FinSA / FinIA – Our blog series with the most important findings for the business world (post 10)
On January 1, 2020, the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) entered into force together with the three implementing ordinances, the Financial Services Ordinance (FINSO), the Financial Institutions Ordinance (FinIO) and the Supervisory Organization Ordinance (SOO). The core objective of this new legislation is to create uniform competitive conditions for financial intermediaries in Switzerland and to improve client protection. The FinSA provides for graduated rules of conduct for financial service providers depending on the required level of client protection. The FinIA contains standardized licensing rules for financial institutions. For independent portfolio managers and trustees, new licensing requirements were introduced.
This article outlines how this new regulatory framework affects foreign financial service providers and which aspects they have to pay particular attention to under the FinSA and the FinIA.
Scope of Application of the FinSA to Foreign Financial Service Providers
The FinSA applies to foreign financial service providers who provide financial services in Switzerland or for clients in Switzerland if they act on a commercial basis. A commercial basis means that there is an independent economic activity pursued on a permanent and for-profit basis.
- Material Scope:
Since the FinSA aims to introduce cross-sectoral rules governing the conduct of market participants, the concept of financial services is broadly defined. Financial services include (i) the acquisition or disposal of financial instruments, (ii) the receipt and transmission of orders in relation to financial instruments, (iii) administration of financial instruments (portfolio management), (iv) provision of personal recommendations on transactions with financial instruments (investment advice), and (v) the granting of loans to finance transactions with financial instruments. Regarding the last point (v), it should be noted that loan transactions with clients are only considered a financial service if clients take out a loan in order to use this money for transactions with financial instruments, i.e. pure loan transactions with clients are not considered a financial service.
On the one hand, the new regulations cover supervised market participants such as banks, securities firms, fund management companies and insurance companies, as well as all asset managers. On the other hand, non-supervised market participants are also subject to the FinSA if they provide financial services.
- Territorial Scope:
The territorial scope is not determined in the FinSA. However, the FinSO provides some clarification although not conclusive clarity but it can be assumed that both domestic as well as inbound and outbound financial services fall within the territorial scope of the FinSA.
i. Provision of financial services to clients in Switzerland:
Firstly, foreign financial service providers are covered by the territorial scope of the FinSA if they provide financial services to clients domiciled in Switzerland, regardless of whether they are located abroad or in Switzerland.
ii. Provision of financial services in Switzerland:
Secondly, foreign financial service providers fall within the territorial scope of the FinSA if they provide a financial service in Switzerland. When a financial service is deemed to be provided in Switzerland is not clear based on the wording of the FinSA and unfortunately this is not specified in the FinSO. However, based on the legislative material, a financial service provided by a foreign financial service provider is deemed to be provided in Switzerland, irrespective of whether the service is actually offered in or outside Switzerland, if the foreign financial service provider (1) has a permanent physical presence in Switzerland, i.e. operates at least a de facto branch or representative office in Switzerland, or (2) sends client advisers to Switzerland on a daily basis to address clients in Switzerland, e.g. in the form of road shows.
iii. Exception - Reverse-Solicitation:
The FinSA does not apply to so-called reverse solicitation transactions, which are initiated by the client with the foreign financial service provider. Based on the current regulation, it is not entirely clear when a reverse solicitation exists in an individual case. In general, a reverse solicitation transaction is deemed to exist if the initiative for a service or product originates exclusively from the client and the request relates to a specific service or product. Particular delimitation problems may arise, for example, in the case of websites. For foreign financial service providers who wish to make use of the reverse solicitation exception, it is advisable to expressly state by means of a disclaimer that their offer is not directed at Swiss clients if their website is also available in German, French or Italian.
Rules of Conduct for Foreign Financial Service Providers
Foreign financial service providers falling within the scope of the FinSA have to comply with various rules of conduct when providing financial services, which are based on the EU MiFID II Directive (see blog post The Duties of Conduct under the Financial Services Act). The scope of the rules of conduct to be followed under the FinSA depends on the client segment to which the respective financial service provider is assigned. Hence, all financial service providers are required to classify their clients in the course of the onboarding process either as (i) retail clients, (ii) professional clients, or (iii) institutional clients. The highest level of protection applies to retail clients and the lowest level of protection applies to institutional clients. Accordingly, the rules of conduct do not apply with respect to institutional clients. Depending on the client segment, clients may declare under certain conditions that they do not wish to remain in their assigned segment, but that they wish to increase their client protection (so-called opting-in) or reduce their client protection (so-called opting-out). Thus, private clients who either have assets of more than CHF 500,000 and demonstrable experience in the financial sector, or assets of more than CHF 2 million, can declare that they wish to be considered as professional clients. Furthermore, professional clients have the option of waiving compliance with some rules of conduct on the part of the financial service provider.
Essentially, the rules of conduct under the FinSA consist of (i) information duties, (ii) documentation and accountability duties, (iii) transparency and due diligence duties regarding client orders and (iv) the duty to conduct an appropriateness and suitability test if the financial service provider provides investment advice or asset management unless it is solely executing or transmitting client orders, i.e. execution-only transactions. These duties apply in addition to any rules of conduct which the financial service provider concerned must also observe under foreign legal systems.
Organizational Measures
Foreign financial service providers must also observe the general organizational obligations. They must ensure compliance with the obligations under the FinSA by means of internal regulations and an appropriate operational organization. This includes, in particular, the definition of appropriate internal procedures and processes as well as the issuance of internal directives and regulations.
Financial service providers may appoint third parties (natural or legal persons) for the provision of financial services. Such appointed third parties must have the necessary skills, knowledge and experience for their work as well as the required licenses and register entries for the relevant activities. However, a financial service provider that appoints a third party to execute a financial service, remains obliged to carefully instruct and supervise such appointed third party. The involvement of third parties is not limited to the direct delegation of tasks. The cooperation with intermediaries and distributors in the distribution of financial instruments may also be considered as an involvement of third parties.
When a financial service is delivered through a chain of providers, the financial service provider that mandates another financial service provider to provide a financial service for a client remains responsible for the completeness and accuracy of the client information and for compliance with the information, verification and documentation duties. This also applies if there are multi-level intermediary or mandate relationships.
Duty to Affiliate to an Ombudsman's Office / Ongoing Development
FinSA provides that financial service providers must affiliate to an ombudsman's office at the latest on commencing activity. This duty also applies to foreign financial service providers that provide financial services in Switzerland or for clients in Switzerland on a commercial basis.
Affiliation with an ombudsman's office must take place no later than six months after recognition of an ombudsman office by the Swiss Federal Department of Finance (EFD). So far, the following ombudsman offices have been recognized by the EFD: Swiss Banking Ombudsman Foundation, Ombudsman's Office for Financial Service Providers, Finanzombudsstelle Schweiz (FINOS), OFS Ombud Finance Switzerland, Financial Services Ombudsman (FINSOM), Swiss Chambers’ Arbitration Institution (SCAI), Terraxis SA, Unabhängige Ombudsstelle Schweiz AG, Extrajudicial conciliation board for financial services in the Principality of Liechtenstein. Portfolio managers domiciled in Liechtenstein that are members of the Association of Independent Portfolio Managers in Liechtenstein and have clients in Switzerland, or that otherwise fall within the scope of the FinSA may affiliate to the latter ombudsman's office.
Since the first ombudsman offices were recognized on June 24, 2020, the current legal situation requires all financial service providers to have been affiliated to an ombudsman by December 25, 2020.
As part of the parliamentary deliberations on the DLT blanket law, the Swiss Parliament adopted amendments to the FinSA and the FinIA in connection with the ombudsman affiliation requirement. In the future, the ombudsman affiliation requirement will apply only to those financial service providers that serve retail clients and will not apply to financial service providers serving solely institutional or professional clients (excluding high-net-worth retail clients who have declared themselves to be professionals).
In order to avoid a situation where financial service providers that serve solely institutional or professional clients have to be affiliated to an ombudsman initially, only to be released from this requirement a few months later, the limitation on the ombudsman affiliation requirement decided by the Swiss Parliament shall be brought into force on the earliest possible date. Since this cannot be before the expiry of the referendum period, the earliest this can be is February 1, 2021. The affiliation requirement for financial service providers serving solely institutional or professional clients would be contrary to the intention of the Swiss Parliament. For this reason, FINMA will not enforce this requirement in the period from December 26, 2020 to January 31, 2021.
Registration Duties for Client Advisers
FinSA has introduced a new registration duty. Accordingly, client advisers of Swiss financial service providers not subject to prudential supervision as well as client advisers of foreign financial service providers may carry out their activity in Switzerland only if they are entered in a register of advisers.
Client advisers within the meaning of the FinSA are natural persons who provide financial services either (i) on behalf of a financial service provider, i.e. employees of financial service providers such as employees of a bank or an independent portfolio manager who advise clients on the investment of their assets or (ii) in their own capacity as a financial service provider, i.e. they provide the financial services themselves, without being employees of a financial service provider.
This means for foreign financial service providers carrying out their activity in Switzerland that their client advisers (or they themselves if they are natural persons providing financial services to clients in Switzerland) must register in the register of advisers. Client advisers of foreign financial service providers who are subject to prudential supervision abroad are exempt from this registration requirement, provided that they provide their services in Switzerland exclusively to professional or institutional clients. The supervision abroad is not required to be equivalent to the Swiss supervision.
Client advisers must apply for registration with one of the authorized registration bodies no later than six months after FINMA has authorized a registration body. The first registration body was authorized by FINMA as of July 20, 2020. This means that client advisers of foreign financial service providers must report to one of the authorized registration bodies for entry in the client adviser register by January 20, 2021. Currently, the following registration bodies for client advisers are authorized by FINMA: ASSOCIATION ROMANDE DES INTERMEDIAIRES FINANCIERS (ARIF), BX Swiss AG and PolyReg Services GmbH.
Client advisers are granted an entry in the register of advisers if they (i) have knowledge of the rules of conduct under the FinSA as well as the necessary expertise for their specific areas of activity, (ii) have taken out professional indemnity insurance or equivalent collateral exists, (iii) are themselves affiliated to an ombudsman's office in their capacity as a financial service provider or the financial service provider for which they work is affiliated to an ombudsman's office, (iv) have not been convicted of any offence under the FinSA or any property offence under the Swiss Federal Criminal Code and have not been banned from performing or practicing an activity in the financial industry.
Licensing Duties for Foreign Financial Institutions
Under the FinIA, foreign financial institutions (securities firms, managers of collective assets, independent portfolio managers, trustees) require a license if they have a permanent physical presence in Switzerland.
A permanent physical presence of a foreign financial institution may exist in the form of a:
- branch that employs persons who perform, in the name of the foreign financial institution concerned, on a permanent and commercial basis in Switzerland or from Switzerland (i) asset management or trustee activities, (ii) portfolio management for collective investment schemes or occupational pension schemes, (iii) securities trading, (iv) conclusion of transactions, or (v) client account management; or
- representative office, i.e. if the foreign financial institution in question employs persons in Switzerland who work for it on a permanent and commercial basis in Switzerland or from Switzerland in another manner than in the form of a branch, namely where these persons forward client orders to them or represent them for marketing or other purposes.
An exception applies to foreign fund management companies: These may not establish branches or representative offices in Switzerland.
With the entry into force of the FinIA, independent portfolio managers and trustees are now subject to a licensing requirement in Switzerland. As a consequence of this new license requirement, foreign portfolio managers and trustees who under prior law were not subject to an authorization requirement and have a permanent physical presence in Switzerland must also comply with the requirements of FinIA and submit a license application to FINMA within three years of the entry into force of FinIA, i.e. by December 31, 2022. They may continue to perform their activity until a decision has been made concerning authorization, provided that they are affiliated to a self-regulatory organization in accordance with the Swiss Anti-Money Laundering Act and are supervised by said organization. Portfolio managers and trustees who commenced their activities in 2020 had to immediately report to FINMA.
Summary
Foreign financial service providers who provide financial services in Switzerland or to clients in Switzerland may be affected by the provisions of the FinSA and the FinIA in various respects. In order to comply with the requirements of the new legislation, foreign financial service providers should regularly assess their operations, adjust them if necessary and check whether they are subject to a licensing and/or registration duty. Most of the new requirements are not applicable from the date of entry into force of the new acts and ordinances, i.e. January 1, 2020, but only after a transition period of several months up to two or even three years.
The following transition deadlines are particularly noteworthy: (Domestic and) foreign financial service providers that do not provide financial services exclusively to institutional or professional clients had to join an ombudsman's office by December 25, 2020. Client advisers of (domestic and) foreign financial service providers who are not exempt from the registration requirement must report to the registration body for entry in the client adviser register by January 20, 2021. By that date, they must meet the registration requirements, which requires appropriate preparatory action. Foreign portfolio managers and trustees operating a branch or a representative office in Switzerland must comply with the FinIA requirements and submit a license application to FINMA by December 31, 2022.
For further information, please contact the Banking & Finance Team.
Authors: Adrian Dörig, Christian Schneiter
