Source: BRP Bizzozero & Partners SA
As we all know, January 1, 2020, represented a turning point for Swiss financial market regulation. On that day, the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) entered into force together with three implementing ordinances, the Financial Services Ordinance (FINSO), the Financial Institutions Ordinance (FinIO) and the Supervisory Organization Ordinance (SOO).
These new laws and ordinances fundamentally reshaped the architecture of Swiss financial market legislation. Their core objective was to create uniform competitive conditions for financial intermediaries in Switzerland and to improve client protections.
Focus on FinSA
As already said, FinSA is aimed to introduce a new regulation of financial services. The concept of financial services is broadly defined by FinSA and includes:
The acquisition or disposal of financial instruments
The receipt and transmission of orders in relation to financial instruments
The administration of financial instruments (portfolio management)
The provision of personal recommendations on transactions with financial instruments (investment advice) and
The granting of loans to finance transactions with financial instruments.
FinSA introduced some cross-sectoral rules for the provision of these services, called “rules of conduct”. In a nutshell, they consist of:
Information duties
Documentation and accountability duties
Transparency and due diligence duties
Duty to carry out an appropriateness or suitability test in case of asset management or (personalized) investment advice services.
These rules of conduct are graduated depending on the required level of client protection. This depends on the client segment to which the respective financial service provider is assigned. Therefore, all financial service providers offering financial services in Switzerland or for clients in Switzerland on a commercial basis must classify their clients either as retail clients, professional clients or institutional clients.
The highest level of protection applies to retail clients and the lowest level of protection to institutional clients. To them, FinSA rules of conduct do not apply. Depending on the client category, clients may declare under certain conditions that they want to change segment, by increasing their protection (the so-called opting in) or reducing their protection (the so-called opting out).
Not only supervised market participants such as banks, securities firms, fund management companies and portfolio managers must comply with these rules of conduct, but also non-supervised market participants if they provide financial services in Switzerland or to clients in Switzerland.
Financial service providers must also observe organizational obligations established by FinSA by adopting appropriate operational measures and by means of internal regulations.
They must also ensure that their staff possess the necessary skills, knowledge, and experience to perform their work. In fact, client advisers must have sufficient knowledge of the code of conduct set out in FinSA and the necessary expertise required to perform their activities.
As a consequence, training has become part of the main organisational duties to be fulfilled by financial service providers in order to comply with the requirements of FinSA. It is also a requirement to be registered for client advisers who are not subject to supervision but to a registration duty with the registration bodies licensed by FINMA to be entitled to carry out financial services in Switzerland or to clients in Switzerland.
Finally, financial service providers must affiliate to an ombudsman’s office which has the task to try to solve through mediation disputes between financial service providers and their clients.
FinSA as the Swiss MIFID?
Driven by the fact that the access to the European market is of the utmost importance for Swiss financial service providers, in the last years Swiss financial market regulation has somehow aligned itself with the EU regulations in comparison with the past. FinSA played a significant role in this respect, introducing into the Swiss regulation behavioural rules similar to the ones under MIFID II. However, there are some important differences between the two regulations which may be found in the areas of:
Client segmentation,
Definition of service types,
Appropriateness and suitability test and
Dealing with retrocession.
In general terms, it can be said that MIFID II is stricter than FinSA and that, as a consequence, there is only a partial overlapping.
However, the risks arising for financial service providers in case of litigation with EU clients who may, under certain conditions, denounce a MIFID II infringement in court based on the Lugano Convention may be considered as lower than before. It is a fact that, notwithstanding these differences still exist, the gap between Swiss regulation and MIFID II has certainly reduced further to the entry into force of FinSA.
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