FIDLEG SOLUTION - News 10/2018

Release of the drafts of
Financial Services Ordinance (FinSO)
Financial Institutions Ordinance (FinIO)
Supervisory Organisation Ordinance (SOO)

FIRST CONCLUSIONS

On 15 June 2018, Swiss Federal Parliament has approved the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA). On 24 October 2018, Swiss Federal Council has released the first drafts of the above mentioned ordinances to these acts.
The consultation period on these drafts will expire on 6 February 2019. The final versions of the ordinances are expected to be released in the the autumm of 2019, thus just some few months before the entry into force of the acts and the ordinances which will most likely be on 1 January 2020.
The first and preliminary conclusions of these draft ordinances can be summarized as follows:

DRAFT OF THE FINANCIAL SERVICES ORDINANCES (FinSO)

Purpose: The FinSA stipulates the regulatory duties of conduct of the financial intermediaries. The FinSO clarifies these duties, in particular the faithful, careful and transparent performance of financial services and the offer of securities and financial instruments (art. 1 FinSO).

Geographical scope of application: The FinSO is applicable to financial services which are carried out commercially (i) in Switzerland to clients in Switzerland or abroad and (ii) from abroad to clients in Switzerland. Those financial services do not fall under FinSO which are provided by foreign providers in the course of a contractual relationship initiated by the client (reverse solicitation) and which are solicited by clients abroad by way of correspondence (art. 2 FinSO).

Concept of the financial service: The FinSA regulates the financial services. What a financial service is, is defined in art. 3 letter c FinSA which knows five different financial services. From these, the term “acquisition and disposal of financial instruments” remains vague and requires interpretation. Pursuant to the FinSO, as such qualifies “each and every activity which, such as a brokerage, is specifically focused on the acquisition or disposal of a financial instrument.” This also contains actions which are focused on such an acquisition or disposal without advising on a related transaction. Road shows do e.g. fall hereunder. Hence, the interpretation of the financial service in general and the “acquisition and disposal of financial instruments” in particular is so broad that it seems to perpetuate the current distribution system pursuant to CISA (art. 3 para. 1 FinSO).

Concept of the offer: The offer is a key element of the new financial markets system as the distribution of a financial instrument is only subject to FinSA and CISA if it qualifies as an offer. An offer is given if sufficient information on the terms of the offer and the financial instrument are provided which in turn is targeted at selling a financial instrument. The addressee of the offer must, thus, be in a position to take an informed decision (art. 3 para. 3 – 5 FinSO). The level for an offer seems to be rather high and does not include pure marketing activities. Marketing for and offers of a financial instrument that is not allowed to be sold to a potential client as e.g. it does not have the necessary registration or due to the profile of the client is illegal (art. 95 para. 3 FinSO).

Client segmentation: If an asset belongs to more than one person, all of them necessarily fall into the same client segment, i.e. into the segment of the person that requires the highest level of investor protection (art. 4 para. 1 FinSO). Persons which have appointed a representative can request that their segmentation is made taking into account this representative (art. 4 para. 4 FinSO). This is also to be respected in the course of the suitability and the appropriateness test (art. 16 FinSO).

Professional treasury department: Finally, the term “professional treasury department” is being defined. It is given if a trained and financially experienced person is entrusted over a longer period of time with the management of the assets”. This makes clear that this person does not need to be full time employed (art. 4 para. 3 FinSO). Even if this term is used at this place just for companies and private investment structures, it will most likely be applied for public law entities and pension funds.

Transparency: Financial services providers have to inform their clients on the singular and the ongoing costs due at the acquisition and the disposal of financial instruments. If this information is disclosed on a BIP, reference to such BIB is satisfactory. Costs which cannot be calculated upfront or the calculation of which is extremely burdensome may be estimated (art. 8 FinSO).

Making available of a basis information document (BIB): The BIB is to be made available either on a permanent medium or on a website. In the case of a website, the financial services provider has to take care (!) that the BIP can at all times to accessed (something that is difficult if the website is maintained by a third party; art. 12 para. 2 FinSO). The information has to be provided at a moment when the client still has time to review it before taking a decision (art. 13/14 FinSO).

Exception from the duty to register: Foreign financial services providers are exempt from the duty to register if (i) they are prudentially supervised in their home country, (ii) are part of a financial group which falls under a consolidated supervision by FINMA and (iii) financial services are offered only towards professional and institutional clients (art. 31 FinSO). Foreign financial services providers not subject to consolidated supervision by FINMA are, however, not exempt from registration.

Transition periods: Given that the final versions of these ordinances are expected to be released just a few months before their entry into force, the transition periods are of importance. These last one year for (i) client segmentation, (ii) the satisfaction of the knowledge requirements by the client advisors, (iii) the satisfaction of the duties to inform, audit, document, and report and (iv) the implementation of the internal organisation (art. 103 – 106 FinSO).

DRAFT OF THE FINANCIAL INSTITUTIONS ORDINANCE (FinIO)

Family Offices: Art. 2 para. 2 letter a FinIA says that among others those persons are not subject to this law who exclusively manage assets of persons with whom they have family ties. Family ties are given in particular with (i) related persons and persons related by marriage in the same line, (ii) related persons up to the third grade in a side line, (iii) spouses and registered partners and (iv) joint heirs until the estate is divided (art. 2 para. 3 FinIO).

Insurance Companies: Insurance companies subject to the Insurance Supervisory Act (ISA) do not need to apply for a license as manager of collective assets in the sense of art. 24 FinIA. This extends the cascade of licenses inherent to the FinIA to insurance companies (art. 4 para. 2 FinIO).

Commerciality of portfolio managers and trustees: Portfolio managers and trustees are only subject to FinIA if they perform their services commercially. Commerciality is given if at least one of the following criteria is met: (i) annual gross profits of CHF 50’000 are generated, (ii) business relationships with more than 20 contractual counterparties are entered into per calendar year, (iii) a timely unlimited management power is granted over assets which at one point in time exceed CHF 5 mio or (iv) transactions are carried out the total value of which exceed CHF 2 mio per calendar year (art. 11 FinIO).

Right to be affiliated with a supervisory organisation: Portfolio managers and trustees have the right to affiliate with a supervisory organisation provided that their internal guidelines and their internal organisation make sure that the regulatory requirements are satisfied (art. 13 FinIO).

Separation of board of directors and executive management: According to the Swiss Code of Obligations, the board of directors carries out the executive management unless it delegates it by way of organisational regulations to an executive management team. FINMA, however, has the competence to request from portfolio managers and trustees that the executive management is delegated and that the majority of the members of these two bodies are not the same persons if (i) the annual gross profits exceed CHF 5 mio and (ii) the business and the way it is carried out require this (art. 15 para. 5 FinIO).

Risk Management and internal control: Art. 21 FinIA determines that persons who carry out the tasks of risk management and internal control may not be involved in the activities which they supervise. Portfolio managers and trustees may deviate from this rule if (i) they have five or less employees or annual gross profits of less than CHF 1.5 mio and (ii) no business with higher risk is carried out. In the case of annual gross profits of more than CHF 10 mio, FINMA can require an independent internal control (art. 19 FinIO).

DRAFT OF THE SUPERVISORY ORGANISATION ORDINANCE (SOO)

Bodies of the Supervisory Organisation (SO): The SO shall have at least two bodies: one for the oversight (comparable to the board or directors) and one for the executive work (comparable to the executive management team; art. 3 SOO).

Independence of the SO: The chairperson of the oversight body shall be independent from the entities to be supervised; e contrario, the other members of the oversight body do not need to be independent. In the case of a casting vote, it must be taken by an independent member. The members of the executive body shall not have any mandates of the entities to be supervised and shall not hold any participations therein, neither directly nor indirectly (art. 4 para. 1/2 SOO).

Activities of the SO: The SO shall only supervise its affiliated entities but shall neither give advise to them nor offer courses to them (art. 4 para. 3 SOO).

Notifications to FINMA: The SO has to notify FINMA of all severe violations of regulatory law (in particular of FinSA) by an affiliated entity, if such violation cannot be cured or a deadline for curing is pointless or if the violation is not cured within the set time period (art. 11 para. 1 SOO).

Supervisory instruments: The SO can audit its affiliated entities itself or delegate this to third parties (e.g. audit firms). Third parties as well as their managing auditors are to be recognized by the SO if they satisfy the requirements and are to be supervised by the SO (art. 12 – 14 SOO).

THERE IS MORE TO COME…

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