FINSA and FINIA: what to expect

The Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) will enter into force on 1 January 2020. They are part of the new financial market architecture of Switzerland, which covers four areas: (1) supervision (already governed by the Financial Market Supervision Act, FINMASA); (2) infrastructure (in the Financial Market Infrastructure Act, FinMIA); (3) services (FinSA); and (4) supervised entities (FinIA).The FinSA contains rules of conduct that financial service providers must observe when dealing with their customers. Compliance with these rules of conduct must be documented. In addition, FinSA provides requirements for prospectuses and requires an easily understandable basic information sheet for financial instruments. The FinIA primarily harmonises the licensing rules for certain financial institutions and now subjects asset managers and trustees to supervision. Below you find a brief description of the rules of conduct and duties that will apply.

Financial Services Act (FinSA)

A level playing field and customer protection

The FinSA intends to create uniform competitive conditions and improve customer protection by imposing new rules of conduct on financial service providers. The focus is on information and enquiry obligations. For an informed investment decision, customers are dependent on sufficient information about their financial service provider as well as about the available financial services and financial instruments. The FINSA then obliges financial service providers to carry out adequacy and suitability tests as well as to document and account for them.

Customer Segmentation

Financial service providers are now required by law to take into account the knowledge, experience, financial circumstances and investment objectives of their clients. The new rules of conduct and product regulations will be adapted to the client segment addressed, whereby a distinction is made between private clients and professional clients. Institutional clients form a subgroup of professional clients.

Professional clients are: public corporations and pension funds as well as companies with professional treasury, large companies and investment structures for wealthy private clients with professional treasury. Institutional clients are financial intermediaries, insurance companies, central banks, private clients are not classified as professional or institutional clients, including wealthy private clients. Unless they declare that they want to be considered professional clients (so-called opting-out option). Conversely, FinSA also grants certain types of investors the right to be divided into a customer group with a higher level of protection (opting-in).  For example, certain professional clients may declare that they wish to be considered as institutional clients or private clients, and institutional clients may declare an opting-in to be a professional client. However, it is not clear whether an opting-in of the institutional client to a private client is possible. While Art. 5 para. 6 FinSA seems to exclude this, Art. 36 para. 3 FinSA seems to assume the opposite.

This customer segmentation has the consequence, for example, that the rules of conduct pursuant to Art. 7 et seq. of the FinSA are not applicable. FINSA are not applicable to institutional clients, while professional clients may waive compliance with certain rules of conduct. . In addition, professional clients generally do not have to undergo an adequacy or suitability test.

Unified Prospectus Requirements

Furthermore, FinSA introduces standardized prospectus requirements for all securities that are offered to the public or traded on a trading venue. Already today, for example, the SIX Swiss Exchange provides for much higher requirements for the admission of securities in its Listing Rules. In addition to the prospectus regulations, there is an obligation to prepare a basic information sheet if more complex financial instruments are offered to private clients. This basic information sheet is intended to facilitate an informed investment decision and a comparison of different financial instruments. No basic information sheet has to be prepared when offering shares.

Ombudsmen

To make it easier for individual clients to take action against any misconduct by their financial service provider,, the FINSA provides for a strengthening of the ombudsman services by requiring all financial services providers to join an ombudsman service and for the ombudsmen services to be officially recognized. However, this should continue to mediate exclusively between the parties and not be given decision-making authority.

Litigation Costs

In order to counteract the problem of the risk of litigation costs in civil proceedings in favor of the plaintiff’s private customers, an exemption is provided to pay advances on litigation costs and securities is provided for certain disputes with financial service providers, financial institutions, banks and insurance companies.. In addition, financial service providers, financial institutions, banks and insurance companies will have to bear their own litigation costs even if they win under certain conditions. The prerequisite for this is in particular that the amount in dispute does not exceed CHF 250,000 and that prior proceedings are conducted before an ombudsman. Finally, the Swiss Civil Procedure Code provides for a provision in Art. 107, according to which the court may distribute the court costs at its discretion under certain conditions.

Financial Institutions Act (FinIA)

Purpose

The FinIA is to regulate the supervision of all financial service providers that conduct asset management business in any form in a uniform decree. The provisions for financial institutions that are already supervised under existing law, i.e. asset managers of collective investment schemes, fund management companies and securities dealers, will be taken over unchanged from the applicable decrees (Swiss Federal Act on Collective Investment Schemes).

Newly regulated financial advisors

Asset managers of pension fund assets, individual client assets and trustees are now also subject to supervision. Asset managers of collective investment schemes and asset managers of pension fund assets (“managers of collective assets”) must meet stricter requirements than asset managers of individual assets and trustees. Thus, managers of collective assets are supervised by FINMA, which has the competence to provide for an audit frequency of several years, taking into account the activity and the associated risks. Asset managers and trustees must have risk management and internal control in place to ensure compliance with legal and internal company regulations among other things. On the other hand, managers of collective assets must have the required minimum capital as well as adequate equity capital – the amount of which is regulated by the Federal Council. The banks are not covered by the FinIA. They remain subject to the Banking Act.

FINMA License

The FinIA provides for a licensing cascade differentiated according to financial service providers, whereby the higher form of licensing now also includes the underlying licensing form(s). This means that only one licence needs to be applied for formally.  However, the holder of a higher licence must also comply with all the obligations of the lower levels.