifies as: (1) a 'financial service' pursuant to Article 3 lit c of FinSA; and/or (2) an 'offer' of financial instruments pursuant to Article 3 lit g of FinSA. Both notions are independent, and a specific activity may qualify only as a financial service, only as an offer or fulfil both criteria.

Both concepts trigger different obligations. The term 'financial service' triggers point-of-sale-related obligations, such as conduct and organisational rules, and the requirement for registration in a client advisers' register. The characterisation of an 'offer' is mainly relevant to the requirement to publish a prospectus and, in some instances, a key information document (KID), and with respect to fund-specific obligations.

The obligations concerning these regulatory concepts are supplemented by specific requirements applicable to the 'advertisement' of financial products and services.

Under FinSA, the following activities are considered financial services when provided for a client (Article 3 lit c of FinSO): (1) purchase and sale of financial instruments; (2) receipt and transmission of orders in relation to financial instruments; (3) portfolio management involving financial instruments; (4) investment advice in relation to financial instruments; and (5) granting of loans to finance transactions with financial instruments.

Of particular relevance to the marketing of funds, the service of the purchase and sale of financial instruments is defined as encompassing any activity that specifically aims at the acquisition and/or disposal of a financial instrument (Article 3 paragraph 2 of FinSO). This covers circumstances in which no advice is provided to the end investor, but where the activity may be seen as an important cause for the investor to make such an investment decision.

The explanatory notice accompanying the publication of FinSO makes it clear that contact with an end client is necessary for an activity to qualify as a purchase and sale as defined by Article 3 paragraph 2 of FinSO. As a rule, the provision of services to supervised financial intermediaries, acting on behalf of their own clients, does not qualify as the 'purchase and sale of a financial instrument' pursuant to Article 3 lit c of FinSA and Article 3 paragraph 2 of FinSO.

FinSA defines an 'offer' as any invitation to acquire a financial instrument that contains sufficient information on the offer and the financial instrument itself, and is typically intended to sell it (Article 3 lit g of FinSA and Article 3 paragraph 5 of FinSO), whereas an offer to the public is deemed to constitute a 'public offer' (Article 3 lit h of FinSA). On the contrary, the provision of information upon clients' unsolicited requests; the reference by name to financial instruments, even in conjunction with factual, general information such as International Securities Identification Numbers (ISINs) or net asset values; the provision of factual information only; or the preparation, provision, publication and forwarding of legally or contractually required information and documents to existing clients or financial intermediaries (eg, corporate action information and invitations to general meetings, such as requests to issue instructions) are not deemed to constitute an offer (Article 3 paragraph 6 of FinSO).

Financial services

If a certain activity is deemed to be a financial service, the main obligations triggered are as follows: (1) client segmentation (Articles 4 et seq of FinSA); (2) conduct rules (Articles 7–19 of FinSA); (3) organisational rules (Articles 21–27 of FinSA); (4) registration in a client advisers' register (Articles 28–34 of FinSA); and (5) affiliation with an ombudsman (Articles 74–86 of FinSA).

Financial service providers must first classify their clients as institutional, professional or retail clients. The classification of a client depends on its corporate structure, regulatory status, wealth and/or expertise in the financial sector (Articles 4–5 of FinSA and Articles 4–5 of FinSO). The client category is instrumental in determining the level of protection afforded under FinSA, as a financial service provider would have to abide by more stringent duties in relation to retail clients. FinSA provides for a relative level of flexibility in relation to client classification, offering specific clients the option to either opt for more or less protection under FinSA (Article 5 of FinSA).

Unless the non-Swiss financial service provider in question is (1) subject to prudential supervision in its home jurisdiction; and (2) exclusively targets per se professional and/or institutional clients in Switzerland, its client advisers – that is, every individual employee performing financial services on its behalf (Article 3 lit e FinSA) – must be registered in a Swiss client advisers' register (Article 28 et seq of FinSA).

FinSA introduces an obligation for both Swiss and non-Swiss financial service providers to be affiliated to a recognised ombudsman prior to providing financial services in Switzerland (Articles 74 et seq of FinSA). This requirement does not apply in relation to per se professional clients and institutional clients.

FinSA further lists specific organisational measures that must be set up and maintained by entities providing financial services (Articles 21–27 of FinSA). Under FinSA, financial service providers must disclose remuneration received from third parties, such as retrocessions, and obtain the client's consent to keep such payments. FinSA also provides for specific obligations in 'chain of providers' configurations, that is, cases in which a financial service provider mandates another one to procure financial services (Article 24 of FinSA). Furthermore, should a financial service provider involve third parties in the provision of financial services, it must carefully select, instruct and supervise such third parties (Article 23 paragraph 2 of FinSA applies to Swiss establishment subject to this act).

When providing financial services to retail and, to a lesser extent, professional clients, financial service providers must also comply with the rules of conduct listed under Articles 7–19 of FinSA, including, in particular, information duties, documenting and reporting duties, as well as, where relevant to the services provided, suitability/appropriateness assessment and/or best execution duties. Article 20 paragraph 2 of FinSA allows for flexibility in the application of such rules of conduct by allowing professional clients to waive some of the requirements.

Offer of financial instruments

Unless a specific exemption applies, when an offer targets retail clients, a KID must be issued (Article 58 of FinSA). The KID for funds must be made available at least in English or in one of the official Swiss languages (German, French and Italian) (Article 89 paragraph 2 of FinSO). European packaged retail and insurance-based investment product (PRIIP) KIDs are considered as equivalent to Swiss KIDs and may be used in their stead (see Annex 10 of FinSO in relation to Article 87 of FinSO, and Article 59 paragraph 2 and Article 63 of FinSA). FinSA contains detailed requirements for the prospectus that must be issued for each public offer of financial instruments (Article 35 et seq of FinSA), but such requirements do not apply to foreign funds, whose prospectus must be issued according to the relevant foreign law.

With respect to the consequences of an offer of non-Swiss funds in Switzerland, FinSA must be read in conjunction with the Federal Collective Investment Schemes Act (CISA). Among other things, the revised CISA sets out specific rules that are applicable to an offer of foreign funds in Switzerland. In addition to the client classification of FinSA, the CISA further distinguishes between qualified and non-qualified investors (see Article 10 of the CISA). Subject to certain exceptions (see Article 10 paragraph 3b of the CISA), retail clients are considered to be non-qualified investors for the purpose of the CISA, while professional and institutional clients under FinSA are considered to be qualified investors under CISA (see, notably, Article 10 paragraph 3 of the CISA).

Of particular relevance to the subject matter of this article, Article 120 of the CISA states that only foreign funds approved by FINMA and for which a Swiss representative, as well as a Swiss paying agent, have been designated can be offered to non-qualified investors (Article 120 paragraphs 1 and 2 of the CISA). These additional requirements are waived for offers that solely target qualified investors. There is one notable exception to this rule: investors that are not per se qualified, but have opted out of the protection afforded to them as retail clients/non-qualified investors (Article 5 paragraphs 1 and 2 of FinSA; this includes high-net-worth individuals) can only be offered foreign funds for which a Swiss representative and a Swiss paying agent have been appointed.

Advertising

The notion of 'advertising' encompasses any communication that is aimed at investors and whose purpose is to draw the attention to financial instruments or services (Article 95 of FinSO). Pursuant to Article 68 of FinSA, advertising must be clearly indicated as such. It must mention the prospectus and KID for the relevant financial instruments, as well as where such documents may be obtained.

Moreover, when advertising for foreign funds, the obligations listed under Article 120 of the CISA must be complied with (Article 127a of the CISO). As a result, no advertising targeting non-qualified investors can be made for foreign funds that are not eligible for investment by such investors. This precludes any marketing of funds to non-qualified investors where those funds are not registered with FINMA.

The new FinIA

FinIA contains provisions for the authorisation and supervision of the organisation of financial institutions, among which, so-called portfolio managers (or IFAs), which have significant importance in Switzerland. It is particularly noteworthy in this context that portfolio managers and trustees now require a licence from FINMA and will be subject to ongoing supervision by SOs. SOs are non-governmental organisations, which are themselves authorised and supervised by FINMA. A portfolio manager, according to the FinIA definition, is a person mandated to manage assets on a commercial basis in the name of and on behalf of clients, provided such assets include financial instruments. Portfolio managers are not subject to FinIA, and therefore do not require a licence if they exclusively hold or manage assets of persons with whom they have 'family ties'. This is of particular relevance for single family offices.

Transitional periods

Although FinSA and FinIA entered into force on 1 January 2020, market participants have been afforded generous transitional periods, in most cases, of two years, to implement the new requirements (Articles 103–111 of FinSO, in relation to Article 95 of FinSO) applicable to their activity until they are able to comply with the new rules. This applies to the rules of conduct published by the Asset Management Association Switzerland (AMAS) regarding the distribution of investment funds. In relation to the offer of non-Swiss funds, the transitional regime further means that, in order to benefit from the more lenient rules of the new regulation concerning the duty to appoint a Swiss representative and paying agent, market participants must first implement the new rules of conduct and organisation requirements.

New self-regulation of AMAS

AMAS has published a revised version of its self-regulation in light of the revised CISA, FinSA and FinIA. The revised self-regulation has been published initially without any formal recognition as a minimum standard by FINMA, but this recognition by FINMA is expected to occur shortly. To the extent that such self-regulation of AMAS is recognised by FINMA, it shall serve as a minimum standard and benchmark, in particular for authorisation or recognition to be issued by FINMA.

A core element of the AMAS self-regulation is the revised AMAS Code of Conduct, which applies to any 'in scope' financial institution, whether that institution provides for financial services or not. It contains detailed rules of conduct based on Article of the 20 CISA, which are product-specific and must be differentiated from the new FinSA rules of conduct at the point of sale.

Another core document is the revised model distribution agreement. In contrast to the former AMAS distribution agreement, the new distribution agreement is now not mandatory for use in the case of distribution in Switzerland. However, the AMAS Code of Conduct will expressly specify that financial intermediaries have to use distribution agreements in line with Swiss or international standards (which in the first case will, in practice, again refer market participants to the AMAS model agreement). The use of the AMAS distribution agreement is also likely to remain key for tax reasons (ie, for VAT purposes).

AMAS self-regulation also includes various technical guidelines, such as on the valuation of assets and the handling of valuation errors, as well as model text to be included in the fund prospectus for the information of investors in Switzerland. Such models will apply to the prospectuses of funds that are approved to be offered to non-qualified investors, as well as to those approved to be offered to qualified investors, which are so-called 'opted-out professional clients' pursuant to Article 5 paragraph 1 of FinSA. This is expected to remain relevant, on a voluntary basis, whenever a financial promoter has chosen to appoint a Swiss representative and paying agent without any legal obligation to do so.

AMAS self-regulation is expected to be relevant mainly for Swiss market participants, but also for foreign financial intermediaries, in particular, in the case of delegation arrangements by Swiss institutions to foreign-based entities, such as foreign asset managers.

Finally, to the extent that the appointment of a Swiss representative and paying agent remains required for foreign funds, one must expect that institutions will impose, as a matter of contractual arrangements, compliance by foreign participants with the revised AMAS self-regulation.

Conclusion

The entry into force of FinSA and FinIA brought along important changes in the regulatory framework, mainly with the introduction of the concepts of 'financial services' and 'offer' of financial instruments. FinSA allows for some flexibility in its application, in particular in relation to (per se) professional and/or institutional clients.

The first step for the implementation of FinSA is to identify the types of services and classification of clients under FinSA, both in terms of financial services and the offer. Based on this first analysis, it is possible to determine which obligations are relevant to the financial service provider.

Despite the new regulations, the Swiss regulatory framework remains very liberal. This holds particularly true where a non-Swiss service provider targets solely sophisticated investors in Switzerland, such as financial institutions or pension funds. In these cases, the impact of FinSA at the point of sale is mitigated, in particular, compared with the Markets in Financial Instruments Directive 2004/39/EC (MiFID II). This is the case at the level of the product, as FinSA and the CISA impose little to no restriction on the offer of foreign funds to qualified investors.

Triggering an important shift of paradigm, both at the product level and point of sale level, the new regulation compels promoters, which are active in the Swiss financial market, to review their business model and update their marketing strategies. That being said, practitioners used to operating under MiFID II regulations are most likely to find the new rules applicable at the point of sale rather familiar.