FinSA&FinIA: background and objectives of the legislation
How did FinSA&FinIA come about?
In the wake of the financial crisis triggered by the collapse of Lehman Brothers in 2008 and the Madoff fraud, the Swiss Financial Market Supervisory Authority (“FINMA”) published its “FINMA Sales Report 2010” in October 2010. It noted “a significant information gap and imbalance of power between financial service providers and retail clients”, which was not sufficiently addressed by existing legislation. After reviewing the comments submitted on this discussion paper, FINMA published the “Position Paper on the Regulation of the Production and Distribution of Financial Products” in February 2012. FINMA again concluded that adequate client protection was not guaranteed and proposed various measures to remedy the identified shortcomings, including the creation of a Financial Services Act.
In March 2012, the Federal Council commissioned the Federal Department of Finance to develop a cross-sector regulation of financial products and services as well as their distribution. The result of this mandate was the draft Federal Act on Financial Services (“FinSA”) and the draft Federal Act on Financial Institutions (“FinIA”), which the Federal Council submitted for consultation in the summer of 2014. Some elements of the drafts for consultation met with harsh criticism. In particular, it was argued that the very extensive client protection provisions would severely restrict the freedom of movement of Swiss financial service providers and lead to excessive costs.
After partial consideration of the criticism, the Federal Council released the revised drafts for parliamentary deliberations end of 2015. Swiss parliament concluded its discussions in June 2018. FinSA&FinIA as well as the related financial services, financial institutions and supervisory organisation ordinances enter into force on January 1, 2020.
What are the objectives of FinSA&FinIA?
The main goals of FinSA&FinIA are
- the strengthening of investor protection under supervisory law;
- the creation of uniform regulatory rules for the provision of financial services and financial instruments;
- the harmonisation of Swiss financial market law with European requirements, in particular with Directive 2014/65/EU on Markets in Financial Instruments (MiFID II) to ensure access for Swiss financial service providers to the European market.
What is the FinSA?
The FinSA is a supervisory decree that defines the conditions under which financial services may be provided and financial instruments be offered. The competent supervisory authorities check compliance with the law and sanction violations. Non-supervised financial service providers must be subject to criminal sanctions if they violate certain FinSA standards (cf. “Does the FinSA contain penal provisions?“). The Financial Services Ordinance (FinSO) contains implementing provisions for the FinSA.
How is the FinSA structured?
The law is divided into titles, chapters and sections. It has 8 titles:
- Title 1: General provisions governing in particular the scope, terminology and client segmentation;
- Title 2: Regulates the requirements for the provision of financial services concerning (i) knowledge requirements, (ii) codes of conduct, (iii) organisation and (iv) register of advisors;
- Title 3: Offering of financial instruments;
- Title 4: Release of documents;
- Title 5: Ombudsman;
- Title 6: Supervision and exchange of information;
- Title 7: Penalties;
- Title 8: Final provisions, including in particular transitional periods.
To whom does the FinSA apply?
According to Art. 2 para. 1 FinSA the law applies to:
- Financial service providers, i.e. all natural or legal persons who provide financial services on a professional basis in Switzerland or for clients in Switzerland. Financial services include (i) the purchase or sale of financial instruments, (ii) the acceptance and transmission of orders relating to financial instruments, (iii) asset management, (iv) investment advice and (v) the granting of loans for the execution of transactions in financial instruments (Art. 3 let. c FinSA);
- Client advisors, i.e. natural persons who provide financial services in their own name or in the name of a financial service provider (Art. 3 let. e FinSA);
- Financial instrument makers.
Art. 2 para. 2 FinSA determines to which entities the FinSA does not apply.
When is the professional provision of financial services assumed?
Only the professional provision of financial services is covered by the FinSA. According to the Federal Council’s report on FinSA and on FinIA, p. 43, a commercial activity exists if the financial service provider carries out an independent economic activity for ongoing profit within the meaning of Art. 2 let. b of the Commercial Register Ordinance. The FinIA contains its own definitions of commercial activity as a prerequisite for financial institutions to be subject to this obligation.
What is the territorial scope of the FinSA?
The FinSA only applies to financial services provided in Switzerland or for clients in Switzerland (Art. 3 let. d FinSA). Art. 2 FinSO states, in line with the principles relating to the passive freedom to provide services applicable in the EU, that a foreign financial service provider may operate in Switzerland if the client relationship or a single financial service assignment was established at the express initiative of or request by a client domiciled in Switzerland (so-called “reverse solicitation”). The foreign service provider may then travel to Switzerland to carry out its activity or exercise it by correspondence without the FinSA becoming applicable. As soon as the foreign financial service provider establishes a physical presence in Switzerland or, for example, takes up residence in Switzerland or is entered in the commercial register here, the service is deemed to have been provided in Switzerland, even if the client relationship was established at the initiative of a client (Explanatory Report FDF on FinSO, FinIO and SOO, p. 18).
Does the FinSA apply equally to all client groups?
No, the FinSA provides for so-called client segmentation, according to which a distinction is to be made between retail clients, professional clients and institutional clients, which are a qualified form of professional clients (Art. 4 FinSA).
What is the purpose of client segmentation?
Not all investors need to be equally protected from the risks of financial services. Different levels of protection are imposed due to different experiences and knowledge as well as the financial circumstances of the clients.
Retail clients enjoy greater investor protection than professional clients, who in turn are better protected than institutional clients. For example, the rules of conduct pursuant to Art.7 ff. FinSA are not applicable to institutional clients, and professional clients may waive compliance with certain rules of conduct (Art. 20 FinSA). In the case of professional clients, neither a suitability nor an appropriateness test is generally required (Art. 13 para. 3 FinSA). Furthermore, a securities prospectus need not be drawn up if the (public) offering is directed exclusively at professional or institutional clients.
Is client segmentation an invention of the FinSA?
No. Our private and supervisory laws provide different levels of protection for different client groups. FinSA’s client segmentation is based on the distinction between qualified and non-qualified investors under the previous Collective Investment Schemes Act on the one hand and on the respective differentiations under MiFID II on the other.
What are institutional and professional clients?
Institutional clients are deemed to be (Art. 4 para. 3 a-d and Art. 4 para. 4 FinSA):
- National and supranational public bodies with professional treasury;
- Financial intermediaries regulated under the Banking Act, the FinIA and the CISA;
- Insurance undertakings in accordance with the Insurance Supervision Act;
- Foreign financial institutions subject to prudential supervision;
- Central banks.
Professional, but not institutional, clients are:
- Public corporations, pension funds, institutions serving the purpose of occupational pension provision and private companies with a professional treasury (cf. “What is a professional treasury?“);
- Large companies pursuant to Art. 4 para. 5 FinSA;
- Private investment structures established for wealthy individuals with professional treasury;
- Wealthy individuals who have declared that they wish to be regarded as professional clients (Art. 5 FinSA).
What is a professional treasury?
A professional treasury is assumed if a professionally qualified person experienced in the financial sector is permanently responsible for managing the financial resources (Art. 4 para. 3 FinSO). Financial Investment competence can be ensured internally by employees or externally by mandated experts (Art. 3 para. 8 FinSO).
What are retail clients?
All clients not classified as professional or institutional are retail clients. This also includes wealthy private individuals, unless they declare that they want to be regarded as professional clients. This so-called opting-out, i.e. the right to be treated as a professional client, is open to private individuals who (i) have assets of at least CHF 500,000 and can assess the risks of a financial service or product on the basis of their knowledge and experience or (ii) have assets of at least CHF 2,000,000 (Art. 5 para. 3 FinSA). Art. 5 FinSO regulates which assets may be included in this calculation.
Can I switch between client segments?
Yes, Art. 5 FinSA grants certain types of investors the right to be allocated to a client group with a lower level of protection (opting-out) or a client group with a higher level of protection (opting-in). As already mentioned, wealthy private individuals can be treated as professional clients and certain professional clients can declare that they wish to be regarded as institutional clients. Conversely, those professional clients who are not institutional clients may declare that they wish to be treated as retail clients. Institutional clients have the same option: They may declare an opting-in to the professional client segment. It is not clear whether an opting-in by an institutional client to a retail client is possible. Art. 5 para. 6 FinSA seems to exclude this; Art. 36 para. 3 FinSA in turn assumes that this is possible.
Financial service providers must inform their clients who are not individual clients of their opting-in rights before providing services (Art. 5 para. 7 FinSA).
Are there rules of conduct under the FinSA?
The rules of conduct pursuant to Art. 7 ff. FinSA contain various obligations which financial service providers must take into account when dealing with their retail and professional clients. Professional clients can dispense with the observance of certain rules of conduct. The rules of conduct do not apply to institutional clients (Art. 20 FinSA).
What are the rules of conduct?
The rules of conduct include:
- Duty to inform (Art. 8 f. FinSA), according to which a client must be informed simply and comprehensibly about the financial service provider (incl. field of activity and supervisory status, connection to ombudsman) and on the other hand about the financial service or financial instrument (incl. risks and costs) before conclusion of the contract. The financial service provider informs its clients of economic ties to third parties if these can lead to a conflict of interest. The content of the relevant information is set out in Art. 9 para. 2 FinSO. Also, companies within a group, to which the financial services provider belongs to, are regarded as third parties (Art.9 para. 1 FinSO). In this context, information must also be provided on the market offers considered when selecting financial instruments, i.e. which product range a financial service provider includes in its product selection and whether it limits itself to its own financial instruments (Art. 10 para. 1 FinSO). Own financial instruments are those which are issued or offered by the financial service provider itself or by companies with a close relationship to the financial service provider (Art. 10 para. 2 FinSO). The “close relationship” is defined in Art. 10 para. 3 FinSO. All information can be made available in a standardized form. In addition, the Key Information Document (“KID”) or upon request, the prospectus must be handed over when a financial instrument is personally recommended to retail clients, if such a document had to be drawn up.
- The obligation to carry-out appropriateness and suitability tests (Art. 10 f. FinSA): Before providing investment advisory or asset management services, financial service providers must check whether these are appropriate and suitable for the client. The appropriateness test (Art. 11 FinSA) is intended to clarify whether the client understands the risks associated with the service. The suitability test (Art. 12 FinSA) aims to answer the question of whether the service is suitable for the client in view of his willingness and ability to take risks. In investment advisory mandates, the suitability test is only necessary if the advice is given with regard to the entire client portfolio and not only with regard to individual transactions. In execution-only mandates, neither an appropriateness nor a suitability test is required, of which the clients must be informed (Art. 13 para. 1 FinSA). It is assumed that professional clients have the necessary knowledge and experience and that the investment risks associated with the service are financially acceptable to them (Art. 13 para. 3 FinSA). Thus, for professional clients, appropriateness and suitability tests are only necessary in exceptional circumstances. In the case of institutional clients, it does not apply at all (Art. 20 para. 1 FinSA). Art. 14 FinSA lays down warning obligations for cases in which the adequacy or suitability is lacking or the corresponding examination cannot be assessed because sufficient information is missing.
- Duty of documentation and accountability (Art. 15 f. FinSA): A financial service provider is obliged to document a great deal of information relating to the provision of services to the client. Upon request, a copy of this documented information must be provided to the client and an account given of the financial service provided, the portfolio and the costs. Art. 18 f. FinSO contains the corresponding implementing provisions.
- Transparency and diligence in client orders (Art. 17 f. FinSA): The FinSA requires that financial service providers observe the principles of good faith and equal treatment of clients when processing client orders, that they execute client orders in the best possible manner financially, temporally and qualitatively, and that they comply with the principles contained in Art. 19 FinSA in the case of securities lending executed with financial instruments from client portfolios. In Art. 20 f. FinSO one will find the corresponding implementation regulations.
Does the FinSA contain organisational requirements?
Yes, requirements for the organisation of a financial service provider are not just to be found in the FinIA. Pursuant to Art. 21-24 FinSA and Art. 23 FinSO, financial service providers shall safeguard, through internal regulations, an appropriate operational management organisation and the fulfillment of duties and ensure that their employees have the necessary skills, knowledge and experience. Pursuant to Art. 25 para. 1 let. e FinSO, the internal remuneration mechanisms must be designed in such a way that no incentives are created to disregard legal obligations or for harmful conduct towards clients. Further, appropriate control systems and binding work and business processes must be defined (Art. 23 para. 2 FinSO).
Do FinSA and FinIA require the documentation of the internal organisation?
Yes. The FinSA obliges financial service providers to create an appropriate operational organisation and to ensure that the obligations of the law are complied with (Art. 21 FinSA). It is required that internal directives be established to define processes for the provision of financial services, compliance with which can be monitored. Art. 23 para. 1 let. a FinSO expressly requires that financial service providers define internal requirements for the purpose of implementing the obligations of FinSA. Under the FinIA, a financial institution must further issue corporate governance rules that are appropriate to the risk and complexity of the business, and precisely describe its business in terms of objects and geographical scope (Art. 9 FinIA). In addition, the two laws provide for various specific obligations regarding documentation and the preparation of internal regulations.
Do the employees of a financial service provider need to be trained or further educated?
Yes, the duty of a financial service provider to ensure that its employees have the necessary skills, knowledge and experience requires that it provides (internally or externally) for their education and training with regard to the rules of conduct under the FinSA and the professional expertise.
May a financial service provider call in third parties?
According to Art. 23 para. 1 FinSA, this is permissible provided that the third parties involved also have the required qualifications, permits and register entries. Art. 24 FinSA states in principle that a financial service provider that receives an order from another financial service provider to render a service for a client may rely on the fact that “the ordering financial service provider has fulfilled its obligations in accordance with FinSA when determining the information about the client and when clarifying the client’s needs and providing information” (Federal Council’s Report on FinSA and FinIA, p. 59 f.). The commissioned financial service provider must follow up any indications which speak against this presumption.
How must a financial service provider deal with conflicts of interest?
Financial service providers must take organisational measures to avoid conflicts of interest or ensure that such conflicts do not result in discrimination against clients. If discrimination cannot be ruled out, the client must be informed accordingly (Art. 25 FinSA and Art. 26 FinSO), whereby certain conducts (e. g. churning, front/parallel/after-running, manipulation in issues or placements of financial instruments) are completely prohibited (Art. 27 FinSO). Art. 25 FinSO lists the organisational measures to be taken to prevent conflicts of interest. Pursuant to Art. 28 FinSO, a financial service provider must document the financial services for which conflicts of interest have arisen or may arise.
A financial service provider must take measures to reduce the risk that employees misuse for their own account information “which they only have because of their function”. This also includes monitoring measures (Art. 27 FinSA).
How does FinSA regulate the handling of third-party compensation by a financial service provider (retrocessions)?
Compensation received by financial service providers from third parties in connection with the provision of services must in principle be passed on to clients. This includes, for example, brokerage fees, commissions, rebates or other benefits of economic value accruing to the financial service provider from third parties (Art. 26 para. 3 FinSA). Such compensations are also called retrocessions.
Retrocessions may only be retained if the client beforehand (i) has been expressly informed that the financial service provider will receive them and (ii) has waived delivery of the retrocession (Art. 26 para. 1 FinSA). If the amount cannot be determined in advance, the client must be informed of the calculation parameters and bandwidths by the financial service provider. Actual amounts received shall be disclosed at the request of the client. If the retrocessions cannot be passed on to the client because they are of non-monetary nature (e.g. soft commissions, research, etc.), the client must also be informed (Art. 29 FinSO).
The retention of retrocessions will therefore continue to be permitted for portfolio-related investment advisors and asset managers, with the result that the Swiss legislature has spoken out against the corresponding prohibition contained in the MiFID II.
What is the advisor register?
This is a register in which client advisors of non-supervised domestic financial service providers and of foreign financial service providers must register before they carry out their activities in Switzerland (Art. 28 para. 1 FinSA).
Client advisors are natural persons who provide financial services in their own name or in the name of a financial service provider in accordance with Art. 3 let. c FinSA (Art. 3 let. e FinSA). Pursuant to the Federal Council’s Report on FinSA and FinIA, p. 43, employees of financial service providers who have no contact with clients or who support the provision of services only in a subordinate manner (e.g. sending documentation in response to a client’s expression of interest) are not considered client advisors.
What is the purpose of the obligation to be entered in the advisor register?
If a financial service provider is subject to supervision by FINMA or a Supervisory Organisation, its compliance with FinSA obligations is already monitored (Art. 87 FinSA). One such duty is to ensure that its own employees are professionally qualified and comply with the rules of conduct (Art. 21 f. FinSA). However, not all persons offering financial services in Switzerland are subject to prudential supervision. Pure investment advisors, for example, provide a financial service in accordance with FinSA, but are not prudentially supervised. There is also a lack of ongoing supervision of foreign financial service providers who render their services on a purely cross-border basis. Client advisors of these financial service providers must be entered in a register of advisors in accordance with Art. 28 para. 1 FinSA (subject to certain exceptions for foreign prudentially supervised financial service providers in accordance with Art. 31 FinSO).
The obligation to register applies only to the client advisors themselves, not their employers.
The advisor register contains information on the client advisor, the financial service provider for whom he or she works, the fields of activity, the training and further education completed by the client advisor and the ombudsman to whom the advisor or the financial service provider for whom he or she works is affiliated (Art. 30 FinSA). By this, a client can obtain information about a client advisor. Since client advisors subject to registration are prohibited from carrying out financial services without registration, the advisor register creates a control function.
What are the requirements for entry in the client advisor register?
Pursuant to Art. 29 FinSA, the client advisors to be registered must be familiar with the FinSA rules of conduct and have the specialist knowledge required to carry out their activities (Art. 6 FinSA). Registration requires the conclusion of professional liability insurance or the existence of equivalent financial securities as well as the affiliation of the consultant or his or her employer / principal with an ombudsman. Then, negative registration requirements must be met (Art. 29 para. 2 FinSA): Registration is not possible, for example, if an advisor has committed certain criminal offences or is prohibited from profession or activity pursuant to the Financial Market Supervisory Act (“FINMASA“) due to a violation of supervisory regulations. The registration requirements must be met on a continuous basis and the registry must be informed of any changes in this regard.
Who maintains the advisor register?
The advisor register is maintained by a registration office approved by FINMA. FINMA may, where objectively justified, approve several registries (Art. 31 FinSA).
Can a client ask the financial service provider to issue documents?
Yes, a financial service provider will be obliged under supervisory law (and not merely as a contractual or a data protection obligation) to provide its client, upon written request and free of charge, with a copy of the client dossier and all other documents drawn up as part of the business relationship. This right to recovery supplements the financial service provider’s accountability (Art. 16 FinIA) and can be enforced in court (Art. 72 f. FinIA). Here, too, it is a question of client protection, which requires the possibility of efficient law enforcement. This is only possible if the client can check whether the financial service provider has acted in accordance with the contract and the law (Federal Council’s Report on FinSA and FinIA, p. 90).
The documents must be issued free of charge and on a permanent data carrier. In the event of unfounded further claims for surrender, the financial service provider may demand compensation (Art. 97 FinSO).
What are ombudsman offices and what are they for?
Prior to the enactment of FinSA&FinIA, banking and insurance law already provided for the institute of the ombudsman’s office. The FinSA now creates new ombudsman offices for all financial services disputes under private law (Art. 74 f. FinSA). The ombudsman ensures that disputes about legal claims between clients and financial service providers can be settled in a confidential and cost-effective mediation procedure before trial. The ombudsman should combine financial market law expertise with mediation expertise and thus be able to deal with the legal and factual aspects of such disputes. The ombudsman offices are approved by the Federal Department of Finance (Art. 84 FinSA). Their sole task is to mediate; they have no decision-making power whatsoever.
Who can initiate the procedure with the ombudsman?
Both the client and the financial service provider may submit a mediation request to the ombudsman at any time if the relevant requirements are met (Art. 75 para. 4 FinSA). The procedure is governed by the regulations of the respective ombudsman office. There is no obligation for either clients or financial service providers to initiate such a mediation procedure. It is merely an opportunity to reach an out-of-court agreement. Alternatively, both sides can go directly to the civil court.
What is the relationship between the proceedings before the ombudsman and the civil action?
The submission of an application for mediation does not exclude a civil action (Art. 76 FinSA). However, as soon as a state conciliation authority, a court, an arbitral tribunal or an authority is involved in the dispute, the ombudsman service terminates its proceedings. If no agreement is reached in the mediation procedure before the ombudsman, a subsequent civil action is possible. Following the mediation procedure before the ombudsman, the plaintiff may unilaterally waive the conciliation procedure under the Code of Civil Procedure (Art. 76 para. 2 FinSA).
Is there an obligation to participate in the proceedings before the ombudsman?
If the application for mediation is submitted by the client, the financial service provider is obliged to participate in the proceedings. In the opposite case, however, the client is not obliged to participate (Art. 78 para. 1 FinSA).
What other obligations does FinSA impose on financial service providers in connection with the ombudsman?
Financial service providers are obliged to join an ombudsman’s office (Art. 77 FinSA) upon commencement of their activities and to finance it (Art. 80 FinSA). In addition, they must inform their clients at the time of entering into the business relationship and when rejecting a legal claim asserted by the client about the possibility of a mediation procedure before the ombudsman (Art. 79 FinSA).
Is a financial service provider entitled to join an ombudsman's office?
Yes, if the corresponding requirements are met (Art. 81 FinSA).
Can a financial service provider be excluded from an ombudsman's office?
Yes, if it repeatedly violates the obligations regarding participation, information of the client and financial participation (Art. 82 FinSA). Exclusion means a breach of the obligation to join as laid down in Art. 77 FinSA and thus a breach of supervisory law, which FINMA will sanction.
Is compliance with the FinSA monitored?
The FinSA is largely supervisory law. The competent supervisory authority is responsible for ensuring that the financial service providers it supervises comply with the obligations flowing from the FinSA. Violations of the FinSA can be prevented, eliminated or sanctioned with the help of the entire catalogue of supervisory measures (Art. 87 FinSA).
Does the FinSA contain penal provisions?
Yes, the FinSA criminalizes the violation of certain rules of conduct, the violation of regulations for prospectuses and basic information sheets and the unauthorized offering of financial instruments by financial service providers and client advisors (Art. 89 f. FinSA). All three offences have in common that the offender must act with intent, and the threat of punishment consists of a fine.
However, it should be noted that the practical relevance of these penal provisions is limited: These do not apply to the persons subject to ongoing supervision by FINMA or the new Supervisory Organisations to be created pursuant to Art. 3 FINMASA or to the persons working for these supervised persons. The supervisory and criminal sanctions regime of the FINMASA (Art. 92 FinSA) applies exclusively to these.
What transitional provisions does FinSA provide?
With the FinSA coming into force on January 1, 2020, financial service providers must comply with the requirements defined therein. However, according to the FinSA and its implementing ordinance, various obligations do not have to be implemented until transitional periods have expired.
A two-year transitional period applies in the following areas:
- Obligation to segment clients according to Art. 4 FinSA (Art. 103 para. 1 FinSO);
- Required knowledge of client advisors pursuant to Art. 6 FinSA (Art. 104 FinSO);
- Information, testing, documentation and accountability obligations as well as duties of transparency and due dilligence with regard to client orders pursuant to Art. 7-18 FinSA (Art. 105 para. 1 FinSO);
- Organisational requirements in accordance with Art. 21-24 FinSA (Art. 106 para. 1 FinSO);
- Compliance with the requirements for dealing with conflicts of interest pursuant to Art. 25-27 FinSA (Art. 106 para. 1 FinSO).
Financial institutions and client advisors must join an ombudsman office within six months of the FinSA coming into force or after the Federal Department of Finance has recognized the responsible ombudsman office (Art. 95 para. 3 FinSA, Art. 108 FinSO, Art. 93 para. 2 FinIO).
Client advisors who are subject to registration, must register with the registration office for entry in the advisor register within six months of the FinSA coming into force or within six months of the approval of a registration office, respectively (Art. 95 para. 2 FinSA, Art. 107 FinSO).
The obligation to publish a prospectus is subject to a transitional period of six months from the date of approval of the reviewing body by FINMA (Art. 109 para. 1.FinSO).
There are also separate transitional provisions for the preparation of basic information sheets in accordance with FinSO.
What is the FinIA?
In a nutshell, the FinIA is a supervisory decree that aims to regulate the requirements for financial institutions as defined in the FinIA. The Financial Institutions Ordinance (FinIO) contains implementig provisions for the FinIA.
How is the FinIA structured?
The law is divided into chapters and sections. It contains five chapters:
- Chapter 1: General provisions applicable to all financial institutions;
- Chapter 2: Financial institutions. This chapter is divided into six sections: (i) asset managers and trustees, (ii) managers of collective assets, (iii) fund managing companies, (iv) securities firms, (v) branches and (vi) representative offices;
- Chapter 3: Supervision;
- Chapter 4: Responsibility and penal provisions;
- Chapter 5: Final provisions containing, in particular, the transitional periods.
What is the purpose of the FinIA?
In the interests of client protection, the FinIA aims to establish uniform licensing conditions for certain financial service providers and to create new licensing categories. In particular, the FinIA satisfies the longstanding request that independent asset managers not previously subject to prudential supervision be subject to a state licensing and supervision regime.
This is intended to create a comparable supervisory framework, a so-called “level playing field”, for the provision of comparable services.
Furthermore, Swiss supervisory law is to be harmonized with foreign (in particular, European) supervisory law. The latter is done for the purpose of enabling Swiss financial institutions to access the European market.
Does the FinIA change the regulatory landscape?
Yes. Under the old law, the licensing requirements for and supervision of the various financial service providers were regulated by various decrees: Securities dealers were governed by the Stock Exchange Act (SESTA) and fund management companies as well as asset managers of collective investment schemes by the Collective Investment Schemes Act (CISA). The Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans contained (and still contain) provisions on asset management in occupational pension schemes and independent asset managers were subject to (self-) regulation by so-called industry organisations whose rules of conduct must have been approved by FINMA (cf.: FINMA Circular 2009/1: Guidelines for Asset Management). Finally, trustees were not regulated in Switzerland, except in the anti-money laundering area. All the above-mentioned financial service providers are now (with the exception of important transitional provisions) subject to the licensing obligations and requirements of the FinIA as well as to ongoing supervision by FINMA or new Supervisory Organisations.
Are all financial service providers subject to the FinIA?
Further, not all persons providing financial services are prudentially supervised; this applies, for example, to investment advisors or certain persons who sell financial products. However, if they provide financial services pursuant to Art. 3 let. c FinSA, FinSA will apply to them.
Which financial institutions are subject to the FinIA?
The FinIA regulates the requirements for the activities of financial institutions. Pursuant to Art. 2 para. 1 FinIA, these are deemed to be such:
- Asset managers (Art. 17 para. 1 FinIA);
- Trustees (Art. 17 para. 2 FinIA);
- Managers of collective assets, which include larger managers of collective investment schemes on the one hand and larger managers of pension assets on the other (Art. 24 FinIA);
- Fund management companies (Art. 32 FinIA);
- Investment firms (previously securities dealers pursuant to SESTA) (Art. 41 FinIA).
Art. 2 para. 2 FinIA lists the financial service providers not subject to the law.
What happens to branches and representative offices of foreign financial service providers in Switzerland?
These require FINMA approval (Art. 52 and 58 FinIA). This is only a partial innovation, as representative offices and branches of foreign banks and securities dealers had to be approved by FINMA already under the old law.
Are investment advisors subject to the FinIA?
No, persons who exclusively provide investment advice are not subject to the FinIA, but must comply with the requirements of FinSA and, in particular, have their client advisors entered in the advisor register (Art. 28 f.FinSA) (cf.: “Advisor register“).
Do all financial institutions require a FINMA license in accordance with the FinIA?
Yes (Art. 5 FinIA). All financial institutions pursuant to Art. 2 para. 1 FinIA, i.e. all asset managers, trustees, collective asset managers, fund management companies and securities firms, must be approved by FINMA, as well as branches and representative offices of foreign financial institutions (Art. 52 and 58 FinIA). FINMA is also responsible for sanctioning (including the withdrawal of licenses) breaches of supervisory decrees. If a financial institution’s license is withdrawn by FINMA, this leads to the dissolution of the company or its removal from the commercial register in the case of sole proprietorships (Art. 66 FinIA).
It should be noted, however, that Art. 6 FinIA provides for a cascade of permits. This means that the higher form of the permit includes the lower form and therefore no separate permits have to be obtained. The highest regulatory requirements and the highest supervisory intensity apply to banks, which are still governed by the Banking Act, but are part of the licensing cascade. The regulatory requirements for asset managers are the lowest. The activities as trustee and fund management company are only partially covered by the cascade rules of the FinIA.
Is there an entitlement to be granted a license?
Anyone who fulfils the FinIA requirements (Art. 7 para. 1 FinIA) is entitled to a license. As the licensing requirements must be met on an ongoing basis, any changes to the facts on which the license is based must be reported to FINMA. Material changes must be submitted to FINMA in advance for approval (Art. 8 FinIA).
Where in the FinIA are the licensing requirements to be found?
The licensing requirements for financial institutions can be found, on the one hand, in the general provisions of Title 1 (Art. 9 ff. FinIA) and in the specific sections on the respective financial institutions in Title 2 of the Act. Art. 53 and 59 FinIA contain the licensing requirements for branches and representative offices of foreign financial institutions.
What are the most important general licensing requirements of the FinIA?
- Organisation, Art. 9 para. 1 FinIA: For a financial institution to obtain FINMA approval, it must issue corporate governance rules that are appropriate to the risk and complexity of the business activity. It must also have an organisation that enables it to fulfil its legal obligations (in particular, those of the FinSA). Financial institutions are required to describe their business area precisely in their internal directives. The business objectives and geographical extent must correspond to the financial institution’s financial capabilities and operational organisation (Art. 12 para. 2 FinIO).
- Risk management and internal control, Art. 9 para. 2 FinIA: Financial institutions must record, measure, control and monitor their risks and ensure effective internal controls. Risk management must relate to all business activities, including, for example, those activities which would alone not trigger a license requirement (Art. 12 para. 4 FinIO).
- Place of management, Art. 10 FinIA: A financial institution must actually be managed in Switzerland. Exceptions exist in the case of appropriate consolidated supervision by a foreign supervisory authority. The officers of a financial institution must reside in a place from which they can effectively carry-out their duties.
- Guarantee obligations, Art. 11 FinIA: The persons responsible for administration and management must guarantee irreproachable business conduct, enjoy a good reputation and possess the professional qualifications required for their activities. Qualified shareholders in a financial institution (at least 10% of the capital or votes or other significant influence) must enjoy a good reputation and ensure that their influence does not adversely affect prudent and sound business activity. In order to enforce this provision, FINMA may suspend voting rights attached to shares held by qualified shareholders (Art. 65 FinIA). Art. 13 FinIO contains implementing provisions.
- Protection against confusion and deception, Art. 13 FinIA. This also means that the terms “asset manager”, “trustee”, “manager of collective assets”, “fund management company” and “investment firm” may only be used by financial institutions licensed to that extent by FINMA.
- Delegation of tasks, 14 FinIA: The delegation of tasks to third parties is permitted if the recipient of the delegation has the necessary skills, knowledge and experience as well as the necessary authorisations. Third parties consulted must be carefully selected, instructed and monitored. Delegation must not affect the adequacy of the organisation of the undertaking (Art. 16 para. 2 FinIO). Art. 15 FinIO states, inter alia, that only the delegation of essential tasks shall be considered as outsourcing in the sense of the law; Art. 16 para. 2 f. FinIO contain further implementing provisions.
- Obligation to join an ombudsman’s office, Art. 16 FinIA.
What are the FinIA supervisory authorities?
FINMA is responsible for the ongoing supervision of the managers of collective assets, fund management companies and securities firms. Ongoing supervision of asset managers and trustees, on the other hand, is carried out by Supervisory Organisations, which in turn are approved and supervised by FINMA (Art. 61 FinIA). Further provisions on Supervisory Organisations can be found in Art. 43a-43l of the Financial Market Supervision Act revised on the basis of FinSA&FinIA and in the new Ordinance on the Supervisory Organisations in Financial Market Supervision (SOO).
How are the periodic supervisory audits of financial institutions carried out under the FinIA?
A distinction is made here between (i) managers of collective assets, fund management companies and securities firms, on the one hand, and (ii) asset managers and trustees on the other:
- The former are obliged to commission an audit firm approved in accordance with 9a of the Audit Supervision Act for the audit pursuant to Art. 24 FINMASA (Art. 63 para. 1 let. a FinIA).
- Asset managers and trustees must instruct an audit firm pursuant to Art. 43k para. 1 FINMASA to perform the audit unless this is carried out by the concerned Supervisory Organisation itself (Art. 62 para. 1 FINMA Act).
At what intervals do the supervisory audits take place?
The financial institutions under FinIA are audited annually, whereby FINMA or the Supervisory Organisation may order an audit frequency of several years, provided that the activity and risk situation of the institution permit this (Art. 62 para. 2 and Art. 63 para. 2 FinIA). For asset managers and trustees, the audit frequency may be increased to a maximum of four years. If no audit is carried out in one year, the institution must submit a report to FINMA or the Supervisory Organisation on the conformity of its business activities with the legal requirements (Art. 62 para. 3 / 63 para. 3 FinIA).
Does the FinIA comment on civil liability?
Art. 68 FinIA states that the liability of financial institutions and their bodies is governed by the provisions of the Swiss Code of Obligations. Where a financial institution delegates tasks to a third party, it shall be liable under civil law for any loss caused by that third party unless it proves that it has exercised due care in the selection, instruction and supervision (Art. 68 FinIA).
Does the FinIA contain penal provisions?
The FinIA makes the violation of professional secrecy, of the recording and reporting obligations of the securities firms and of the provision on protection against confusion and deception a criminal offence (Art. 69 f. FinIA). A breach of professional secrecy may result in a fine or imprisonment of up to five years, while the other offences are punishable by a fine of up to CHF 500,000.00.
What transitional provisions does the FinIA provide?
The FinIA contains the following important transitional provisions:
- Financial institutions that were already supervised by FINMA before the FinIA entered into force do not require a new licence and must comply with the requirements of the law within one year of its entry into force (Art. 74 FinIA); the same applies to financial institutions abroad that already have a licence through a branch or representative office in Switzerland (Art. 93 para. 3 FinIO).
- Financial institutions (asset managers and trustees) that did not previously require a licence but require a licence under FinIA must notify FINMA of this within six months of its entry into force (Art. 74 para. 2 FinIA); the same applies to financial institutions abroad that become subject to a licence requirement under FinIA as a result of a branch or representative office in Switzerland (Art. 93 para. 4 FinIO).
- Financial institutions (asset managers and trustees) that did not previously require a licence but require a licence under FinIA must comply with the FinIA requirements within three years of entry into force and submit a licence application to FINMA (Art. 74 para. 2 FinIA); the same applies to financial institutions abroad that are now subject to a licence requirement under FinIA because of a branch or representative office in Switzerland (Art. 93 para. 4 FinIO). A major reason for the long transition period for asset managers and trustees is that Supervisory Organisations that could take over the ongoing supervision of asset managers and trustees do not yet exist on January 1, 2020 (cf.: “What are the FinIA supervisory authorities?“).
- Asset managers and trustees who commence their activities within one year of the FinIA coming into force must report to FINMA immediately and fulfil all licensing requirements. They must then join a Supervisory Organisations no later than one year after FINMA has approved it and within such time period submit a licence application to FINMA (Art. 74 para. 3 FinIA).
- Asset managers and trustees who commence their activities one year after the FinIA comes into force require a FINMA licence and affiliation with a Supervisory Organisation from the outset (Art. 74 para. 3 FinIA, e contrario).