FinSA / FinIA – Our blog series with the most important findings for the business world (Post 11)
The Financial Services Act (FinSA), which came into force on 1 January 2020, requires financial service providers to assign their clients to different client categories based on their knowledge and experience. Under certain conditions, clients can change their assigned category. Who determines whether these conditions are met and what happens if they subsequently cease to apply?
Client segmentation under the FinSA
The FinSA distinguishes between two main categories of clients: retail clients and professional clients. A subgroup of professional clients is the category of institutional clients. Depending on the client category, the financial service provider is subject to different duties of conduct, whereby the level of protection is highest for retail clients (see our blog post on Client Segmentation under FinSA).
Opting out
Wealthy retail clients may declare in writing that they wish to be treated as professional clients (so-called opting out). This makes particular sense if the wealthy retail clients are interested in investment products that financial service providers are not allowed to offer to normal retail clients due to their risk profile. Opting out from retail client to institutional client (and reverse opting in from institutional to retail client) is, however, not possible.
By switching to a higher client category, the level of protection for these wealthy retail clients is reduced. The financial service provider must therefore inform the retail clients of the consequences of opting out. In order to switch categories, retail clients must credibly declare in writing that, based on their training, education and professional experience or comparable experience in the financial sector, they possess the knowledge necessary to understand the risks associated with the investments and that they have assets of at least CHF 500,000. In the case of persons with assets of at least CHF 2 million, no proof of such knowledge is required (Art. 5 para. 2 lit. a and b FinSA). Retail clients whose assets do not exceed the relevant thresholds cannot declare an opting out.
Pursuant to Art. 5 para. 7 FinSA, the financial service provider is obliged to inform professional clients that they may opt-in in order to be considered retail clients. Conversely, financial service providers are not obliged to inform wealthy retail clients of the possibility of opting out in order to be considered professional clients.
If a client declares an opting out, it applies to all business relationships of said client with the financial service provider concerned.
Eligible assets
Art. 5 of the Financial Services Ordinance (FinSO) specifies which assets are eligible when calculating the thresholds for an opting out. These assets include financial investments held directly or indirectly by retail clients, namely sight or time deposits with banks and securities firms, certificated and uncertificated securities, derivatives, precious metals, life insurance policies with a surrender value and restitution claims from other such assets held in trust. Such assets are eligible if they are liquid, i.e. easily convertible into cash (so-called bankable assets). Direct investments in real estate and claims from social insurance schemes as well as occupational pension assets are not eligible assets within the meaning of Art. 5 FinSO.
Does the financial service provider have to verify the client's information?
The calculation of eligible assets is generally the client's responsibility. The client should ordinarily know best about his financial assets and be in a position to assess which of his assets are liquid and what price could be obtained for these assets. In principle, the financial service provider has no obligation to verify the accuracy of the client's information. The client must only credibly declare that he or she meets the requirements for qualification as a high-net-worth retail client. Under the old Collective Investment Schemes Act (CISA), proof of such qualification was still required. However, if the financial service provider knows or has reason to believe that the information provided by the client is incorrect, it must make further inquiries. If there are no serious doubts about the client's information, the financial service provider can be content with a plausibility check.
What to do if the client's financial situation changes
If the financial service provider was entitled to rely on the information provided by the client at the time of the client segmentation, it shall also be entitled to rely on such information in the period thereafter. No obligation therefore arises for the financial service provider to clarify any changes in the client's personal circumstances or to continuously verify the accuracy of the client classification. Rather, when opting out, the financial service provider must inform the client that he or she is obliged to notify the financial service provider in the event of a change in his or her personal circumstances. It is therefore up to the client to inform the financial service provider of any changes. If, however, in the course of the business relationship, indications arise that give rise to doubts as to the correctness of the client's classification, the financial service provider must review the client classification accordingly.
Such indications may arise in asset management and investment advisory relationships in connection with the civil law duty to inquire. In accordance with the practice of FINMA and the self-regulatory codes of conduct, asset managers are obliged to regularly obtain information about the client's situation. There is no consensus on the frequency of these inquiries. In our opinion, no spontaneous duty to inquire on the part of the financial service provider can be derived from such practice.
The FinSA provisions concerning the appropriateness and suitability assessment also do not provide for a duty to inquire for asset management and investment advisory relationships with retail clients that declared an opting out. This is due to the fact that in the case of professional clients - which includes retail clients with opting out - it can be assumed pursuant to Art. 13 para. 3 FinSA that they have the necessary knowledge and experience and that the investment risks associated with the financial service are financially bearable. Therefore, in the case of professional clients, financial service providers are only subject to a more extensive duty to examine in connection with the appropriateness and suitability assessment if there are indications that an investment may not be appropriate or suitable.
If the financial service provider only has occasional contact with a client, it is advisable to carry out a new classification each time contact is made. This is conceivable, for example, if a client contacts the financial service provider with interruptions of several years in order to conclude individual transactions, but not in the case of permanent relationships, such as asset management relationships.
What if the requirements for opting out are no longer met?
If the client informs the financial service provider of any changes to his or her financial situation or if it becomes apparent in the course of a review that the requirements for allocation to the higher client category are no longer met, the financial service provider must inform the client thereof.
The financial service provider is obliged to assign the client to a client category during the entire business relationship in accordance with the legal requirements. If the financial service provider therefore detects deviations from the client's previous financial situation, or is informed by the client of such deviations, it must clarify again whether the client can still be considered a professional client and, if this is not the case, carry out a reclassification. If after such reclassification the client is now considered a retail client due to the changed financial situation, the financial service provider must comply with the increased information and protection requirements of the FinSA with respect to this business relationship.
If you have any further questions, please contact our Banking and Finance Team.
Authors: Jana Essebier, Stefan Grieder, Ria Gurtner
